UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 1-12396
THE BEARD COMPANY
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(Exact name of registrant as specified in its charter)
Oklahoma 73-0970298
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Enterprise Plaza, Suite 320
5600 North May Avenue
Oklahoma City, Oklahoma 73112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 842-2333
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0006665 par value
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
requirement 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 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 l0-K or any amendment to this
Form 10-K. [ ]
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.
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
The aggregate market value of the voting common stock held by non-affiliates of
the registrant, computed by using the last sale price of registrant's common
stock on the OTC Bulletin Board as of the close of business on June 30, 2005,
was $5,032,000.
The number of shares outstanding of the registrant's common stock as of March
31, 2006 was Common Stock $.0006665 par value - 5,539,210
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its 2006 Annual Meeting of
Stockholders are incorporated by reference as to Part III, Items 10, 11, 12, 13
and 14.
THE BEARD COMPANY
FORM 10-K
For the Fiscal Year Ended December 31, 2005
TABLE OF CONTENTS
PART I
Item 1. Business.........................................................
Item 1A. Risk Factors.....................................................
Item 1B. Unresolved Staff Comments.......................................
Item 2. Properties.......................................................
Item 3. Legal Proceedings................................................
Item 4. Submission of Matters to a Vote of Security Holders..............
Item 4a. Executive Officers and Significant Employees of the Registrant...
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities......................
Item 6. Selected Financial Data..........................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation...........................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......
Item 8. Financial Statements and Supplementary Data......................
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................
Item 9A. Controls and Procedures..........................................
Item 9B Other Information................................................
PART III
Item 10. Directors and Executive Officers of the Registrant...............
Item 11. Executive Compensation...........................................
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................
Item 13. Certain Relationships and Related Transactions...................
Item 14. Principal Accounting Fees and Services...........................
PART IV
Item 15. Exhibits and Financial Statement Schedules.......................
SIGNATURES .................................................................
THE BEARD COMPANY
FORM 10-K
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE
FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.
IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND,"
"PROJECT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE
THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE
DISCLOSED UNDER "ITEM 1. BUSINESS (c) NARRATIVE DESCRIPTION OF OPERATING
SEGMENTS, "ITEM 1A, RISK FACTORS," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT.
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY ASSUMES NO DUTY TO UPDATE OR
REVISE ITS FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR
EXPECTATIONS OR OTHERWISE.
PART I
Item 1. Business.
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(a) General development of business.
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General. Prior to October, 1993, The Beard Company ("Beard" or the
"Company"), then known as Beard Oil Company ("BOC"), was primarily an oil and
gas exploration company. During the late 1960's we made the decision to
diversify. In 1968 we started a hazardous waste management company, USPCI, Inc.
("USPCI"), which was partially spun off to shareholders in January 1984.
Following two public offerings and several acquisitions USPCI became so
successful that it subsequently listed on the New York Stock Exchange in 1986.
It was acquired by Union Pacific Corporation in 1987-1988 for $396 million ($111
million to BOC stockholders for their residual 28% interest, of which $60
million was distributed to shareholders).
In 1989 BOC founded Beard Investment Company (now The Beard Company) for
the purpose of building new businesses which Beard management believed to have
either high growth potential or better-than-average profit potential. Our goal
has been to nurture each investment to the point where it could sustain its
growth through internal cash flow.
We have been involved in numerous businesses during the last 28 years, many
of them unsuccessful. We have now reduced our operating activities down to four
segments:
o The coal reclamation ("Coal") Segment, which is in the business of
operating coal fines reclamation facilities in the U.S.;
o The carbon dioxide ("CO2") Segment, which has profitably produced CO2
gas since the early 1980's;
o The China ("China") Segment, which is focusing on the construction and
operation of organic chemical compound fertilizer plants in China; and
o The e-Commerce ("e-Commerce") Segment, whose current strategy is to
develop business opportunities to leverage starpay's(TM) intellectual
property portfolio of Internet payment methods and security
technologies.
Net Operating Loss Carryforwards. We have approximately $44.9 million of
unused net operating losses ("NOL's") available for carryforward, which expire
between 2006 and 2008, and approximately $3.5 million in tax depletion
carryforwards. The loss of the NOL's would have a negative impact on our future
value. If we were to experience an "ownership change" as defined in Section 382
of the Internal Revenue Code, we would be severely limited in our ability to use
our NOL's in the future. Our Certificate of Incorporation contains provisions to
prevent the triggering of such a change by restricting transfers of shares
without the Board of Directors' consent to any person if that person was, or
would thereby become, a holder of 5% or more of the fair market value of our
outstanding capital stock.
Effect of Recent Operations on Liquidity. Sustaining the operating
activities of our unprofitable Coal, China and e-Commerce segments, plus our
overhead, has resulted in a serious outflow of cash during the past several
years. We have managed this cash shortfall through a series of financings and
the sale of various assets, principally those left over from our discontinued
operations. These financings were supplemented by the funds we received from the
McElmo Dome litigation (the "Settlement". See "Item 3. Legal Proceedings--McElmo
Dome Litigation" for complete details). The financings included private
placements of (i) $1,200,000 of 10% Floating Rate Notes due November 30, 2006
(the "2006 Notes") coupled with warrants and a production payment completed in
June of 2004, (ii) $2,100,000 of 12% Convertible Subordinated Notes due February
15, 2010 (the "2010 Notes") completed in October of 2004 and January of 2005 and
(iii) $2,004,102 of 12% Convertible Subordinated Notes due August 31, 2009 (the
"2009 Notes"). In each case the Notes were offered to accredited investors and
sold on a best efforts basis by us and by an investment banking firm which acted
as a selling agent.
The offering of 2009 Notes was commenced in June of 2005. At year-end 2005
a total of $1,135,000 of the 2009 Notes had been sold, including $624,102 of
2009 Notes which were exchanged for 2006 Notes. As of December 31, 2005, the
2010 and 2009 Notes were convertible into 2,100,000 and 504,444 (649,859 at
March 31, 2006) shares of the Company's common stock, respectively, and their
conversion will create a substantial amount of dilution on our future earnings
per share. Sale of the 2010 and 2009 Notes, net of the exchange and legal and
other costs associated with the offerings, provided approximately $2,219,000 of
net proceeds to us in 2005 and substantially improved our liquidity and working
capital position. The net proceeds provided the necessary working capital to
"bridge the gap" until our new fertilizer plant in China develops positive cash
flow and the financing for the Pinnacle Project (defined below) has been
finalized. The 2010 Notes gave the purchasers a security position in certain
equipment owned by Beard Technologies, Inc. ("BTI") in the event that we did not
obtain sufficient financing to perform the Pinnacle Project.
We have several projects in various stages of development in the Coal
Segment which, subject to arranging necessary financing, we ultimately expect to
mature into operating projects. We have finalized a definitive agreement with
Pinnacle Mining Company, LLC, a coal mining and energy resources company
("PMC"), to construct and operate a pond fines recovery project in West Virginia
(the "Pinnacle Project" or the "Project"). PMC is a wholly-owned subsidiary of
PinnOak Resources, LLC ("PinnOak").
In February of 2005 we successfully concluded a $900,000 financing for our
initial fertilizer manufacturing plant in China. In September of 2005 we
announced the opening of the facility. In October of 2005 the plant produced its
first inventory and sold its first fertilizer.
Unless the context otherwise requires, references to us herein include our
consolidated subsidiaries, including BOC.
Recent Developments
Loans from and Agreement with PinnOak Resources. Since September of 2004,
when PMC signed an agreement whereby BTI agreed to construct the Pinnacle
Project, PinnOak has been anxious for the Project to get started despite the
fact that a USDA guaranty needed to secure a $9,000,000 bank loan has not yet
been obtained. Accordingly, during the fourth quarter of 2005, PinnOak loaned
$1,100,000 to Beard Pinnacle, LLC ("BPLLC") to get construction started.
On February 8, 2006, we filed a Form 8-K advising that two of our
wholly-owned subsidiaries, BTI and BPLLC, had executed an agreement with PinnOak
in connection with the Project (the "February 8 Agreement"). The 8-K pointed out
that (i) we had previously received and accepted a proposal from a lending
institution to provide a $9,000,000 loan for the Project and (ii) that
affiliates of PinnOak had agreed to provide $2,800,000 of equity and own 50% of
BPLLC. Both commitments are subject to the condition that the USDA guarantees at
least 70% of the borrowed amount (the "Guaranty"). At this point our loan
application is still being reviewed by the USDA, and there is no assurance that
the Guaranty will be forthcoming.
The agreement provides that if BPLLC has not obtained the Guaranty or a
third party loan in an amount sufficient to complete the Project on or before
April 1, 2006, PinnOak has committed to assume control of the Project and be
responsible for funding or arranging the funding of the Project. If additional
funding is needed prior to receipt of the Guaranty, PinnOak has agreed to
provide additional loans to BPLLC to finance construction of the Project, and
BTI, BPLLC and registrant have agreed to provide certain collateral. As of April
12, 2006 (including the $1,100,000 advanced in 2005 and an additional $875,000
which had been advanced prior to the February 8 Agreement) PinnOak had advanced
a total of $5,910,000 to finance the construction. On March 23 the amount of
BPLLC's note was increased from $5,100,000 to $9,000,000 and the "trigger date"
for certain events was extended from April 1, 2006 to May 1, 2006.
Fertilizer Sales. To date the production from our fertilizer
manufacturing plant near Beijing has lagged significantly behind our original
projections and it now appears that it will be at least July or August before we
will be able to reach the monthly production rate of 1,935 tons of OCCF we are
now projecting as the full production rate of the existing facility. We had
originally projected reaching a monthly production rate of 2,667 tons, which we
had projected as the targeted production rate of the present facility, in
December of 2005. However, initial capacity has been lowered because some of the
equipment was downsized to reduce the cost of the facility. In addition, the
plant has added equipment to provide a new line of liquid fertilizer which will
add to its sales capacity. Despite the slow start, March sales have been
encouraging and sales are on the uptrend.
Because of the delay in reaching our targeted production rate, the plant
owners have each had to loan an additional US$40,000 to provide the additional
working capital needed until the plant can generate sufficient funds to sustain
its own operations. (See "Operations in China---Financing of Initial Fertilizer
Manufacturing Plant in China").
Placement of Convertible Subordinated Notes. During the first quarter of
2006 we sold another $192,851 of 2009 Notes, generating additional working
capital of approximately $191,000.
Bank Credit Facility on Colorado Gas Wells. On March 28, 2006, we closed on
a $350,000 reducing revolving credit facility with a local bank secured by a
first lien on the production from our eight new gas wells in Yuma County,
Colorado. The new credit facility provides an initial borrowing base of
$350,000, with such commitment reducing at the rate of $10,000 per month. The
loan matures on September 30, 2007, with interest payable monthly at Wall Street
Journal Prime Rate plus 150 basis points. As of April 10, 2006, $260,000 has
been drawn against the facility. $115,000 of such amount was used to repay loans
from related parties; the balance was added to working capital.
CONTINUING OPERATIONS
Coal Reclamation Activities. Our coal reclamation activities, which are
conducted by Beard Technologies, Inc. ("BTI"), comprise the Coal Segment. BTI is
in the business of operating coal fines reclamation facilities in the U.S. and
provides slurry pond core drilling services, fine coal laboratory analytical
services and consulting services.
Carbon Dioxide Operations. Our carbon dioxide activities comprise the CO2
Segment, consisting of the production of CO2 gas which is conducted through
Beard. We own non-operated working and overriding royalty interests in two
producing CO2 gas units in Colorado and New Mexico.
Operations in China. Our activities in China, which are conducted by Beard
Environmental Engineering, LLC ("BEE") through its consolidated subsidiaries,
comprise the China Segment. BEE and its subsidiaries are pursuing environmental
opportunities in the PRC, focusing on the installation and construction of
plants that manufacture OCCF.
e-Commerce. Our e-Commerce activities, which are conducted by
starpay.com(TM), l.l.c. ("starpay") and its parent, Advanced Internet
Technologies, L.L.C. ("AIT"), comprise the e-Commerce Segment. starpay's current
focus is on developing licensing agreements and other fee based arrangements
with companies implementing technology in conflict with its intellectual
property.
(b) Financial information about industry segments.
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Financial information about industry segments is contained in the
Statements of Operations and Note 15 of Notes to the Company's Financial
Statements. See Part II, Item 8---Financial Statements and Supplementary Data.
(c) Narrative description of operating segments.
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We currently have four operating segments: Coal, CO2, China, and
e-Commerce. All of such activities, with the exception of our CO2 gas production
activities, are conducted through subsidiaries. We, through our corporate staff,
perform management, financial, consultative, administrative and other services
for our subsidiaries.
COAL RECLAMATION ACTIVITIES
Background of Beard Technologies, Inc. In early 1990 we acquired more than
80% of Energy International Corporation ("EI"), a research and development firm
specializing in coal-related technologies. We sold EI in 1994, retaining certain
assets which were contributed to a wholly-owned subsidiary, BTI.
Impact of Section 29. In the late 1990's significant activity in the coal
industry was focused upon the development of fine coal waste impoundment
recovery projects which qualified for Federal tax credits of $20 to $25 per ton
under Section 29 of the Internal Revenue Code. In order to qualify for the tax
credit, the projects had to produce a synthetic fuel (i) from a facility placed
in service before July 1, 1998; (ii) pursuant to a binding contract entered into
before January 1, 1997; and (iii) before January 1, 2008.
The MCN Projects. Beginning in April of 1998, BTI operated six pond
recovery/Section 29 briquetting projects for a subsidiary of MCN Energy Group,
Inc. ("MCN"). At the time this made BTI, to the best of our knowledge, the
largest operator of coal recovery plants in the world. Unfortunately MCN became
concerned that the plants might not qualify for the tax credit and took a
special charge of $133,782,000 at year-end 1998 to completely write off the
projects. In January of 1999 MCN terminated the contracts, which later qualified
for the tax credits. This was a major setback to BTI and had a severe negative
impact on its subsequent income and cash flow.
Sharp Increase in Natural Gas Prices; Effect on Coal Demand. The recent
sharp increase in natural gas prices has had a major impact upon the electric
power generating industry. It now appears that natural gas will be in
increasingly short supply in future years. As a result, the price of coal when
compared to the price of gas on a Btu basis has become increasingly attractive.
It now appears that coal, which accounts for over 50% of the nation's power
generating capacity, will remain the principal fuel source for electric power
production for a number of years.
The rising price of natural gas has driven the spot price of coal to record
levels that have not been seen in the coal industry since the oil crisis of 1974
and 1975. Many energy economists believe that natural gas prices will remain
high for many years to come. The strong coal market, plus added pressure from
regulatory agencies to more quickly reclaim or re-mine abandoned slurry
impoundments, has sparked renewed interest among pond owners and coal operators
to quickly move forward with pond recovery projects. Many of these recovery
projects had been sitting on the back burner for a number of years because of
marginal coal prices and stagnant demand.
We believe this is an ideal set of circumstances for BTI, which in recent
years has been totally focused on pond recovery. During the last seven years,
BTI has called on numerous coal producers and utilities, particularly those
having ponds which it believes have large reserves of recoverable coal fines. We
have a great deal of expertise in the complicated business of coal pond
recovery. We believe that we are the industry leader and that most coal
operators contact us first when they are interested in having a pond recovered.
Projects Under Development. This convergence of high coal prices with added
regulatory agency pressure has resulted in BTI having more potential projects on
the drawing board than at any other time in its existence. In September of 2004
we announced the signing of an agreement to perform the Pinnacle Project. (See
below). The contract has an initial term of six years and is extendible for an
additional four years if sufficient coal reserves remain at the end of the
initial term.
Currently, we are actively pursuing seven other projects, all but two of
which are located in the Central Appalachian Coal Basin. We also have a number
of other projects in the pipeline for follow up once these projects have come to
a resolution. We have had more coal producers and utilities call us to discuss
projects in the last two years than we had during the previous 13 years of BTI's
existence.
Pinnacle Project. In 2004 we formed Beard Pinnacle, LLC ("BPLLC"), an
Oklahoma limited liability company, a subsidiary of BTI. BPLLC was formed to
construct and operate a pond fines recovery facility, known as the Pinnacle
Project, located at the Smith Branch Coal Refuse Disposal Facility owned by PMC,
a subsidiary of PinnOak. The facility is located near Pineville, West Virginia.
BTI and PinnOak have executed an agreement regarding the initial equity funding
of BPLLC and its development and operation of the Pinnacle Project based upon
the premise that BPLLC or its lender would receive a USDA loan guaranty of up to
70% of a $9,000,000 loan. Based upon this premise, the parties commenced
construction of the Pinnacle Project in September of 2005 and PinnOak advanced
$1,100,000 to finance the construction in 2005. (See "Item 1. Business. General
development of business---Recent Developments---Loans from and Agreement with
PinnOak Resources" for additional details).
Although it has not been determined whether the principal financing for the
Pinnacle Project will be from the USDA-guaranteed loan or from funding arranged
by PinnOak, to date PinnOak has advanced a total of $5,910,000 to cover
construction costs. We presently anticipate that we will have initial production
from the Project in June of 2006.
At this point, we cannot determine whether the USDA-guaranteed financing or
financing arranged by PinnOak will provide the funds for the Pinnacle Project.
Additionally, we cannot assure you that any of the seven pond recovery projects
currently under development will proceed.
Improved Drilling and Lab Capabilities. In 2000 BTI made substantial
investments to improve its slurry pond core drilling equipment and its fine coal
laboratory analytical services capabilities. In addition to supporting its own
pond recovery project evaluations, BTI is now able to offer state of the art
drilling and analytical services to commercial clients who are independently
investigating their own projects.
Principal Products and Services. The principal products and services
supplied by our Coal Segment are (i) the capability to undertake large
reclamation projects and the cleanup of slurry pond recovery sites; (ii) core
drilling of slurry ponds and evaluation of recoverable coal reserves; (iii)
consulting reclamation technology; (iv) technical services; and (v) proprietary
coal reclamation technology.
Sources and Availability of Raw Materials. There are numerous coal
impoundments scattered throughout the eastern third of the U.S. which contain
sizeable reserves of coal fines which we believe can be recovered on an economic
basis while at the same time solving an environmental problem. With the recent
dramatic increase in coal prices, slurry pond owners are recognizing that
recovery can be done on a profitable basis, making it a win-win proposition for
both the pond owner and the company undertaking the project.
Dependence of the Segment on a Single Customer. The Coal Segment accounted
for the following percentages of our consolidated revenues from continuing
operations for each of the last three years.
Percent of
Consolidated
Revenues from
Fiscal Year Continuing
Ended Operations
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12/31/05 3.8%
12/31/04 19.4%
12/31/03 9.9%
As of December 31, 2005, the segment was not dependent on a single
customer. Loss of all of the segment's customers at that time would not have a
material adverse effect on the segment nor on us. Assuming BPLLC is a
consolidated subsidiary in 2006, the Pinnacle Project is expected to account for
more than 90% of segment revenues and approximately 44% of consolidated
revenues. Early termination of this Project would have a material adverse effect
on the segment and on us in such year. However, as additional projects under
development by the segment have been negotiated and finalized, such dependence
will be lessened.
Facilities. BTI leases an office and laboratory facilities from the Applied
Research Center at the University of Pittsburgh ("UPARC"). BTI's facilities at
UPARC give the Coal Segment access to a wide range of coal and mineral testing
capabilities.
Market Demand and Competition. The coal reclamation industry is highly
competitive, and the Coal Segment must compete against larger companies, as well
as several small independent concerns. Competition is largely on the basis of
technological expertise and customer service.
Seasonality. The coal reclamation business is somewhat seasonal due to the
tendency for field activity to be reduced in cold and/or bad weather.
Environmental Matters. Compliance with Federal, state and local laws
regarding discharge of materials into the environment or otherwise relating to
protection of the environment are of primary concern to the segment, and the
cost of addressing such concerns are factored into the cost of each project. The
cost of compliance varies by project and cannot be estimated until all of the
contract provisions have been finalized. See " Regulation---Environmental and
Worker Safety Matters."
Financial Information. Financial information about the Coal Segment is set
forth in the Financial Statements. See Part II, Item 8---Financial Statements
and Supplementary Data.
CARBON DIOXIDE OPERATIONS
General. Our carbon dioxide (CO2) gas operations are conducted by the
parent company which owns working and overriding royalty interests in two CO2
gas producing units.
Carbon Dioxide (CO2) Properties
[GRAPHIC OMITTED]
McElmo Dome. The McElmo Dome field in Dolores and Montezuma Counties in
western Colorado is a 240,000-acre unit which produces CO2 gas.
We own a 0.53814206% working interest (0.4526611% net revenue interest) and
an overriding royalty interest equivalent to a 0.0920289% net revenue interest
in the Unit, giving us a total 0.5446900% net revenue interest.
Deliveries of CO2 gas are transported through a 502-mile pipeline to the
Permian Basin oilfields in West Texas where such gas is utilized primarily for
tertiary oil recovery. Kinder Morgan CO2 Company, L.P. serves as operator of the
unit. There are 52 producing wells, ranging from 7,634 feet to 8,026 feet in
depth, that produce from the Leadville formation at individual rates of up to 55
million cubic feet per day. McElmo Dome is believed to be the largest producing
CO2 field in the world. The Four Corners Geological Society in 1983 estimated
that the field contained 17 trillion cubic feet ("TCF") of CO2. The gas is
approximately 98% CO2.
In 2005 we sold 1,902,000 Mcf (thousand cubic feet) attributable to our
working and overriding royalty interests at an average price of $.60 per Mcf. In
2004, we sold 1,787,000 Mcf attributable to our working and overriding royalty
interests at an average price of $.42 per Mcf. In 2003 we sold 1,529,000 Mcf
attributable to our working and overriding royalty interests at an average price
of $.33 per Mcf. We were underproduced by 48,000 Mcf on the sale of our share of
McElmo Dome gas at year-end 2005.
As the result of the recent increase in oil prices, CO2 demand for tertiary
recovery and McElmo Dome production has increased accordingly. CO2 production,
which averaged 784 million cubic feet per day in 2003, increased to 887 million
cubic feet per day in 2004, and increased further to 957 million cubic feet per
day in 2005. We have been advised by the operator that the field is now capable
of producing 1.2 billion cubic feet per day.
We consider our ownership interest in the McElmo Dome Field to be one of
our most valuable assets. At year-end 2005 the field had produced 5.048 TCF of
CO2, leaving 11.952 TCF of remaining reserves. The operator reported that the
Unit contains more than 10 TCF of reserves (54.5 BCF to our net interest). As a
result of the settlement of the McElmo Dome litigation, the recent improvement
in oil prices and the increased demand and improved pricing for CO2, we now
believe that our interest in the field has a fair market value of approximately
$7.8 million versus a book value of $329,000 at year-end 2005.
Our interest in the McElmo Dome Field is subject to a deed of trust lien in
the amount of approximately (i) $389,000 in favor of a holder of our 2009 Notes
and (ii) $2,783,000 in favor of a related party.
Anticipated Improvement in Pricing as a Result of the McElmo Dome
Settlement. In addition to establishing a cash settlement fund to settle the
litigation, the McElmo Dome Settlement Agreement also provided for the
monitoring of pipeline tariffs, minimum prices and funding for a CO2 Claims
Committee to enforce these provisions. (See "Item 3. Litigation"). We anticipate
additional improvement in pricing from the above. Moreover, we are continuing to
investigate marketing our share of the CO2 through other parties at a higher
price.
Bravo Dome. We also own a 0.05863% working interest in the 1,000,000-acre
Bravo Dome CO2 gas unit in northeastern New Mexico. Bravo Dome is believed to be
the second largest producing CO2 field in the world. At December 31, 2005, we
had produced 670,000 Mcf of CO2 gas which is presently in storage. We sold no
CO2 gas from Bravo Dome in 2005, 2004 and 2003. Our solid CO2 segment, which was
sold in 1997, had previously provided the market for such gas. We are continuing
our efforts to market our share of the gas at a reasonable price, but such
efforts have to date been unsuccessful.
Occidental Petroleum Corporation operates the Bravo Dome field. The 350
producing wells are approximately 2,500 feet deep. The gas is approximately 99%
CO2.
Net CO2 Production. The following table sets forth our net CO2 production
from McElmo Dome for each of the last three fiscal years:
Net CO2
Fiscal Year Production
Ended (Mcf)
----- -----
12/31/05 1,902,000
12/31/04 1,787,000
12/31/03 1,529,000
Average Sales Price and Production Cost. The following table sets forth our
average sales price per unit of CO2 produced and the average lifting cost (lease
operating expenses and production taxes) per unit of production for the last
three fiscal years:
Average Sales Average Lifting
Fiscal Year Price Per Mcf Cost Per Mcf
Ended of CO2 of CO2
----- ------ ------
12/31/05 $0.60 $0.07
12/31/04 $0.42 $0.06
12/31/03 $0.33 $0.06
Market Demand and Competition. Our principal market for CO2 is for
injection into mature oil fields in the Permian Basin, where industry demand is
expected to grow modestly for the next several years. Our primary competitors
for the sale of CO2 include suppliers that have an ownership interest in McElmo
Dome, Bravo Dome and Sheep Mountain CO2 reserves, and Petro-Source Carbon
Company, which gathers waste CO2 from natural gas production in the Val Verde
Basin of West Texas. There is no assurance that new CO2 sources will not be
discovered or developed, which could compete with us or that new methodologies
for enhanced oil recovery will not replace CO2 flooding.
Dependence of the Segment on a Single Customer. The CO2 Segment accounted
for the following percentages of our consolidated revenues from continuing
operations for each of the last three years. Our CO2 revenues are received from
two operators who market the CO2 gas to numerous end users on behalf of the
interest owners who elect to participate in such sales. In 2005, approximately
95% of our revenues from the sale of CO2 gas was derived from Kinder Morgan,
L.P. and approximately 5% was derived from Exxon Mobil.
Percent of
Consolidated
Revenues from
Fiscal Year Continuing
Ended Operations
----- ----------
12/31/05 84.6%
12/31/04 77.6%
12/31/03 85.7%
Under the existing operating agreements, so long as any CO2 gas is being
produced and sold from the field, we have the right to sell our undivided share
of the production to either Kinder Morgan or Exxon Mobil and also have the right
to sell such production to other users. During 2005 Kinder Morgan was offering a
slightly higher price than Exxon Mobil, so more of the segment's production was
sold to Kinder Morgan. We believe that the loss of either Kinder Morgan or Exxon
Mobil as a customer would have a material adverse effect on the segment and on
us.
Productive Wells. Our principal CO2 properties are held through our
ownership of working interests in oil and gas leases which produce CO2 gas. As
of December 31, 2005, we held a working interest in a total of 396 gross (0.45
net) CO2 wells located in the continental United States. The table below is a
summary of such developed properties by state:
Number of Wells
---------------
State Gross Net
----- ----- ---
Colorado............................. 46 0.248
New Mexico........................... 350 0.205
Total............................ 396 0.453
Financial Information. Financial information about our CO2 gas operations
is contained in our Financial Statements. See Part II, Item 8---Financial
Statements and Supplementary Data.
OPERATIONS IN CHINA
Background Information. In 1998 we opened an office in the People's
Republic of China (the "PRC" or "China"). In 1999 we established a
Representative Office in Beijing. In 2001 Beijing Beard Bio-Tech Engineering
Co., Ltd. ("BTEC"), a Chinese corporation, was organized as a wholly-owned
subsidiary to serve as the operating entity for all of the China Segment's
activities in the PRC. In 2002 we formed BEE, a wholly-owned Oklahoma limited
liability company, to serve as the parent company of BTEC and all of the
segment's subsidiaries in the PRC. In February of 2005 BEE and a private
investor formed BEE/7HBF, LLC which is owned 50% each by BEE and the private
investor. This new entity then formed a wholly foreign-owned enterprise ("WFOE")
in China, called Xianghe BH Fertilizer Co., Ltd. ("XBH"), that serves as the
marketing arm for the fertilizer we produce in China and controls and manages
the segment's initial fertilizer manufacturing plant in the PRC.
Environmental Opportunities. China is a large country with serious
environmental problems which include atmospheric pollution, ground water
pollution and land pollution. To solve these problems the government has made
the decision to permit the use of foreign equipment and technology. The amount
of arable land in China is limited considering its dense population. China is
the largest user of chemical fertilizers in the world. Unfortunately, the
carryover of fertilizers from one planting to the next and the considerable
runoff into lakes and rivers has polluted much of China's arable land and fresh
water resources.
Organic-Chemical Compound Fertilizer Initiatives. China, which is the
world's fourth largest country in area, is also the world's most heavily
populated country, with a population of almost 1.3 billion. China categorizes
about 800 million of their population as "farmers." The average sized farm is
less than two acres. In order to earn a subsistence living, China's farmers
must, if possible, multi-crop the same plot of soil, frequently using hybrid
crop varieties with greater yields that stress the soil much more so than
non-hybrid crops. To ensure production, fertilizers are used with each planting,
which increases soil stress. This abusive farming practice has, over time,
resulted in damaged, less productive soil. Working with the top agronomists and
academicians in the Chinese agricultural community, we have developed a concept
to mitigate this problem by manufacturing organic chemical compound fertilizers
("OCCF"). The end result is a line of environmentally friendly fertilizers
utilizing organics derived from waste materials that, due to their abundance,
are a serious environmental nuisance in China.
Formulation of Product. The formulation of our products will be based on
the target crops and determined by leading soil scientists at China Agricultural
University in Beijing and agronomists in each province. Our production will
amount to less than about 5% of total fertilizer demand in each of the provinces
in which we are planning to construct a facility. We believe that the sales
price for our products will be commensurate with and that the quality will be
superior to other similar products presently available. We expect to receive
strong support for our products from these senior scientists and from the
Provincial authorities. Based on these and other factors, we are confident that
our products will be well received by the agricultural community once they have
had an opportunity to test them.
REUSE License Agreement. In February of 2003 BEE entered into a License
Agreement with Real Earth United States Enterprises, Inc. ("REUSE") whereby BEE
obtained the exclusive right and license to use the REUSE proprietary composting
technology in the PRC. BEE also has the exclusive right to license or sublicense
the technology in the PRC. The exclusive right is for a term of five years and
will be automatically extended for additional five year periods if BEE or its
affiliates have entered into written agreements for either (i) the sublicense of
five plants or (ii) the sale to Cooperative Joint Ventures ("CJV's") of five
plants during the respective periods involved.
BEE will pay a license fee prior to the start up date of each plant which
utilizes the REUSE technology. For biosolid plants, such fee will be determined
by the design biocell capacity of each plant. The fee for a biosolid plant will
range from $125,000 to $250,000 depending upon the size of the plant. The
license fee for a municipal solid waste plant will be higher due to the
complexity of the plant and equipment involved. If either type of plant is later
expanded, BEE will pay a supplemental license fee equal to 10% of the
construction cost of the plant enhancement. BEE will also pay a quarterly
royalty payment to REUSE for each metric ton of compost sold.
BEE has placed the marketing of the REUSE technology on hold pending
completion and successful startup of our initial fertilizer manufacturing plant
described below, which will be used to showcase our OCCF technology.
Financing of Initial Fertilizer Manufacturing Plant in China. In February
of 2005 we announced that a private investor had agreed to finance the cost of
our initial fertilizer manufacturing facility in the PRC. Beard Environmental
Engineering, L.L.C. ("BEE") and the investor have formed a limited liability
company, BEE/7HBF, LLC ("BEE/7HBF") which is expected to own all of our
fertilizer operations in China. BEE/7HBF then formed XBH to serve as the
marketing arm for the fertilizer we produce in China and control and manage the
day-to-day operations of the facility. The investor and BEE each made a $50,000
cash contribution to and have a 50% ownership and equity in BEE/7HBF. The
investor loaned $850,000 of additional funds to BEE/7HBF in the first half of
2005 to fund the capital costs and pre-operating costs of the facility. The
lender can look only to available funds of BEE/7HBF for repayment, and neither
we nor BEE will be liable for repayment of the loan.
The initial plant is located near Beijing and produces a new,
environmentally friendly, OCCF. The new fertilizer will use up to 62% less
chemicals and yet provide superior performance as compared to chemical
fertilizers presently used in the PRC. The plant was initially targeted to
produce about 32,000 metric tons annually. However, in order to reduce the
initial cost of the facility, it was later scaled back to a capacity of
approximately 23,000 metric tons of OCCF per year. In addition, the plant has
added equipment to produce a new line of liquid fertilizer which will add to its
sales capacity. The facility has been sized to permit production capacity to be
more than doubled to meet future market demand. The plant produced and shipped
its initial product in October of 2005.
Method of Distribution. Our OCCF is distributed primarily through warehouse
distributors who purchase our product in bulk and then market directly to end
users who are primarily farmers. Presently, XBH distributes its production
through small to mid-size warehouse distributors. These are fertilizer
distributors that maintain one or more warehouses stocked with various
fertilizer products and distribute on demand to 50 or more retail outlets. Some
of the retail outlets may also be owned by the warehouse distributor, but the
majority are independently owned or are part of a chain of retail outlets.
Orders received from the warehouse distributor are generally priced Ex-Factory.
Sources and Availability of Raw Materials. We maintain at least two
qualified sources of all raw materials necessary for producing our OCCF product.
In addition, our purchasing department is continuously seeking better pricing
while maintaining quality.
Backlog. At December 31, 2005, XBH had a backlog of orders believed to be
firm in the amount of US$20,000. All of such orders are expected to be filled
within the current fiscal year.
Dependence of the Segment on a Single Customer. As of December 31, 2005,
XBH was not dependent upon a single customer. Loss of all of the segment's
customers at that time would not have a material adverse effect on the segment
nor on us. The segment recorded its initial revenues of US$29,000 in December of
2005 and accounted for only 2.1% of consolidated revenues. The segment generated
no revenues in 2004 and 2003.
Principal Products and Services. The principal products and services
supplied by our China Segment are the manufacture and production of OCCF. It may
later utilize proprietary technology licensed from others for the manufacture of
a portion of its production.
Facilities. XBH leases office, manufacturing and appurtenant space in
Xianghe County, Hebei Province, located about 37 miles southeast of Beijing. The
facility is sited on about 22 acres of land in an industrial development and is
comprised of a workshop (approximately 30,000 square feet, three-story office
building with third-floor apartments (approximately 9,500 square feet/floor),
finished-goods warehouse (approximately 11,000 square feet), dormitory and
shower/mechanical building (approximately 2,500 square feet), two guardhouses
and a coal storage building. The total area under roof is approximately 74,500
square feet.
Market Demand and Competition. The China Segment must compete against
significantly larger companies, as well as a number of small independent
concerns. Competition is largely on the basis of technological expertise,
product quality and customer service.
Seasonality. Fertilizer sales in China are subject to seasonal swings in
demand. In general, producers of row crops (e.g., wheat, corn and cotton) in our
market area of China purchase fertilizers during two major buying seasons.
Fertilizer is used at an increased rate in early spring to provide the boost
winter crops require to become active again and to carry their growth through to
harvest. Orders for spring sales begin in September and run through November.
Again in the fall, fertilizer usage is increased as farmers prepare their fields
for planting winter crops. Orders for winter sales, although not as significant
as fall sales orders, begin in March and run through May. Alternately,
greenhouse growers in this part of China generally have three growing seasons as
a result of the type of vegetable crops raised there. Fertilizer sales into this
market tend to be much less seasonal. As opposed to row crops farmers, who have
two major application events each year, greenhouse growers apply fertilizers to
their crops over a longer period of time during the growth cycle of the crop.
Financial Information. Financial information about the China Segment is set
forth in the Financial Statements. See Part II, Item 8---Financial Statements
and Supplementary Data.
e-COMMERCE
Formation of starpay.com(TM), inc. (now starpay.com, l.l.c.). In 1999 four
patent applications were filed embodying the features of a new secure payment
system for Internet transactions and we formed starpay.com, inc. ("starpay") to
pursue the development of the payment system. In 2000, starpay filed two
additional patent applications which considerably broadened the scope and the
potential of its patent claims. In 2001 starpay became starpay.com, l.l.c.
In May of 2003 we formed Advanced Internet Technologies, L.L.C. ("AIT").
The members of starpay.com, l.l.c. contributed their entire membership interests
in starpay to AIT for equivalent membership interests in AIT. starpay became a
wholly-owned subsidiary of AIT with Marc Messner, Beard's VP-Corporate
Development and the inventor of starpay's technology, serving as its Sole
Manager. Current ownership in AIT is as follows: Beard (71%); Messner (15%);
patent attorney (7%); Web site company (7%).
The starpay Technology. Our secure payment methods and technologies address
payer and transaction authentication in many forms. These include, but are not
limited to, performing a payer query for authentication and transaction consent
verification, as well as, chaining split transactions into an integrated
verifiable unique transaction authenticating the user and the transaction
attributes in the process.
Other features of starpay's technology include a patent-pending system that
incorporates the innovative use of the ubiquitous compact disc or smart card as
a security and transaction-enabling device. The enabling device, user's
identifier and/or PIN must all be present to enable a payment transaction on the
Internet. This technology is an additional layer of security that may or may not
be applied to starpay's proprietary process flow models.
License Agreement. In November of 2001 VIMachine, Inc. ("VIMachine"), the
owner of U.S. Patent 5,903,878, "Method and Apparatus for Electronic Commerce"
(the "VIMachine Patent") granted to starpay the exclusive marketing rights, with
respect to certain clients (the "Clients") which starpay has identified to
VIMachine, for security software and related products and applications. starpay
believes the VIMachine Patent will provide numerous opportunities to generate
related licensing agreements in the electronic authentication and payment
transaction fields.
In March 2002 starpay's marketing rights with respect to its Clients were
broadened to include the right to litigate on behalf of VIMachine all patent
claims in relation to the VIMachine Patent and related foreign applications or
patents. Any settlement and/or judgment resulting from starpay's prosecution of
the VIMachine Patent claims will be shared 50/50 or 25/75 between starpay and
VIMachine (depending upon who the infringing party may be) following
reimbursement to starpay (from the settlement and/or judgment monies) for
litigation related expenses incurred, including defense of any counterclaims.
Visa Litigation. In May of 2003 starpay along with VIMachine filed a suit
in the U. S. District Court for the Northern District of Texas, Dallas Division
against Visa International Service Association and Visa USA, Inc., both d/b/a
Visa (Case No. CIV:3-03-CV0976-L). In July of 2003 the Plaintiffs filed, with
the express written consent of the Defendants, an Amended Complaint. The ongoing
suit seeks damages and injunctive relief (i) related to Visa's infringement of
the VIMachine Patent; and (ii) under California's common law and statutory
doctrines of unfair trade practices, misappropriation and/or theft of starpay's
intellectual property and/or trade secrets. In addition, Plaintiffs are seeking
attorney fees and court costs related to the foregoing claims. If willfulness
can be shown, Plaintiffs will seek treble damages.
On January 4, 2005, following a Markman hearing held in late October of
2004, the Magistrate Judge filed a Report and Recommendation of the United
States Magistrate Judge addressing his findings and recommendations with respect
to the claim constructions to be applied to the VIMachine Patent. The Magistrate
Judge found that 24 of the 28 claims asserted by the Plaintiffs were valid. Both
parties have pursued modifications of the Magistrate's recommendations in the
form of an appeal to the District Court and are awaiting the Court's final
ruling on claim construction issues.
See "Item 3. Legal Proceedings---Visa Litigation" for additional details.
Issuance of Initial Patent; Exclusive License Agreement. On April 9, 2002,
the U.S. Patent and Trademark Office issued U.S. Patent No. 6,370,514 (the
"Voucher Patent") to starpay on its patent application titled "Method for
Marketing and Redeeming Vouchers for use in Online Purchases." All claims
submitted in this application were allowed.
On March 28, 2003, starpay finalized a Patent License Agreement with
Universal Certificate Group LLC ("UCG"), a private company based in New York
City. UCG has developed a universal online gift certificate that is accepted as
payment at hundreds of online stores through its subsidiary, GiveAnything.com,
LLC. The Agreement, which remains in effect for the term of the patent, grants
to UCG the exclusive, worldwide license to use, improve, enhance or sublicense
the Voucher Patent. Under the Agreement, starpay received a license fee payable
annually for three years plus a royalty payable semi-annually during the patent
term. starpay also shares in any license fees or royalties paid to UCG for any
sublicenses. UCG has the exclusive right to institute any suit for infringement
under the Agreement. starpay has the right to jointly participate in any suit,
in which case any damages obtained will be shared according to the fees and
expenses borne by each party. UCG has the option to terminate the Agreement at
any time without liability.
starpay's Strategy and Current Opportunities. starpay's plan is to develop
licensing agreements and other fee based arrangements with companies
implementing technology in conflict with our intellectual property. We have
identified and investigated many opportunities for our intellectual property
portfolio which include various e-commerce payment systems, security access
applications and secure document transmission. Although there are many
applications for our technology, our focus is on Internet security,
authentication and electronic payments. starpay is continuously assessing these
situations looking toward the possibility of generating additional licensing
opportunities.
starpay believes that its intellectual property portfolio provides the
technology and methods for enabling the most secure payment system and
authentication protocols available for use on the Internet. If starpay is
successful in its strategic licensing and litigation efforts, the e-Commerce
Segment is expected to become a major contributor to our future success.
However, no assurance can be given that starpay will successfully capitalize on
its Internet security methods and technologies.
Facilities. starpay occupies a small portion of the office space occupied
by us at our corporate headquarters located in Oklahoma City, Oklahoma.
Market Demand and Competition. The e-commerce industry is rapidly changing
and highly competitive, and the e-Commerce Segment must compete against
significantly larger companies, as well as a number of small independent
concerns. Competition is largely on the basis of technological expertise,
customer service, capital available for product branding and the ability to
react quickly to a constantly changing environment.
Dependence of the Segment on a Single Customer. The e-Commerce Segment
accounted for the following percentages of the Company's consolidated revenues
from continuing operations for each of the last three years.
Percent of
Consolidated
Revenues from
Fiscal Year Continuing
Ended Operations
----- ----------
12/31/05 2.2%
12/31/04 3.0%
12/31/03 4.2%
The segment presently has only one customer, a licensee. However, the
licensee has already generated one sublicense and is pursuing others. We believe
that the loss of the segment's present customer would not have a material
adverse effect on the segment since the segment would then be in a position to
pursue licenses directly with other parties. The loss of the present customer
would not have a material adverse effect on us.
Financial Information. Financial information about the e-Commerce Segment
is set forth in the Financial Statements. See Part II, Item 8---Financial
Statements and Supplementary Data.
REGULATION
General. We are subject to extensive regulation by federal, state, local,
and foreign governmental authorities. Our operations in the United States and
China are subject to political developments that we cannot accurately predict.
Adverse political developments and changes in current laws and regulations
affecting us could dramatically impact the profitability of our current and
intended operations. More stringent regulations affecting our coal reclamation
activities could adversely impact the profitability of our future coal
reclamation operations and the availability of those projects.
Environmental and Worker Safety Matters. Federal, state, and local laws
concerning the protection of the environment, human health, worker safety,
natural resources, and wildlife affect virtually all of our operations,
especially our coal reclamation and environmental remediation activities. These
laws affect our profitability and increase the Company's exposure to third party
claims.
It is not possible to reliably estimate the amount or timing of our future
expenditures relating to environmental matters because of continually changing
laws and regulations, and the nature of our businesses. We cannot accurately
predict the scope of environmental or worker safety legislation or regulations
that will be enacted. Our cost to comply with newly enacted legislation or
regulations affecting our business operations may require us to make material
expenditures to comply with these laws. We do not presently include
environmental exposures in our insurance coverage. Should we become involved
with projects having environmental exposure, we believe we will have no
difficulty in obtaining environmental coverage adequate to satisfy our probable
environmental liabilities. As of this date, we are not aware of any
environmental liability or claim that could reasonably be expected to have a
material adverse effect upon our present financial condition.
OIL AND GAS OPERATIONS
In January of 2005 we announced that we were back in the oil and gas
business. We reported that in recent years our wholly-owned subsidiary, BOC, has
filed on a number of federal and state oil and gas leases. One of the leases
which BOC acquired was a 640-acre tract covering all of Section 36, Township 3
North, Range 48 West, in Yuma County, Colorado.
In January of 2004 BOC entered into a farmout agreement with Vista
Resources ("Vista") of Pittsburgh, Pennsylvania. Vista has now drilled eight
wells in the Niobrara Formation on the farmout lands. Under the farmout
arrangement, BOC was carried for a 22.5% working interest in the initial well in
which it owns a 3.6% overriding royalty interest until payout and a 22.5%
working interest (19.6875% net revenue interest) thereafter. We paid our 22.5%
share of the cost of the additional wells. All eight of the wells were completed
as gas producers in the Niobrara Formation at a depth of approximately 2,800
feet. The wells were placed on production in the fourth quarter of 2005, and are
currently producing at an average rate of approximately 65-70 MCF per day from
each well. If we can convince Vista to add additional compression equipment we
are hopeful that the production rate can be increased to 100-150 MCF per day
which we feel can be done without impairing the future economics of the
reservoir. Our share of the production from these wells totaled $86,000 in 2005.
BOC also has a 4.5% overriding royalty interest in 12 wells which produce
coal bed methane gas from the Mesaverde Formation from a 317 acre tract in
Section 1, Township 41 North, Range 71 West, Campbell County, Wyoming. Our share
of production from these wells totaled $8,000 in 2005.
In addition to the producing tracts in Colorado and Wyoming, BOC owns
undeveloped leases covering 41 acres in Colorado, 4,510 acres in Mississippi, 33
acres in Nebraska and 11,230 acres in Wyoming, a total of 15,814 acres.
OTHER CORPORATE ACTIVITIES
Other Assets. During the last six years we have disposed of most of the
assets related to our discontinued operations. However, we still have a few
remaining assets and investments which we are in the process of liquidating as
opportunities materialize. At year-end 2005 such assets consisted primarily of
the residue of an iodine extraction plant and related equipment, drilling rig
components and related equipment, wastewater storage tanks and a real estate
limited partnership in which we are a limited partner. All of such assets are
reflected on our books for less than their anticipated realizable value. As
excess funds become available from such liquidations they will be utilized for
working capital, reinvested in our ongoing business activities or redeployed
into newly targeted opportunities.
Office and Other Leases. We lease office space in Oklahoma City, Oklahoma,
aggregating 5,817 square feet under a lease expiring September 30, 2006, at a
current annual rental of $81,000. In addition, our subsidiaries lease space at
other locations as required to serve their respective needs.
Employees. As of December 31, 2005, we employed 85 full time and two part
time employees in all of our operations, including five full time employees and
two part time employees on the corporate staff.
(d) Financial information about foreign and domestic operations and export
- --- ----------------------------------------------------------------------
sales.
------
See Item 1(c) for a description of foreign and domestic operations and
export sales.
Item 1A. Risk Factors.
- -------- -------------
Lack of Profitable Operations in Recent Periods. Although we were
profitable in 2004 as a result of the McElmo Dome Settlement (see "Item 3. Legal
Proceedings---McElmo Dome Litigation" for complete details), we have suffered
net operating losses during each of the last seven years. Until we can
demonstrate the ability to generate positive cash flow from operations, this
shortcoming will impede our ability to borrow funds and may impact our ability
to achieve profitability in the future.
There is no certainty that we will be able to achieve or sustain
profitability or positive cash flows from operating activities in the future.
Our Financial Position. Our net worth became negative as of December 31,
2001, and the deficiency increased to ($5,333,000) at year-end 2003. Receipt of
the second installment of the Settlement reduced the deficiency to ($4,144,000)
at year-end 2004. However, such deficiency increased to ($5,983,000) at year-end
2005 and will continue to increase until we are able to achieve profitability in
our Coal and China Segments. Our business will continue to require substantial
expenditures. Our inability to generate positive cash flow from operations has
limited our ability to borrow funds and impacted our ability to achieve
profitability. We must achieve a turnaround in both our China and Coal Segments
this year. If a turnaround is not successful or is only partially successful, we
will need to pursue additional outside financing which would likely involve
further dilution to our shareholders. We cannot assure that we will be able to
obtain additional financing on terms that we deem acceptable, or at all.
We have substantial indebtedness and may not have enough revenues to pay
our debts. As of December 31, 2005, we had $8,669,000 of total debt outstanding,
including $132,000 of accrued interest to an affiliate of the Chairman,
$1,631,000 of which is due in 2006. If we obtain the USDA Guaranty for a loan
for the Pinnacle Project, $1,100,000 of the $1,631,000 of debt due in 2006 would
be repaid to PinnOak from the proceeds of the USDA Guaranteed loan. If we do not
obtain the USDA Guaranty for the Pinnacle Project, PinnOak has agreed to either
fund or arrange for funding of the project and we expect to replace the current
note with a long term note with a term of three and one-half to four years,
which would also defer all or a portion of the $1,100,000 principal payable to
PinnOak in 2006. We, or our subsidiaries may become further indebted. This much
debt could pose substantial risks to our business. The indebtedness may require
us to use available funds for payment of principal and interest instead of
funding our operations. The debt could also inhibit our ability to raise
additional capital. It is possible that we will not have enough cash flow from
our operations to pay the principal and interest on our debt. This would have a
material adverse effect on us.
Limited Liquidity. Our common stock trades on the Over-The-Counter Bulletin
Board. Although we currently have ten firms making a market in our stock, the
volume of trading has been relatively low and fairly sporadic. Approximately 42%
of our 5,539,000 outstanding shares are held by management and another 8.5% are
held by a long-term institutional holder. In addition, there is substantial
potential dilution, with preferred shares convertible into 287,000 shares,
presently exercisable warrants and options totaling 708,000 shares, notes
convertible into 2,604,000 shares at year-end 2005 (2,750,000 at March 31,
2006), and a total of 598,000 shares at year-end 2005 (566,000 shares at March
31, 2006) in two DSC Plans scheduled for distribution in 2006 and future years.
History of Delays in Finalizing New Coal Projects. We have experienced
delays in the past in finalizing our new coal projects. We may experience
additional delays in the future. Although we have signed a definitive agreement
on the Pinnacle Project, it is uncertain at this time whether the ultimate
financing will come from a bank and guaranteed by the USDA, or be provided or
arranged by the pond owner. Accordingly, the terms of the financing are
uncertain at this time. No definitive contracts have been signed in connection
with the other projects currently under development in the Coal Segment, nor has
any financing been arranged to date for these projects. Continued delays in
finalizing our new coal projects may have a material adverse effect on us.
History of Delays in Finalizing Projects in China. We have experienced
delays in the past in finalizing projects in China and may experience additional
delays in the future. In early 2005 we successfully arranged the financing for
our initial project. Although the project was completed under budget and in a
timely manner, we have failed to achieve our projected rate of market
penetration and the project is now several months behind budget. Continued
delays in finalizing our new projects in China, or delays in meeting budgeted
projections, may have a material adverse effect on us.
starpay Intellectual Property Rights; Copying by Competitors. We have
identified at least three competitors that offer services that potentially
conflict with starpay's intellectual property rights. If we are unable to
protect our intellectual property rights from infringement, we may not be able
to realize the anticipated profit potential from the e-Commerce Segment.
Failure to Achieve a Settlement or Win a Judgment in the Lawsuit Against
Visa. In connection with the lawsuit against Visa, we have agreed to bear
one-half of the out-of-pocket expenses (excluding legal fees) borne by the law
firm handling the case. At this point it is difficult to estimate the maximum
exposure for such expenses, or the length of time before the matter might be
resolved. However, if our operating results do not improve going forward and we
are unable to pay our share of the expenses, then we would be faced with
reducing our potential recovery from any settlement or judgment.
Political and economic uncertainty in China could worsen at any time and
our operations could be delayed or discontinued.
Our business is subject to political and economic risks, including:
o Loss of revenue, property and equipment as a result of unforeseen
events like expropriation, nationalization, war and insurrection;
o Risks of increases in import, export and transportation regulations
and tariffs, taxes and governmental royalties;
o Renegotiation of contracts with governmental entities;
o Changes in laws and policies governing operations of foreign-based
companies in China;
o Exchange controls, currency fluctuations and other uncertainties
arising out of foreign government sovereignty over international
operations;
o Laws and policies of the United States affecting foreign trade,
taxation and investment; and
o The possibility of being subject to the exclusive jurisdiction of
foreign courts in connection with legal disputes and the possible
inability to subject foreign persons to the jurisdiction of courts in
the United States.
Item 1B. Unresolved Staff Comments.
- ------- --------------------------
Not applicable.
Item 2. Properties.
- ------- -----------
See Item 1(c) for a description of properties.
Item 3. Legal Proceedings.
- ------ ------------------
Neither we nor any of our subsidiaries are engaged in any litigation or
governmental proceedings which we believe will have a material adverse effect
upon the results of operations or financial condition of any of such companies.
However, we were a plaintiff in a lawsuit where our share of the claims,
exclusive of interest and costs, exceeded 10% of consolidated current assets at
year-end 2004. This suit has now been settled. See "McElmo Dome Litigation"
below.
McElmo Dome Litigation. In 1996 we joined with other Plaintiffs in filing
in U.S. District Court for the District of Colorado a suit against Shell Oil
Company, Shell Western E & P, Inc., Mobil Producing Texas and New Mexico, Inc.
and Cortez Pipeline Company, a partnership (collectively, the "Defendants").
Plaintiffs' complaint alleged damages caused by Defendants' wrongful
determination of the value of CO2 produced from the McElmo Dome Field (the
"Field"---see "Carbon Dioxide Operations" at pages 10-12) and the corresponding
wrongful underpayment to Plaintiffs.
A Settlement Agreement was signed in 2001 (the "Settlement"). The
Settlement became final in 2003 and we received our $1,151,000 share of the
first installment of the Settlement. We received additional installments
totaling $2,943,000 in 2004. We expensed all of our share, totaling $450,000, of
the costs of the litigation. The Settlement proceeds resulted in net income of
$3,976,000, after alternative minimum taxes of $118,000.
Subsequent to the Settlement several issues have arisen concerning
implementation of the Settlement Agreement that are currently in dispute which
may result in additional money being owed to the Plaintiffs in the litigation. A
mediation held in Denver in March of 2005 was unsuccessful. In July of 2005, the
party who served as the court-appointed fairness expert in the McElmo Dome
Litigation rendered his advisory opinion on the merits of several issues
currently in dispute concerning implementation of the Settlement Agreement. The
advisory opinion, which was not binding on the parties, failed to resolve the
matter and in October 2005 the parties agreed to proceed to binding arbitration.
The three arbitrators selected held a preliminary hearing in Albuquerque on
March 1, 2006. The parties presented their respective positions concerning
various procedural issues and established a scheduling and procedure order. A
hearing on the merits is scheduled to be held in Albuquerque on June 26-30,
2006, with an award to be issued within 30 days thereafter. The Company
estimates that, if all of the matters in dispute should be resolved in the
Plaintiffs' favor, the Company could receive as much as $540,000 for our share
of the money in dispute.
It should be noted that the matters which are currently the subject of
arbitration do not include additional sums which may be owed to Plaintiffs for
2005 and subsequent years. If the arbitration results in an award to Plaintiffs,
it is anticipated that additional money will ultimately be owed to Plaintiffs
for the later periods.
Coalition Managers Litigation. In April of 2002 a suit was filed in the
U.S. District Court of Colorado (Harry Ptasynski v. John M. Cogswell, et
al---Case No. 02-WM-0830 (OES) against the attorneys and managers (including our
Chairman) of the CO2 Claims Coalition, LLC (the "Coalition"---one of the
Plaintiffs in the preceding lawsuit which has now been settled). We are not a
defendant in the suit, which was initially brought by Ptasynski and another
party which later dismissed itself from the action. In this action Ptasynski is
seeking to recover a share of the proceeds of the Coalition's settlement against
the Defendants in the McElmo Dome lawsuit despite the fact that he opted out of
the lawsuit in order to pursue his own claims in a separate lawsuit against the
Defendants in Texas. Although his case was initially successful in Texas it was
later overturned on appeal.
The Coalition held back $1 million of the Settlement proceeds to defend the
costs of the Ptasynski suit until such time as its outcome has been determined.
Presently approximately $735,000 remains in the defense fund. Once the case has
been resolved, any remaining funds net of costs will be distributed to the
Coalition members, including us. In March of 2004 the Court dismissed the claims
against the attorneys and several of the claims against the managers but gave
the Plaintiff the opportunity to make additional arguments as to why other
claims should not be dismissed. In April of 2004 Plaintiff asked the Court not
to dismiss the remaining claims and moved to file a Second Amended Complaint
against the managers and, for the first time, against the Coalition. In May of
2004 the Defendants asked the Court to deny Plaintiff's new Complaint and have
been waiting for the Court's Order since then. We consider the Plaintiff's
claims to be without merit. We will receive approximately 22% of the remaining
funds, if any, once the suit has been resolved.
Visa Litigation. In May of 2003 our 71%-owned subsidiary, starpay.com,
l.l.c., along with VIMachine, Inc. filed a suit in the U. S. District Court for
the Northern District of Texas, Dallas Division against Visa International
Service Association and Visa USA, Inc., both d/b/a Visa (Case No.
CIV:3-03-CV0976-L). VIMachine is the holder of U.S. Patent No. 5,903,878 (the
"VIMachine Patent") that covers, among other things, an improved method of
authenticating the cardholder involved in an Internet payment transaction. In
July of 2003, the Plaintiffs filed an Amended Complaint. The suit seeks damages
and injunctive relief (i) related to Visa's infringement of the VIMachine
Patent; (ii) related to Visa's breach of certain confidentiality agreements
express or implied; (iii) for alleged fraud on the Patent Office based on Visa's
pending patent application; and (iv) under California's common law and statutory
doctrines of unfair trade practices, misappropriation and/or theft of starpay's
intellectual property and/or trade secrets. In addition, Plaintiffs are seeking
attorney fees and costs related to the foregoing claims. If willfulness can be
shown, Plaintiffs will seek treble damages.
In August of 2003 the Defendants filed a motion to dismiss the second,
third and fourth claims. Despite objections to such motion by the Plaintiffs,
the Judge on February 11, 2004, granted Defendants' motion to dismiss the second
and third causes of action, and denied the motion insofar as it sought to
dismiss the fourth cause of action. Accordingly, Plaintiffs' fourth claim
(misappropriation and/or theft of intellectual property and/or trade secrets)
will continue to move forward.
In February of 2004 Defendants filed an Answer to Plaintiffs' Amended
Complaint. In such filing Visa denied each allegation relevant to claim four.
Visa asked that the VIMachine Patent be declared invalid, and, even if it is
found valid, Visa asked that they be found not to infringe the VIMachine Patent.
Visa asked for other related relief based on these two allegations.
In April and May 2004, Plaintiffs filed their Patent Infringement
Contentions and a supplement thereto detailing Visa's alleged infringement of
the majority of the patent claims depicted in the VIMachine Patent.
Subsequently, in May of 2004, Defendants filed Preliminary Invalidity
Contentions requesting the VIMachine Patent be found invalid.
From May through October 2004, the Plaintiffs and Defendants submitted
numerous filings related to interpretation of the terms and phrases set out in
the 878' patent claims. A hearing regarding patent claim construction (a
"Markman hearing") was held in October of 2004, allowing both parties to present
oral arguments before the Court regarding the claim construction issues. On
January 4, 2005, Magistrate Judge Sanderson filed a Report and Recommendation of
the United States Magistrate Judge addressing his findings and recommendations
with respect to the claim constructions to be applied to the VIMachine Patent.
Judge Sanderson found that 24 of the 28 claims asserted by the Plaintiffs were
valid. Both parties have pursued modifications of the Magistrate's
recommendations in the form of an appeal to District Judge Lindsey and are
awaiting the Court's final ruling on claim construction issues.
In July of 2005 the Federal Circuit Court of Appeals issued an en banc
decision in the patent case of Phillips v. AWH Corp. (the "Phillips Case"). That
is, instead of relegating the case to a three-judge panel, it was heard by the
entire Federal Circuit bench. The Federal Circuit attempted to explain how the
operative language in patents is to be interpreted. One key question before the
Court was to which sources of information the trial court should refer when
construing patent claims.
Subsequent to the Federal Circuit's decision in July, Defendants requested
and the Court ordered supplemental briefs to the Court addressing Magistrate
Judge Sanderson's Report and Recommendation respective to the Markman hearing in
light of the Federal Circuit's en banc decision in the Phillips Case. Both
parties filed their supplemental briefs in August 2005. Oral arguments regarding
these issues were held in November of 2005. On January 19, 2006, Magistrate
Judge Sanderson filed his final Report and Recommendation on the Markman issues
to District Judge Lindsay who will in turn provide the Court's final ruling on
claim construction issues. In his report Judge Sanderson found no reason to
change any portions of his recommendations filed on January 4, 2005, in light of
the Federal Circuit's decision in the Phillips Case. We anticipate a final
Markman ruling may occur as early as mid-April 2006. Thereafter, a revised
Scheduling Order will be prepared setting out a new trial date.
During the first quarter of 2000 starpay's trade secrets were relayed to
Visa verbally in face-to-face conferences and telephone calls, as well as in
correspondence by post and electronic mail. After receiving starpay's technology
and ideas, Visa filed a series of provisional patent applications beginning in
April of 2000 using starpay's trade secrets. At the same time, Visa wrongfully
incorporated starpay's trade secrets in to its Visa Payer Authentication Service
("VPAS"). VPAS infringes the VIMachine Patent. From early 2000 until recently,
starpay tried on several occasions to enter into meaningful negotiations with
Visa to resolve their intellectual property concerns. Visa has continually
denied their infringement of the VIMachine Patent and starpay's assertion that
Visa has appropriated starpay's trade secrets.
In November of 2000 Visa publicly announced that it was testing VPAS. In
September of 2001 Visa stated that, once rolled out globally, it expected VPAS
to reduce Internet payment disputes by at least 50%. In an October 2004, news
release, Visa depicted Verified by Visa as "the leading security standard for
authentication of Internet transactions." In this release Visa announced that
Verified by Visa had "recorded an increase of close to 200% in the number of
transactions for the quarter ending in September 2004," and that "total Verified
by Visa card volume for the first nine months of 2004 was $5.4 billion." In
April of 2005 Visa announced that "transaction volume during the first quarter
of 2005 had increased more than 230% over last year." Towards the end of 2005
Visa announced that Verified by Visa had "$7 billion in volume during the first
half of the year......a 194% year-over-year increase." Since late 2005,
Plaintiffs have not seen or received public information bearing on the
transaction volume within the Verified by Visa system.
Both sides anticipate filing dispositive motions this year, probably during
the summer. Until Judge Lindsey rules regarding pending claim construction
issues, there is no scheduling order in place. Plaintiffs will push for a trial
in calendar 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 4a. Executive Officers and Significant Employees of the Registrant.
- -------- ---------------------------------------------------------------
The table below sets forth the age, positions with us and the year in which
each person first became our executive officer or significant employee. All
positions are held with us unless otherwise indicated, and such persons are part
of the corporate staff serving us and all of our subsidiaries unless otherwise
indicated.
Executive Officer
Or Significant
Employee of
Beard or Beard
Name Principal Positions<F6> Oil Since Age
---- -------------------- --------- ---
W. M. Beard Chairman of the Board and
Chief Executive Officer<F1><F2> June 1969 77
Herb Mee, Jr. President & Chief Financial Officer<F1><F2> November 1973 77
Philip R. Jamison Chairman - Beard Technologies, Inc.<F3> February 1997 67
C. David Henry President - Beard Technologies, Inc. July 2004 52
and Beard Pinnacle, LLC<F4>
Riza E. Murteza President & CEO - Beard Environmental Engineering, L.L.C.
Chairman - Beijing Beard Sino-American Bio-Tech Engineering Co., Ltd. November 1998 76
Chairman, President & CEO - Xianghe BH Fertilizer Co., Ltd.<F4>
Marc A. Messner President - Advanced Internet Technologies, L.L.C.,
Sole Manager - starpay.com, l.l.c.<F6>
and Vice President Corporate Development of the Company April 1999 44
Jack A. Martine Controller and Chief Accounting Officer October 1996 56
Rebecca G. Voth Secretary and Treasurer<F2> July 1997 46
_______________
<FN>
<F1>
Director of the Company.
<F2>
Trustee of certain assets of the Company's 401(k) Trust.
<F3>
Devotes all of his time to this subsidiary.
<F4>
Devotes all of his time to these subsidiaries.
<F5>
Devotes most of his time to these subsidiaries.
<F6>
Indicated entities are subsidiaries of the Registrant.
</FN>
Information concerning our executive officers and certain significant
employees is set forth below:
W. M. Beard has served as our Chairman of the Board and Chief Executive
Officer since December 1992. He previously served as our President and Chief
Executive Officer from our incorporation in October 1974 until January 1985. He
has served BOC as its Chairman of the Board and Chief Executive Officer since
its incorporation. He has also served as our director and as a director of BOC
since their incorporation. Mr. Beard has been actively involved since 1952 in
all management phases of us and BOC from their inception, and as a partner of
their predecessor company.
Herb Mee, Jr. has served as our President since October 1989 and as our
Chief Financial Officer since June 1993. He has served as BOC's President since
its incorporation and as its Chief Financial Officer since June 1993. He has
also served as our director and as a director of BOC since their incorporation.
Mr. Mee served as President of Woods Corporation, a New York Stock Exchange
diversified holding company, from 1968 to 1972 and as its Chief Executive
Officer from 1970 to 1972.
Philip R. Jamison has served as Chairman of BTI since July 2004. He
previously served as BTI's President from August 1994 until July 2004. Mr.
Jamison has been associated with the coal industry since 1960, working in
various positions. From 1972 to 1977 he served as Vice President Operations for
International Carbon and Minerals and as President and CEO of all its coal
producing subsidiaries. From 1979 to 1988 he served as CEO of four small
companies which were engaged in the production and sale of coal.
C. David Henry has served as President of BTI since July 2004. He previously
served from 2000 until July 2004 as BTI's Vice President of Operations where he
focused on the development of coal recovery operations through the utilization
of advanced coal processing technologies and the production of high-grade fine
coal products. His area of expertise includes recovery and reclamation of coal
slurry impoundments, testing and analysis of coal slurry samples, slurry pond
reclamation design and coal preparation.
Riza E. Murteza has served as President and Chief Executive Officer of BEE
since December 2002 and of its predecessor since November 1998. He has served as
Chairman of BTEC since December 2001. He was appointed Senior Advisor to the
United Nations Development Project for China, residing in China for one year
(1996-1997) while assisting large Chinese enterprises' move to a market economy.
Prior to that he served as General Manager and Project Manager for two large
projects in Indonesia and a large project in the Soviet Union for periods
totaling nine years.
Marc A. Messner has served as President of AIT and as sole manager of
starpay. com, l.l.c. since May 2003. He served as President and Chief Executive
Officer of starpay (and its predecessor) from April 1999 to May 2003, and as
Sole Manager of starpay since May 2003. He has also served as our Vice President
- - Corporate Development since August 1998. Mr. Messner is the inventor of
starpay's proprietary payment system technology. From 1993 to 1998 he served as
President of Horizontal Drilling Technologies, Inc., a company he founded in
1993 which we acquired in 1996.
Jack A. Martine has served as our Controller, Chief Accounting Officer and
Tax Manager since 1996. Mr. Martine had previously served as tax manager for BOC
from June 1989 until October 1993. Mr. Martine is a certified public accountant.
Rebecca G. Voth has served as Corporate Secretary of us and BOC since
October 1993, and has served as Treasurer of such companies since July 1997.
All executive officers serve at the pleasure of the Board of Directors.
There is no family relationship between any of our executive officers. All
executive officers hold office until the first meeting of the Board of Directors
following the next annual meeting of stockholders or until their prior
resignation or removal.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------
Matters.
--------
Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters.
(a) Market information.
Our common stock trades on the OTC Bulletin Board ("OTCBB") under the
ticker symbol BRCO. The following table sets forth the range of reported high
and low bid quotations A for such shares on the OTCBB for each full quarterly
period within the two most recent fiscal years:
2005<F1><F2> High Low
------------ ---- ---
Fourth quarter $2.60 $0.90
Third quarter 2.75 1.75
Second quarter 2.85 1.70
First quarter 3.00 0.52
2004<F1><F2> High Low
------------ ---- ---
Fourth quarter $0.83 $0.52
Third quarter 1.25 0.35
Second quarter 1.00 0.115
First quarter 0.275 0.10
_______________
<FN>
<F1>
The reported quotations were obtained from the OTCBB Web Site. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. The
quotations reflect the high best bid and low best bid for each quarter. One
market maker has frequently quoted a bid of $0.01 per share, and at other
times a bid of $.0001 per share, and such bids are not considered to
reflect a realistic bid for the shares.
<F2>
All of the 2004 quotations prior to August 6, 2004, have been adjusted to
reflect the 2-for-1 stock split effected at the close of business on that
date.
</FN>
(b) Holders.
As of March 31, 2006, the Company had 428 record holders of common stock.
(c) Dividends.
To date, we have not paid any cash dividends. The payment of cash dividends
in the future will depend upon our financial condition, capital requirements and
earnings. We intend to employ our earnings, if any, primarily in our coal
reclamation activities and do not expect to pay cash dividends for the
foreseeable future. The Certificate of Designations of our Preferred Stock does
not preclude the payment of cash dividends. The Certificate provides that, in
the event we pay a dividend or other distribution of any kind, holders of the
Preferred Stock will be entitled to receive the same dividend or distribution
based upon the shares into which their Preferred Stock would be convertible on
the record date for such dividend or distribution.
(d) Securities authorized for issuance under equity compensation plans<F1>.
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, warrants outstanding options, under equity compensation
and rights warrants and rights plans (excluding securities
reflected in column (a))
(a) (b) (c)
------------------------------------- ---------------------- --------------------------------
Equity compensation 1993 SO Plan - 26,250<F2> $2.08<F2> None
plans approved by security
holders 2003-2 DSC Plan - 580,155<F3> $0.53<F3> None
Equity compensation plans 2005 SO Plan - 45,000<F4> $2.70<F4> 55,000
not approved by security
holders 2005 DSC Plan - 17,935<F5> $1.46<F5> 82,065
------------------------------------- ---------------------- --------------------------------
Total All Plans - 669,340 $0.76 137,065
===================================== ====================== ================================
_______________
<FN>
<F1>
The numbers shown in the above table are as of December 31, 2005.
<F2>
The 1993 Stock Option Plan, as amended and as adjusted for subsequent stock
splits, authorized the issuance of 412,500 shares of common stock.
Stockholders approved the initial plan and all subsequent amendments. The
Plan terminated on August 26, 2003.
<F3>
The 2003-2 Deferred Stock Compensation Plan, as amended, which authorized
800,000 shares to be issued, was approved by the stockholders at the 2004
Annual Stockholders' Meeting. At the time the Plan was terminated on
November 17, 2005, a total of 797,812 Stock Units had been credited to the
Participants' Stock Unit Accounts based upon the Participants' deferral of
$425,100 of Fees or Compensation. At year-end 2005, 217,653 shares had been
distributed to the Participants, 4 fractional shares had been cashed out,
and 580,155 additional shares remained to be distributed to Participants
who had elected the equal annual installments distribution method. As of
March 31, 2006, an additional 56,242 shares had been distributed, leaving
523,913 shares to be issued.
<F4>
The 2005 Stock Option Plan, which authorized the issuance of 100,000 shares
of common stock to be issued, was adopted by the Board of Directors on June
9, 2005. The Plan will be presented for approval by stockholders at the
2006 Annual Stockholders' Meeting.
<F5>
The 2005 Deferred Stock Compensation Plan, which authorized 100,000 shares
to be issued, was adopted by the Board of Directors on November 17, 2005.
As of December 31, 2005, a total of 17,935 Stock Units had been credited to
the Participants' Stock Unit Accounts based upon the Participants' deferral
of $26,150 of Fees or Compensation. As of March 31, 2006, a total of 42,495
shares had been credited to the Participants' Accounts, based upon the
Participants' deferral of $55,850 of Fees or Compensation. The Plan will be
presented for approval by stockholders at the 2006 Annual Stockholders'
Meeting.
</FN>
Item 6. Selected Financial Data.
- ------- ------------------------
The following financial data are an integral part of, and should be read in
conjunction with, the financial statements and notes thereto. Information
concerning significant trends in the financial condition and results of
operations is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 27 through 38 of this report.
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of operations data:
Revenues from continuing operations $ 1,379 $ 972 $ 593 $ 469 $ 602
Interest income 19 3 1 119 177
Interest expense (999) (694) (637) (519) (326)
Earnings (loss) from continuing
operations (2,302) 937 (1,490) (4,391) (1,453)
Earnings (loss) from discontinued
operations 142 -- (121) (223) (868)<F1>
Net earnings (loss) (2,160) 937 (1,611) (4,614) (2,321)
Net earnings (loss) attributable to
common shareholders (2,160) 937 (1,611) (4,614) (2,321)
Net earnings (loss) per share<F2>:
Basic:
Earnings (loss) from continuing
operations (0.39) 0.18 (0.33) (1.05) (0.37)
Earnings (loss) from discontinued
operations 0.02 0.00 (0.02) (0.05) (0.21)
Net earnings (loss) (0.37) 0.18 (0.35) (1.10) (0.58)
Diluted:
Earnings (loss) from continuing
operations (0.39) 0.14 (0.33) (1.05) (0.37)
Earnings (loss) from discontinued
operations 0.02 0.00 (0.02) (0.05) (0.21)
Net earnings (loss) (0.37) 0.14 (0.35) (1.10) (0.58)
Balance Sheet Data:
Working capital (2,448) (994) (854) (303) 281
Total assets 4,464 2,712 2,380 2,703 5,497
Long-term debt (excluding
current maturities) 7,038 5,393 6,322 5,680 3,952
Convertible preferred stock 889 889 889 -- --
Redeemable preferred stock -- -- -- 889 889
Total common shareholders' equity
(deficiency) (5,983) (4,144) (5,333) (4,833) (344)
_______________
<FN>
<F1>
In March 2001, we determined that we would no longer provide financial
support to ISITOP, Inc., an 80%-owned subsidiary specializing in the
remediation of polycyclic aromatic hydrocarbon contamination. In May 2001,
we sold the fixed assets of the 50%-owned subsidiary involved in natural
gas well testing operations. In August 2001, we made the decision to cease
pursuing opportunities in Mexico and the WS Segment was discontinued. (See
note 3 of notes to financial statements).
<F2>
All per share numbers have been adjusted to reflect the 2-for-1 stock split
effected by us as of August 6, 2004.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
--------------
The following discussion addresses the significant factors affecting our
results of operations, financial condition, liquidity and capital resources.
Such discussion should be read in conjunction with our financial statements
including the related notes and our selected financial information.
Overview
- --------
General. In 2005 we operated within the following operating segments: (1)
the Coal Reclamation Segment, (2) the Carbon Dioxide ("CO2") Segment, (3) the
China Segment, and (4) the e-Commerce Segment.
The Coal Segment is in the business of operating coal fines reclamation
facilities in the U.S. and provides slurry pond core drilling services, fine
coal laboratory analytical services and consulting services. The CO2 Segment
consists of the production of CO2 gas. The China Segment is focusing on the
construction and operation of plants that manufacture environmentally friendly
organic chemical compound fertilizer ("OCCF") in China. The e-Commerce Segment
is engaged in a strategy to develop business opportunities to leverage starpay's
intellectual property portfolio of Internet payment methods and security
technologies.
In 2005 our continuing operations reflected a loss of $2,302,000 compared
to earnings of $937,000 in 2004 and a loss of $1,490,000 in 2003.
Beginning in 1999 we started discontinuing the operations of those segments
that were not meeting their targeted profit objectives and which did not appear
to have significant growth potential. This ultimately led to the discontinuance
of four of our unprofitable segments. Such discontinued operations contributed
earnings of $142,000 in 2005 compared to losses of $-0- and $121,000 in 2004 and
2003, respectively. See "Discontinued Operations" below.
Now that the McElmo Dome litigation has been settled, we are focusing our
primary attention on the Coal, China and e-Commerce Segments, which we believe
have significant potential for growth and profitability.
We have other assets and investments that we have been liquidating as
opportunities have materialized.
Operating results for 2005, 2004 and 2003 continue to be impacted by the
lack of a major coal reclamation contract since January of 1999. Termination of
our last such contract (see "Coal Reclamation Activities---The MCN Projects")
has resulted in a severe decline in the segment's revenues---from $8,585,000 in
1998 down to $52,000 in 2005---with a correspondingly dramatic impact on
profitability. The segment, which had an operating profit of $1,678,000 in 1998,
recorded operating losses of $516,000 in 2003, $682,000 in 2004 and $783,000 in
2005. $6,000 of the 2003 loss resulted from impairments of long-lived assets
within the segment.
Operating profit of the CO2 Segment in 2005 increased $364,000, or 62%,
from the prior year, as a result of both increased production and higher
pricing. The operating losses of the China Segment increased to $787,000 in 2005
compared to $549,000 for the prior year as the segment incurred increased costs
associated with the construction and initial operations of its first fertilizer
plant in China. $336,000 of the losses incurred by the segment during the year
were incurred by the LLC which owns our fertilizer manufacturing operations and
by its wholly-owned subsidiary, Xianghe BH Fertilizer Co., Ltd. The operating
loss of the e-Commerce Segment increased to $139,000 from $124,000 the previous
year as a result of increased expenses associated with its lawsuit against VISA.
The operating loss from corporate activities at the parent company level
increased $27,000, or 3%, primarily as a result of increased amortization of
capitalized costs associated with debt. The Company's overall results for 2005
were disappointing - a loss of $2,302,000 compared to earnings of $937,000 in
2004. While revenues for 2005 increased $407,000, expenses increased $424,000
compared to 2004 and the bottom line was severely impacted by a $305,000
increase in interest expense. Further, the results for 2004 reflected the
receipt of $2,943,000 for the second and third installments of the McElmo Dome
settlement with no comparable income amount in 2005.
Operating profit of the CO2 Segment in 2004 increased $222,000, or 61%,
from the prior year, as a result of both increased production and higher
pricing. The operating losses of the China Segment decreased to $549,000 in 2004
from $724,000 for the prior year as the segment incurred fewer administrative
costs associated with the termination of a relationship with a former technology
partner in China. The operating loss of the e-Commerce Segment increased to
$124,000 from $100,000 the previous year as a result of increased expenses
associated with its lawsuit against VISA. The operating loss from corporate
activities at the parent company level decreased $231,000, or 20%, primarily as
a result of lower professional fees and a reduction in amortization of
capitalized costs associated with our debt offerings. The year reflected a
reversal of our fortunes---going from a loss of $1,611,000 in 2003 to earnings
of $937,000 in 2004, primarily reflecting (i) the receipt of $2,943,000 as the
second and third installments of the McElmo Dome settlement versus $1,151,000
the prior year, (ii) a $379,000 increase in total revenues, and (iii) a
reduction in operating costs of $59,000.
Operating profit of the CO2 Segment in 2003 increased $72,000, or 25%, from
the prior year, as a result of both increased production and higher pricing. As
a result of the dissolution of the relationship with its previous technology
partner in China, losses of the China Segment increased to $724,000 in 2003 from
$46,000 the prior year when results of the first 11 months were reported as a
$357,000 loss in earnings of unconsolidated affiliates. The e-Commerce Segment
reported its first revenues in 2003, and reduced its operating loss to $100,000
from $202,000 the previous year when results were burdened by a $45,000
impairment of intangible assets. The operating loss from corporate activities at
the parent company level increased $183,000, or 19%, primarily as a result of
higher insurance costs and professional fees, and costs associated with the debt
offerings. Our total net loss decreased $3,003,000, or 65%, to $1,611,000
primarily reflecting (i) the receipt of $1,162,000 as the first installment of
the McElmo Dome settlement and (ii) the fact that $2,433,000 of the 2002 loss
resulted from impairment of long-lived assets, investments and other assets.
The recurring net losses and overall declines in financial condition and
liquidity raise substantial doubts about our ability to continue as a going
concern, as expressed in the independent auditors' opinion on page 40.
Liquidity and capital resources
- -------------------------------
Capital investments. The Company's capital investment programs have
required more cash than has been generated from operations during the past three
years. Cash flows provided by (used in) operations during 2005, 2004 and 2003
were $(1,888,000), $328,000, and $(851,000), respectively, while capital
additions from continuing operations were $2,097,000, $217,000 and $55,000,
respectively, as indicated in the table below:
2005 2004 2003
---- ---- ----
Coal $1,504,000 $ 183,000 $ 7,000
Carbon dioxide 26,000 33,000 33,000
China 279,000 -- --
e-Commerce -- 1,000 --
Other 288,000 -- 15,000
---------- ---------- ----------
Total $2,097,000 $ 217,000 $ 55,000
========== ========== ==========
Our 2006 capital expenditure budget has tentatively been set at $9,130,000.
This includes the capital cost of the Pinnacle Project, but does not include the
cost of any additional recovery plants that may be constructed by the Coal
Segment since the timing and dollar amount of such projects are uncertain and
the projects are subject to the availability of financing. It also does not
include the cost of doubling the production capacity of the fertilizer
manufacturing facility in China, since the timing of the increase has not yet
been determined, and the funds for such increase, if it should occur, will need
to come from the cash flow of the present facility.
Liquidity. The Coal Segment produced a healthy profit in 1998, but has
since operated unprofitably. Activity commenced in China in late 1998 and in the
e-Commerce Segment in early 1999, but both are still essentially start-up
operations. Sustaining the operating activities of our three unprofitable
segments, plus our overhead, has resulted in a serious outflow of cash during
the past three years. We have managed to survive this cash shortfall to date
through a series of financings and the sale of various assets, principally those
left over from our discontinued operations. A $2,783,000 long-term line of
credit from an affiliate of the Chairman, secured by our working and overriding
royalty interests in the McElmo Dome Field, has been periodically extended and
currently matures in April of 2008.
Two private placements of notes and warrants totaling $629,000 were
completed in February and July of 2003. Three additional private placements were
completed in June and December of 2004 and January of 2005 for gross proceeds of
$3,300,000, of which $1,455,000 was received in 2004. In addition, we borrowed
$200,000 from a related party in November 2003, $103,000 from an unconsolidated
subsidiary in December 2003, and $125,000 from a bank in February and March of
2004. Such funds were needed to "bridge the gap" until the distribution of the
McElmo Dome settlement had been completed. Receipt of the second and third
installments from the McElmo Dome litigation improved our balance sheet and
income statement. We received $1,162,000 of the settlement in July of 2003, and
$2,826,000 and $117,000 in March and May of 2004, respectively. Upon receipt of
the second installment, we were able to eliminate $2,620,000 of our total
indebtedness. (See "Item 3. Legal Proceedings---McElmo Dome Litigation").
We borrowed an additional $200,000 from the unconsolidated subsidiary in
November of 2004 to provide needed working capital until the $2,100,000 private
placement was completed in January of 2005. Another private placement was
commenced in June of 2005 and $1,135,000 of the notes had been sold by year-end,
$624,102 of which were received in exchange for one of the earlier issues. We
had sold another $193,000 of these notes by March 31, 2006. On March 28, 2006,
we obtained a $350,000 credit facility from a local bank which has been used to
provide us with additional working capital since that date. See "Item 1.
Business. General development of business. Recent Developments---Bank Credit
Facility on Colorado Gas Wells").
Our activities in 2003 were primarily funded by the proceeds from two
private placements of notes and warrants, by loans from related parties or an
affiliate and by the sale of assets. Our activities in 2004 and 2005 were
primarily funded from the proceeds of four additional private placements. Future
cash flows and availability of credit are subject to a number of variables,
including demand for our coal reclamation services and technology, continuing
demand for CO2 gas, demand for the installation of fertilizer manufacturing
facilities in China and the e-Commerce Segment's success (i) in developing
licensing agreements and other fee based arrangements with companies
implementing technology in conflict with its intellectual property or (ii)
resulting from its ongoing Visa litigation.
During 2005 we reduced our working capital by $1,504,000 to $(2,448,000) in
2005 from $(994,000) at year-end 2004. The Coal Segment used $1,918,000 to
purchase equipment and $801,000 to fund operating losses. The China Segment
required $818,000 to fund net advances for operations and $430,000 to purchase
equipment. Another $139,000 was used to fund the startup activities of the
e-Commerce Segment. We repaid $634,000 in debt and $510,000 in accrued interest
expense. Other corporate activities utilized approximately $811,000 of working
capital. The bulk of these expenditures were funded by an additional $4,338,000
in debt, $1,172,000 from the sale of carbon dioxide and $246,000 from the sale
of assets.
As a result, at December 31, 2005, we were in a negative working capital
position with working capital of $(2,448,000), and a current ratio of 0.25 to 1.
We expect our working capital position to be improved in 2006 as a result of the
Pinnacle Project operations. At this juncture it is uncertain whether the
$9,000,000 loan for the Pinnacle Project will come from a loan arranged by the
pond owner or from the bank if the USDA guaranty is obtained. We anticipate that
this determination will occur no later than May of 2006 and that our agreements
with PinnOak (some of which are still in the final negotiation stage) will be
finalized at that point. In either event the pond owner will be obligated, once
the remaining draft agreements have been finalized and executed, to reimburse us
in June for overhead charges through May totaling $370,000, plus approximately
$377,000 for BTI equipment and other project expenses incurred but not yet
billed to the Pinnacle Project. Regardless of the source of funding,
construction on the project is moving forward rapidly and we expect to have
first coal production and start generating cash flow in June of 2006. In
addition, if the USDA guaranty is obtained, a portion of the $9,000,000 bank
loan will be utilized to pay off the loans from PinnOak, so $1,100,000 of the
working capital deficit will go away. If the USDA guaranty is not obtained, and
PinnOak arranges for the funding of the project, BPLLC's short-term note to
PinnOak will be replaced by a $9,000,000 note with a term of approximately three
and one-half to four years. If PinnOak assumes control of the project, BPLLC
will be owned 75% by PinnOak and 25% by BTI, instead of the 50% ownership each
Company now has of BPLLC.
In addition to the $747,000 cash infusion from the Pinnacle Project
discussed above, we expect to generate cash of at least $50,000 from the
disposition of the remaining assets from two of our discontinued segments, and
can sell certain other assets to generate cash if necessary. Moreover, we
believe it is likely that we will receive up to $500,000 as a result of the
binding arbitration scheduled to be held at the end of June, 2006. Although we
believe that we have a strong position in this matter, there is no assurance
that the matters in dispute will be resolved in our favor. See "Item 3. Legal
Proceedings. McElmo Dome Litigation."
Our principal business is coal reclamation, and this is where management's
operating attention is primarily focused. $5,910,000 has already been advanced
by PinnOak to finance construction on the Pinnacle Project. The Coal Segment is
actively pursuing seven other projects which it has under development. With the
exception of the Pinnacle Project, no definitive contracts have been signed and
there is no assurance that the required financing will be obtained or that any
of the projects will materialize.
In addition, our initial fertilizer manufacturing plant in China commenced
production in October of 2005. Although sales have developed much more slowly
than anticipated, recent sales have been encouraging. As a result, we now
anticipate that the plant will be generating positive cash flow during the last
six months of 2006, in which case we will no longer be burdened with carrying
the overhead in China.
We incurred losses from continuing operations totaling $2,855,000 during
the past three years. The Company realized net earnings from discontinued
operations totaling $21,000 during such period as the bulk of the assets of the
four discontinued segments were sold. The problems from the discontinued
segments are now behind us and management expects to dispose of the few assets
remaining from such operations in 2006. We will pursue the sale of such assets
as opportunities become available.
Once the Pinnacle Project and the China fertilizer plant start generating
positive cash flow, the outlook for the Company will significantly improve.
Although we feel there is a high degree of certainty that both projects will
achieve this result, there is no assurance that such will be the case. If, on
the other hand, both projects achieve their targeted objectives, we will have
taken a major step toward restoring our credibility and putting ourselves on the
path to profitability.
It is essential that these projects move forward quickly. If that does not
occur, we must pursue additional outside financing, which would likely involve
further dilution to our stockholders. Our selected liquidity highlights for the
past three years are summarized below:
2005 2004 2003
---- ---- ----
Cash and cash equivalents $ 363,000 $ 127,000 $ 216,000
Accounts and other receivables, net 215,000 167,000 89,000
Asset sales 246,000 63,000 234,000
Assets of discontinued operations held for resale 20,000 40,000 55,000
Liabilities of discontinued operations held for resale 42,000 95,000 92,000
Trade accounts payable 717,000 177,000 133,000
Current maturities of long-term and short-term debt 1,631,000 774,000 698,000
Long-term debt 7,038,000 5,393,000 6,322,000
Working capital (2,448,000) (994,000) (854,000)
Current ratio 0.25 to 1 0.27 to 1 0.32 to 1
Net cash provided by (used in) operations (1,888,000) 328,000 (851,000)
In 2005, we had positive cash flow of $236,000. Operations of the Coal,
China, and e-Commerce Segments and the discontinued operations resulted in cash
outflows of $1,676,000 (See "Results of operations---Other corporate activities"
below).
Our investing activities utilized cash of $1,499,000 in 2005. Proceeds from
the sale of assets provided cash of $246,000. Net distributions from our
investment in Cibola and a real estate partnership provided cash of $241,000.
Acquisitions of property, plant and equipment and intangible assets used
$2,097,000 of the cash outflow.
Our financing activities provided cash flows of $3,623,000 in 2005. We
received net cash of $4.258,000 from our borrowings and from the exercise of
warrants and utilized $634,000 for payments on lines of credit and term notes.
At December 31, 2005 we had no available lines of credit. However, at March
31, 2006 we had cash and cash equivalents of $287,000, plus available credit of
$150,000, primarily as a result of the $350,000 reducing revolving credit
facility closed in March of 2006 with a local bank.
Material Trends and Uncertainties. We recorded a net loss of $2,160,000 in
2005 compared with net earnings of $937,000 in 2004 and a net loss of $1,611,000
in 2003. 2004 results benefited from the $2,943,000 received from the McElmo
Dome settlement. We have generated operating losses for seven consecutive years.
The recent trend had been positive until 2005. We recorded an operating loss of
$1,717,000 in 2005 versus operating losses of $1,700,000 in 2004 and $2,138,000
in 2003, respectively. Despite the amount of debt that we have incurred in
recent years, we believe that we have the ability to finance our Coal and China
projects on a project financing basis, as demonstrated by the financing of our
initial fertilizer plant in China and the Pinnacle Project in West Virginia. At
the corporate level, future borrowings will likely be dependent upon our ability
to generate positive cash flows from operations. It is unlikely that additional
borrowings will be made available to us from a related party. We will continue
to pursue USDA-guaranteed loans for our Coal projects, but there is no assurance
we will be successful in such efforts. As discussed above, it is critical that
we achieve positive cash flow on our Coal and China projects this year. If we do
not achieve positive cash flow on our Coal and China projects this year, we may
be forced to raise additional capital, which would likely further dilute our
shareholder holdings. We cannot assure you that we would be able to raise
additional capital on acceptable terms, or at all.
Our 2005, 2004 and 2003 financial results were burdened by impairments of
long-lived assets totaling $-0-, $-0- and $82,000, benefited from earnings from
discontinued operations totaling $142,000 in 2005 and were burdened by losses
from discontinued operations totaling $-0- and $121,000, respectively in 2004
and 2003. At year-end 2005 our total assets, net of current assets of $820,000,
had been written down to $3,644,000. $329,000 of this amount consisted of our
McElmo Dome properties which generated revenues of $1,172,000 and operating
profits of $949,000 in 2005. We believe it is highly unlikely that there will be
any significant impairments going forward. Nor do we anticipate having any
additional losses from the operations of the discontinued segments going
forward. On the other hand, 2003 and 2004 financial results benefited from the
McElmo Dome settlement in the gross amount of $1,162,000 and $2,943,000,
respectively. The Settlement is a non-recurring item, so we will not have this
benefit in the future except to the extent that McElmo Dome operating results
may benefit from improved pricing or reduced pipeline charges as a result of the
Settlement.
In addition, the Company recorded impairments of investments and other
assets of $4,465,000, $3,087,000 and $2,159,000 related to its investment in
Cibola Corporation for the years 2005, 2004 and 2003, respectively. While the
Company owned 80% of the common stock of Cibola through November 30, 2005, it
did not have financial or operating control of this gas marketing subsidiary.
After considering the impairments mentioned, the Company recorded net earnings
of $338,000, $409,000 and $357,000 for 2005, 2004 and 2003, respectively, from
its investment in Cibola which represented actual distributions to the Company
under terms of an agreement with Cibola which was terminated on December 1,
2005.
One uncertainty we are facing is the amount of litigation expense the
e-Commerce Segment will incur in 2006 and possibly 2007 related to the
litigation against Visa. It is difficult to estimate how much the segment's
one-half of the out-of-pocket expenses (excluding legal fees) associated with
such litigation may total. However, we believe that the anticipated improved
results from the Coal, China and CO2 Segments, will take care of such expenses.
Results of operations
- ---------------------
General. We discontinued four of our segments, all of which were
unprofitable, during the period from 1998 to 2001. Management has since been
focusing its attention on making the remaining operations profitable. We have
now succeeded in bringing our initial fertilizer project in China on-line, and
anticipate that the Pinnacle Project will be on stream in June of 2006. Subject
to obtaining the necessary financing, we believe we are now getting close to
bringing one or more of the other projects under development in the Coal Segment
to reality. If not, as mentioned above, we will need to pursue additional
outside financing, which would likely involve further dilution to our
shareholders.
Operating profit (loss) for the last three years for our remaining segments
is set forth below:
2005 2004 2003
---- ---- ----
Operating profit (loss):
Coal $ (783,000) $ (682,000) $ (516,000)
Carbon dioxide 949,000 585,000 363,000
China (787,000) (549,000) (724,000)
e-Commerce (139,000) (124,000) (100,000)
----------- ----------- -----------
Subtotal (760,000) (770,000) (977,000)
Other - principally corporate (957,000) (930,000) (1,161,000)
----------- ----------- -----------
Total $(1,717,000) $(1,700,000) $(2,138,000)
=========== =========== ===========
Following is a discussion of results of operations for the three-year
period ended December 31, 2005.
Coal reclamation. As a result of the recent change of direction, we have
focused much of our attention on coal reclamation. The following table depicts
segment operating results for the last three years:
2005 2004 2003
---- ---- ----
Revenues $ 52,000 $ 189,000 $ 59,000
Operating costs (520,000) (719,000) (441,000)
SG&A (305,000) (135,000) (129,000)
Other expenses (10,000) (17,000) (5,000)
--------- --------- ---------
Operating profit (loss) $(783,000) $(682,000) $(516,000)
========= ========= =========
The 2005 operating loss for the segment was $101,000 greater than that of
2004 largely due to no active projects and limited lab analysis activity. In
addition, the segment incurred greater SG&A type expenses as it prepared for the
Pinnacle project which is expected to begin production in 2006. The 2004
operating loss reflects the negative impact of the early termination of a
contract that did not work out as expected. The 2003 operating losses included
$6,000 of impairments of long-lived assets. Except for the aforementioned
contract, no new projects were undertaken during the three year period. However,
the industry climate has improved dramatically in recent months due to the
increase in coal and natural gas prices, and the outlook for the segment has
correspondingly improved, with seven other projects currently under development
including two new projects since the beginning of 2005.
Carbon dioxide. The primary component of revenues for this segment is the
sale of CO2 gas from the working and overriding royalty interests of our two
carbon dioxide producing units in Colorado and New Mexico. These units also
provide very minor amounts of revenue from the sale of oil, natural gas and
sulphur. The following table depicts operating results for the last three years:
2005 2004 2003
---- ---- ----
Revenues $ 1,172,000 $ 754,000 $ 508,000
Operating expenses (181,000) (128,000) (106,000)
DD&A (42,000) (41,000) (39,000)
----------- ----------- -----------
Operating profit $ 949,000 $ 585,000 $ 363,000
=========== =========== ===========
The following table shows the trend in production volume, sales prices and
lifting cost for the three years:
2005 2004 2003
---- ---- ----
Net production (Mcf) 1,902,000 1,787,000 1,529,000
Average sales price per Mcf $ 0.60 $ 0.42 $ 0.33
Average lifting cost per Mcf $ 0.07 $ 0.06 $ 0.06
As evidenced by the above, revenues, production, sales prices and lifting
costs per Mcf are all trending up. More importantly, the operating margin
continues to trend upward. As a result of additional development drilling in the
field in 2003-2004, the increase in oil prices which has increased the demand
for CO2, and the anticipated continuing improvement in CO2 pricing as a result
of the McElmo Dome settlement, we look for continuing improvement in the outlook
for the CO2 Segment in 2006.
China. In 2003 and most of 2004 the China Segment focused its attention on
the financing and construction of fertilizer plants utilizing composting
technology licensed from third parties. These efforts were unsuccessful;
accordingly, in the fall of 2004 the segment shifted its focus to the concept of
a much smaller mini-plant which would not utilize the licensed technology. The
initial mini-plant was constructed in 2005 and began operations in the fourth
quarter of 2005, recording the segment's first revenues of $29,000. The segment
had no revenues in 2004 or 2003, and recorded $802,000, $548,000 and $724,000 of
operating and SG&A expenses in 2005, 2004 and 2003, respectively, while pursuing
its various marketing efforts. The segment recorded operating losses of
$787,000, $549,000 and $724,000 attributable to its operations in China for the
years 2005, 2004 and 2003, respectively.
e-Commerce. In early 1999, we began developing our proprietary concept for
an Internet payment system through starpay. starpay recorded its initial
revenues of $25,000 in 2003 and $29,000 and $31,000 in 2004 and 2005,
respectively. The segment recorded $168,000, $147,000 and $119,000 of SG&A
expenses, respectively, in 2005, 2004 and 2003. Operating results for 2004 and
2005 were burdened with additional expenses associated with the segment's
ongoing litigation against VISA and, as a result, operating losses increased
from $100,000 in 2003 to $124,000 in 2004 and to $139,000 in 2005.
Other corporate activities. Other corporate activities include general and
corporate operations, as well as assets unrelated to our operating segments or
held for investment. These activities generated operating losses of $957,000 in
2005, $930,000 in 2004 and $1,161,000 in 2003. The increased operating loss in
2005 compared to 2004 was due to higher professional fees associated with the
search for project financing and increased amortization of capitalized costs
associated with our subordinated debt, including a $51,000 charge for
capitalized costs associated with an unsuccessful search for new financing. The
$231,000 decrease in the operating loss for 2004 compared to 2003 was
attributable to a $58,000 reduction in professional fees and other SG&A costs, a
$91,000 drop in amortization costs associated with our subordinated debt, and
the fact that there was no impairment of leases in 2004.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") decreased to $861,000 in 2005 from $870,000 in
2004 after decreasing from $923,000 in 2003. The $9,000 decrease in 2005
compared to 2004 was the result of reductions in many types of expenses, none of
which were individually significant. The $53,000 decrease in 2004 was primarily
attributable to lower professional fees associated with the issuance of our
debt.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expenses increased to $187,000 in 2005 after decreasing to $92,000
in 2004 from $169,000 in 2003. The increase in 2005 was due to higher
depreciation costs associated with the plant in China and increased amortization
expense associated with the issuance of debt in 2005. The decrease in 2004 was
the result of lower amortization costs associated with the issuance of our
subordinated debt. The lower amortization expense was the result of such costs
being amortized over a longer term than in the prior year.
Impairment of long-lived assets. In 2003 we recognized $82,000 of
impairment of long-lived assets as required by Financial Accounting Standards
Board ("FASB") No. 144. Assets in the Coal Segment were impaired $6,000 in 2003
while the remaining $76,000 of the 2003 impairments related to assets unrelated
to the operating segments. No such impairments were required in 2004 or 2005.
Interest income. Interest income increased to $19,000 in 2005 after
increasing to $3,000 in 2004 from $1,000 in 2003. The increases are from
short-term investments associated with increased levels of cash on hand as a
result of our debt offerings.
Interest expense. Interest expense increased to $999,000 in 2005 from
$694,000 in 2004 and from $637,000 in 2003 reflecting the increased level of
debt in each year as we borrowed to meet our working capital and operating needs
and to fund the Coal and China ventures. These amounts include $109,000 for 2005
and $119,000 for both 2003 and 2004 paid to Cibola Corporation for Beard's
investment in Cibola.
Equity in earnings of unconsolidated affiliates. Our equity in earnings of
unconsolidated affiliates reflected net earnings of $336,000, $495,000 and
$354,000 for 2005, 2004 and 2003, respectively, after the impairments discussed
below. Our equity in the operating losses of our affiliate in China reflected a
loss of $357,000 for 2002, the second year of conducting the operations in China
in this format, and $-0- for both 2003 and 2004, respectively.
Offsetting our share of the losses of the affiliate in China was our share
of the earnings of Cibola Corporation ("Cibola"). Although we owned 80% of the
common stock of Cibola, we did not have operating or financial control of this
gas marketing subsidiary which was formed in 1996. We recorded $4,803,000,
$3,496,000 and $2,515,000 representing our 80% share of the earnings of Cibola
for 2005, 2004 and 2003, respectively. Due to the terms of an agreement with the
minority and preferred shareholders of Cibola, however, that provided that the
net worth of Cibola would have to reach $50,000,000 before we could begin to
receive our 80% share of any excess over $50,000,000, we also recorded
impairments of $4,451,000, $3,087,000 and $2,159,000 for the years 2005, 2004
and 2003, respectively. Beard also wrote off $13,000 of its remaining investment
in Cibola in the third quarter of 2005. Cibola, then, contributed a net
$230,000, $290,000 and $238,000 of our financial net income for fiscal years
2005, 2004 and 2003, respectively, after netting the interest charges above and
these impairments against our 80% share of earnings, pursuant to this agreement.
The agreement was terminated, according to its terms, by the minority common and
preferred shareholders effective December 1, 2005. Cibola did not reach the
aforementioned net worth position and accordingly we received from Cibola only
the net amounts recorded above and already distributed. In addition, in 2004, we
recorded $86,000 in earnings from our investment in JMG-15, a real estate
partnership in Texas that sold a parcel of land during the year, compared to
losses of $2,000 for each of the years 2005 and 2003, respectively, from this
partnership.
Gain on sale of assets. Gains from the sale of assets totaled $64,000,
$14,000 and $1,000 in 2005, 2004 and 2003, respectively. Such gains reflected
proceeds from the sale of certain assets sold in such years.
Impairment of investments and other assets. The Company recorded
impairments of $4,465,000, $3,087,000 and $2,159,000 for the years 2005, 2004
and 2003, respectively, which reduced the recorded earnings attributable to the
Company's investment in Cibola to the actual distributions received under the
terms of an agreement which was terminated by the minority and preferred
shareholders on December 1, 2005.
Income taxes. We have approximately $48.4 million of net operating loss
carryforwards and depletion carryforwards to reduce future income taxes. Based
on our historical results of operations, it is not likely that we will be able
to fully realize the benefit of our net operating loss carryforwards which begin
expiring in 2006. At December 31, 2005 and 2004, we have not reflected as a
deferred tax asset any future benefit we may realize as a result of our tax
credits and loss carryforwards. Our future regular taxable income for the next
three years will be effectively sheltered from federal income tax as a result of
our substantial tax credits and loss carryforwards. Continuing operations
reflect foreign and state income and federal alternative minimum taxes of
$35,000, $118,000 and $-0- for 2005, 2004 and 2003, respectively. It is
anticipated that we will continue to incur minor alternative minimum tax in the
future, despite our carryforwards and credits.
Discontinued operations. Bolstered by gains totaling $155,000 from the
sales of equipment, discontinued operations recorded net earnings of $142,000
for the year 2005. As mentioned in the Overview above, our financial results
from the discontinuance of these four segments were burdened by losses of $-0-
and $121,000, respectively, in 2004 and 2003. As of December 31, 2005, the
assets and liabilities of discontinued operations held for resale totaled
$20,000 and $42,000, respectively. We believe that all of the assets of the
discontinued segments have been written down to their realizable value. See Note
4 to the financial statements.
Forward looking statements. The previous discussions include statements
that are not purely historical and are "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including statements regarding our expectations, hopes, beliefs, intentions
and strategies regarding the future. Our actual results could differ materially
from its expectations discussed herein, and particular attention is called to
the discussion under "Liquidity and Capital Resources---Effect of Recent
Developments on Liquidity" and "Material Trends and Uncertainties" contained in
this Item 7.
Impact of Recently Adopted Accounting Standards
- -----------------------------------------------
In November of 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle
capacity and spoilage costs be excluded from the costs of inventory and expensed
when incurred. This standard is effective for fiscal periods beginning after
June 15, 2005. The Company will adopt SFAS No. 151 effective January 1, 2006.
The adoption of this new standard is not expected to have a material effect on
the Company's consolidated financial statements.
In December of 2004, the FASB issued SFAS No. 123R, Share-Based Payment, a
revision of SFAS No.123, Accounting for Stock-Based Compensation. SFAS 123R
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based upon their fair values. Pro forma disclosure is no longer an
acceptable alternative. As allowed by the Securities and Exchange Commission,
SFAS 123R must be adopted at the beginning of the next fiscal year that begins
after June 15, 2005. The Company will adopt SFAS 123R effective January 1, 2006.
The Company believes that the effects of implementing SFAS 123R will not be
significantly different from the pro forma disclosures.
In May of 2005, the FASB issued FASB No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FADB Statement No. 3. SFAS
154 applies to all voluntary changes in accounting principle and requires
retrospective application to prior periods' financial statements in accounting
principle unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. Adoption of SFAS 154 is required
for accounting changes and error corrections made in fiscal years beginning
after December 15, 2005. The Company will adopt this new standard effective
January 1, 2006. The adoption of this standard is not expected to have a
material effect on the Company's consolidated financial statements.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. For example, unexpected changes in market conditions or a
downturn in the economy could adversely affect actual results. Estimates are
used in accounting for, among other things, the allowance for doubtful accounts,
valuation of long-lived assets, legal liability, depreciation, taxes, and
contingencies. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Receivables and Credit Policies
- -------------------------------
Accounts receivable include amounts due from the sale of CO2 from properties in
which we own an interest, a tax refund due, accrued interest receivable and
uncollateralized customer obligations due under normal trade terms requiring
payment within 30 days from the invoice date. Notes receivable are stated at
principal amount plus accrued interest and are normally not collateralized.
Payments of accounts receivable are allocated to the specific invoices
identified on the customers remittance advice or, if unspecified, are applied to
the earliest unpaid invoices. Payments of notes receivable are allocated first
to accrued but unpaid interest with the remainder to the outstanding principal
balance. Trade accounts and notes receivable are stated at the amount management
expects to collect from outstanding balances. The carrying amounts of accounts
receivable are reduced by a valuation allowance that reflects management's best
estimate of the amounts that will not be collected. Management individually
reviews all notes receivable and accounts receivable balances that exceed 90
days from invoice date and based on an assessment of current creditworthiness,
estimates the portion, if any, of the balance that will not be collected.
Management provides for probable uncollectible accounts through a charge to
earnings and a credit to a valuation allowance based on its assessment of the
current status of individual accounts. Balances that are still outstanding after
management has used reasonable collection efforts are written off through a
charge to the valuation account and a credit to trade accounts receivable.
Changes to the valuation allowance have not been material to the financial
statements.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
- -----------------------------------------------------------------------
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition
- -------------------
We recognize revenue when it is realized or receivable and earned. Revenue from
the CO2 Segment is recognized in the period of production. Revenue from Coal
Segment projects is recognized in the period the projects are performed. Revenue
from the sale of inventory produced by our China Segment is recognized when the
product is shipped or delivered. License fees from the e-Commerce segment are
recognized over the term of the agreement.
Off-Balance Sheet Arrangements
- ------------------------------
We do not have any material off-balance sheet arrangements.
Contractual Obligations
- -----------------------
The table below sets forth our contractual cash obligations as of December 31,
2005:
Payments Due By Period
-------------------------------------------------------------------------------------------
Contractual 2011 and
Obligations Total 2006 2007-2008 2009-2010 Beyond
- ----------------------------- ---------------- --------------- -------------- --------------- --------------
Long-term debt obligations $ 11,234,000 $2,327,000 $4,383,000 $4,524,000 $ -
Capital lease obligations 47,000 9,000 22,000 16,000 -
Operating lease obligations 780,000 302,000 339,000 139,000 -
Purchase obligations - - - - -
Other long-term liabilities - - - - -
---------------- --------------- -------------- ---------------- --------------
Total $ 12,061,000 $2,638,000 $4,744,000 $ 4,679,000 $ -
================ =============== ============== ================ ==============
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------- -----------------------------------------------------------
At December 31, 2005, we had notes receivable of $20,000 and total debt of
$8,669,000, including accrued interest to related parties of $132,000 and an
accrued production payment totaling $366,000. Debt in the amount of $6,916,000
has fixed interest rates; therefore, our interest expense and operating results
would not be affected by an increase in market interest rates for this amount.
The remaining outstanding $154,000 principal balance of our $1,200,000 of 10%
Participating Notes bears interest at an annual rate equal to the Wall Street
Journal Prime Rate plus 4% with a floor of 10%. The Notes required payment of
interest only until November 30, 2004. The Company then began amortizing the
notes with equal payments of principal and interest over the remaining eight
quarters. At December 31, 2005, interest was accruing on these notes based on a
rate of 11.25%. Another $1,100,000 note in the Coal Segment is accruing interest
at WSJ Prime plus 2%, or 9.25%, at year-end. A 10% increase in market interest
rates above the year-end rates would have increased our interest expense by less
than $5,000. At December 31, 2005, a 10% increase in market rates above the 10%
floor would have reduced the fair value of our long-term debt by $83,000.
We have no other market risk sensitive instruments.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The Beard Company and Subsidiaries
Index to Financial Statements
Forming a Part of Form 10-K Annual Report
to the Securities and Exchange Commission
Page
Number
------
Report of Independent Registered Public Accounting Firm.....................
Financial Statements:
Balance Sheets, December 31, 2005 and 2004...............................
Statements of Operations, Years ended December 31, 2005, 2004 and 2003...
Statements of Shareholders' Equity (Deficiency), Years ended December
31, 2005, 2004 and 2003................................................
Statements of Cash Flows, Years ended December 31, 2005, 2004 and 2003...
Notes to Financial Statements, December 31, 2005, 2004 and 2003..........
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
The Beard Company
Oklahoma City, Oklahoma
We have audited the accompanying consolidating balance sheets of The Beard
Company and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for each of the years in the three-year period ended December 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 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 included 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 audits provide 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 The Beard Company and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that The Beard Company and subsidiaries will continue as a going concern. As
discussed in Note 2 to the financial statements, The Beard Company and
subsidiaries' recurring losses and negative cash flows from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
COLE & REED, P.C.
Oklahoma City, Oklahoma
April 12, 2006
THE BEARD COMPANY AND SUBSIDIARIES
Balance Sheets
December 31, December 31,
Assets 2005 2004
--------------------- ----------------------
Current assets:
Cash and cash equivalents $ 363,000 $ 127,000
Accounts receivable, less allowance for doubtful
receivables of $80,000 in 2005 and $97,000 in 2004 215,000 167,000
Inventories 149,000 -
Prepaid expenses and other assets 67,000 32,000
Current maturities of notes receivable 6,000
Assets of discontinued operations held for resale 20,000 40,000
--------------------- ----------------------
Total current assets 820,000 366,000
--------------------- ----------------------
Note receivable, less allowance for doubtful receivable of
$30,000 in 2005 and 2004 (note 6) 14,000 -
Restricted certificate of deposit 50,000 50,000
Investments and other assets, net of impairment
of $17,064,000 in 2004 (note 5) 36,000 1,560,000
Property, plant and equipment, at cost (note 7) 4,779,000 2,090,000
Less accumulated depreciation, depletion and amortization 1,512,000 1,457,000
--------------------- ----------------------
Net property, plant and equipment 3,267,000 633,000
--------------------- ----------------------
Intangible assets, at cost (note 8) 523,000 292,000
Less accumulated amortization 246,000 189,000
--------------------- ----------------------
Net intangible assets 277,000 103,000
--------------------- ----------------------
$ 4,464,000 $ 2,712,000
===================== ======================
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Trade accounts payable $ 717,000 $ 177,000
Accrued expenses (note 3) 878,000 314,000
Short-term debt - related entities (note 9) 1,100,000 200,000
Current maturities of long-term debt (note 9) 215,000 241,000
Current maturities of long-term debt - related entities (note 9) 316,000 333,000
Liabilities of discontinued operations held for resale 42,000 95,000
--------------------- ----------------------
Total current liabilities 3,268,000 1,360,000
--------------------- ----------------------
Long-term debt less current maturities (note 9) 1,268,000 428,000
Long-term debt - related entities (note 9) 5,770,000 4,965,000
Other long-term liabilities 133,000 103,000
Minority interest in consolidated subsidiary 8,000 -
Common shareholders' equity (deficiency):
Convertible preferred stock of $100 stated value;
5,000,000 shares authorized; 27,838 shares issued
and outstanding 889,000 889,000
Common stock of $.0006665 and $.001333 par value per share;
15,000,000 and 7,500,000 authorized; 5,472,968 and 4,839,565
shares issued and outstanding in 2005 and 2004, respectively 4,000 3,000
Capital in excess of par value 38,509,000 38,193,000
Accumulated deficit (45,374,000) (43,214,000)
Accumulated other comprehensive loss (11,000) (15,000)
--------------------- ----------------------
Total common shareholders' equity (deficiency) (5,983,000) (4,144,000)
--------------------- ----------------------
Commitments and contingencies (notes 4, 10, and 14)
$ 4,464,000 $ 2,712,000
===================== ======================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Operations
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
------------------ ----------------- ----------------
Revenues:
Coal reclamation $ 52,000 $ 189,000 $ 59,000
Carbon dioxide 1,172,000 754,000 508,000
China 29,000 - -
e-Commerce 31,000 29,000 25,000
Other 95,000 - 1,000
------------------ ----------------- ----------------
1,379,000 972,000 593,000
------------------ ----------------- ----------------
Expenses:
Coal reclamation 825,000 854,000 570,000
Carbon dioxide 181,000 128,000 106,000
China 802,000 548,000 724,000
e-Commerce 168,000 147,000 119,000
Selling, general and administrative 861,000 870,000 923,000
Depreciation, depletion and amortization 187,000 92,000 169,000
Impairment of long-lived assets (notes 1, 7, 8 and 16) - - 82,000
Other 72,000 33,000 38,000
------------------ ----------------- ----------------
3,096,000 2,672,000 2,731,000
------------------ ----------------- ----------------
Operating profit (loss):
Coal reclamation (783,000) (682,000) (516,000)
Carbon dioxide 949,000 585,000 363,000
China (787,000) (549,000) (724,000)
e-Commerce (139,000) (124,000) (100,000)
Other, principally corporate (957,000) (930,000) (1,161,000)
------------------ ----------------- ----------------
(1,717,000) (1,700,000) (2,138,000)
Other income (expense):
Interest income 19,000 3,000 1,000
Interest expense (999,000) (694,000) (637,000)
Equity in net earnings of unconsolidated affiliates 4,801,000 3,582,000 2,513,000
Impairment of investments and other assets (notes 1, 5, 7, 8 and 16) (4,465,000) (3,087,000) (2,159,000)
Gain on settlement - 2,943,000 1,151,000
Gain on sale of assets 64,000 14,000 1,000
Minority interest in operations of unconsolidated subsidiaries 42,000 - -
Other (12,000) (6,000) (222,000)
------------------ ----------------- ----------------
Earnings (loss) from continuing operations before income taxes (2,267,000) 1,055,000 (1,490,000)
Income tax (expense) benefit (note 11) (35,000) (118,000) -
------------------ ----------------- ----------------
Earnings (loss) from continuing operations (2,302,000) 937,000 (1,490,000)
Discontinued operations (note 3):
Earnings from discontinued brine extraction/iodine manufacturing
activities 44,000 21,000 -
Loss from discontinued interstate travel facilities activities - - (9,000)
Earnings (loss) from discontinued natural gas well servicing activities 98,000 (21,000) (112,000)
------------------ ----------------- ----------------
Earnings (loss) from discontinued operations 142,000 - (121,000)
------------------ ----------------- ----------------
Net earnings (loss) $ (2,160,000) $ 937,000 $(1,611,000)
================== ================= ================
Net earnings (loss) attributable to common shareholders (note 4) $ (2,160,000) $ 937,000 $(1,611,000)
================== ================= ================
Net earnings (loss) per average common share outstanding: Basic (notes 1 and
12):
Earnings (loss) from continuing operations $ (0.39) $ 0.18 $ (0.33)
Earnings (loss) from discontinued operations 0.02 - (0.02)
------------------ ----------------- ----------------
Net earnings (loss) $ (0.37) $ 0.18 $ (0.35)
================== ================= ================
Net earnings (loss) per average common share outstanding: Diluted (notes 1 and
12):
Earnings (loss) from continuing operations $ (0.39) $ 0.14 $ (0.33)
Earnings (loss) from discontinued operations 0.02 - (0.02)
------------------ ----------------- ----------------
Net earnings (loss) $ (0.37) $ 0.14 $ (0.35)
================== ================= ================
Weighted average common shares outstanding:
Basic 5,888,000 5,215,000 4,542,000
================== ================= ================
Diluted 5,888,000 6,478,000 4,542,000
================== ================= ================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Shareholders' Equity (Deficiency)
Total
Accumulated Common
Capital in Other Shareholders'
Preferred Common Excess of Accumulated Comprehensive Treasury Equity
Shares Stock Shares Stock Par Value Deficit Income (loss) Stock (Deficiency)
---------------- ---------------- ----------- ----------- ------------ --------- -------------
Balance, December 31, 2002 - $ - 3,657,690 $3,000 $38,207,000 $(41,182,000) $(15,000) $(1,846,000) $(4,833,000)
Net loss - - - - - (1,611,000) - - (1,611,000)
Comprehensive loss:
Foreign currency translation
adjustment - - - - - - - - -
-----------
Total comprehensive loss - - - - - - - - (1,611,000)
-----------
Expiration of mandatory redemption
option for preferred stock 27,838 889,000 - - - - - - 889,000
Issuance of stock warrants - - - - 24,000 - - - 24,000
Reservation of shares pursuant
to deferred compensation plan
(note 12) - - - - 198,000 - - - 198,000
Issuance of shares pursuant to
termination of deferred
stock compensation plan - - 1,000,000 - (488,000) (1,358,000) - 1,846,000 -
--------------- ---------------- ------------ ------------- --------- ------------ -----------
Balance, December 31, 2003 27,838 889,000 4,657,690 3,000 37,941,000 (44,151,000) (15,000) - (5,333,000)
Net earnings - - - - - 937,000 - - 937,000
Comprehensive income:
Foreign currency translation
adjustment - - - - - - - - -
---------
Total comprehensive income - - - - - - - - 937,000
---------
Issuance of stock warrants - - 181,875 - 50,000 - - - 50,000
Reservation of shares pursuant
to deferred compensation
plan (note 12) - - - - 202,000 - - - 202,000
--------------- ---------------- ------------ ------------- --------- ------------ -----------
Balance, December 31, 2004 27,838 $889,000 4,839,565 $3,000 $38,193,000 $(43,214,000) $(15,000) $ - 4,144,000)
Net loss - - - - - (2,160,000) - - (2,160,000)
Comprehensive income (loss):
Foreign currency translation
adjustment - - - - - - 4,000 - 4,000
------------
Total comprehensive loss - - - - - - - - (2,156,000)
------------
Issuance of stock warrants - - 415,750 1,000 122,000 - - - 123,000
Reservation of shares pursuant
to deferred compensation
plan (note 12) - - - 194,000 - - - 194,000
Issuance of shares pursuant
deferred stock compensation
plan - - 217,653 - - - - - -
--------------- ---------------- ------------ ----------------------- ------------ -----------
Balance, December 31, 2005 27,838 $889,000 5,472,968 $4,000 $38,509,000 $(45,374,000) $(11,000) $ - $(5,983,000)
=============== ================ ============ ============= ========= ============ ============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Year Ended December 31,
-----------------------------------------------------
2005 2004 2003
---------------- ----------------- ----------------
Operating activities:
Cash received from customers $ 1,349,000 $ 894,000 $ 593,000
Gain on settlement - 2,943,000 1,162,000
Cash paid to suppliers and employees (2,456,000) (2,670,000) (2,247,000)
Interest received 18,000 3,000 1,000
Interest paid (600,000) (830,000) (279,000)
Taxes paid (119,000) - -
Operating cash flows of discontinued operations (80,000) (12,000) (81,000)
---------------- ----------------- ----------------
Net cash provided by (used in) operating activities (1,888,000) 328,000 (851,000)
---------------- ----------------- ----------------
Investing activities:
Acquisition of property, plant and equipment (2,097,000) (221,000) (59,000)
Acquisition of intangibles (44,000) (34,000) (3,000)
Proceeds from sale of assets 139,000 14,000 1,000
Proceeds from sale of assets of discontinued operations 107,000 49,000 233,000
Other investments 396,000 418,000 319,000
---------------- ----------------- ----------------
Net cash provided by (used in) investing activities (1,499,000) 226,000 491,000
---------------- ----------------- ----------------
Financing activities:
Proceeds from line of credit and term notes 2,017,000 755,000 879,000
Proceeds from related party debt 2,321,000 1,065,000 814,000
Payments on line of credit and term notes (219,000) (1,397,000) (828,000)
Payments on related party debt (415,000) (1,069,000) (302,000)
Proceeds from exercise of warrants 123,000 45,000 -
Member contribution to a consolidated partnership 25,000 - -
Capitalized costs associated with issuance of
subordinated debt (203,000) (42,000) (66,000)
Other (26,000) - -
---------------- ----------------- ----------------
Net cash provided by (used in) financing activities 3,623,000 (643,000) 497,000
---------------- ----------------- ----------------
Net increase (decrease) in cash and cash equivalents 236,000 (89,000) 137,000
Cash and cash equivalents at beginning of year 127,000 216,000 79,000
---------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 363,000 $ 127,000 $ 216,000
================ ================= ================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Reconciliation of Net Earnings (Loss) to Net Cash Provided by (Used In) Operating Activities:
Year Ended December 31,
-----------------------------------------------------
2005 2004 2003
---------------- ----------------- ----------------
Net earnings (loss) $ (2,160,000) $ 937,000 $(1,611,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 187,000 92,000 169,000
Provision for abandonment costs 30,000 - -
Gain on sale of assets (64,000) (14,000) (1,000)
Gain on sale of assets of discontinued operations (154,000) (33,000) (51,000)
Provision for uncollectible accounts and notes - - 17,000
Impairment of investments and other assets of
discontinued operations - - 85,000
Equity in net earnings of unconsolidated
affiliates (4,801,000) (3,582,000) (2,513,000)
Impairment of investments and other assets 4,465,000 3,087,000 2,240,000
Non cash compensation expense and stock warrants 194,000 206,000 222,000
Minority interest in consolidated partnership (42,000)
Other (21,000) 5,000 -
Net change in assets and liabilities of discontinued
operations (33,000) - (17,000)
(Increase) decrease in accounts receivable, other
receivables, prepaid expenses and other current assets (86,000) (126,000) 58,000
Increase in inventories (149,000) - -
Increase (decrease) in trade accounts payable,
accrued expenses and other liabilities 746,000 (244,000) 551,000
---------------- ----------------- ----------------
Net cash provided by (used in) operating activities $ (1,888,000) $ 328,000 $ (851,000)
================ ================= ================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2005, 2004, and 2003
(1) Summary of Significant Accounting Policies
- --- ------------------------------------------
The Beard Company's ("Beard" or the "Company") 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.
Nature of Business
- ------------------
The Company's current significant operations are within the following segments:
(1) the Coal Reclamation ("Coal") Segment, (2) the Carbon Dioxide ("CO2")
Segment, (3) the China ("China") Segment, and (4) the e-Commerce ("e-Commerce")
Segment.
The Coal Segment is in the business of operating coal fines reclamation
facilities in the United States of America and provides slurry pond core
drilling services, fine coal laboratory analytical services and consulting
services. The CO2 Segment consists of the production of CO2 gas. The China
Segment is pursuing environmental opportunities in China, focusing on the
financing, construction and operation of organic chemical compound fertilizer
plants. The e-Commerce Segment consists of a 71%-owned subsidiary whose current
strategy is to develop business opportunities to leverage starpay's(TM)
intellectual property portfolio of Internet payment methods and security
technologies.
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.
Use of estimates
- ----------------
Management of the Company 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 these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
There were no cash equivalents at December 31, 2005 or 2004. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less at the date of
purchase to be cash equivalents.
Receivables and Credit Policies
- -------------------------------
Accounts receivable include amounts due from the sale of CO2 and natural gas
from properties in which the Company owns an interest, accrued interest
receivable and uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice date. Notes receivable
are stated at principal amount plus accrued interest and are normally not
collateralized. Payments of accounts receivable are allocated to the specific
invoices identified on the customers remittance advice or, if unspecified, are
applied to the earliest unpaid invoices. Payments of notes receivable are
allocated first to accrued but unpaid interest with the remainder to the
outstanding principal balance. Trade accounts and notes receivable are stated at
the amount management expects to collect from outstanding balances. The carrying
amounts of accounts receivable are reduced by a valuation allowance that
reflects management's best estimate of the amounts that will not be collected.
Management individually reviews all notes receivable and accounts receivable
balances that exceed 90 days from invoice date and based on an assessment of
current creditworthiness, estimates the portion, if any, of the balance that
will not be collected. Management provides for probable uncollectible accounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are still
outstanding after management has used reasonable collection efforts are written
off through a charge to the valuation account and a credit to trade accounts
receivable. Changes to the valuation allowance have not been material to the
financial statements.
Inventory
- ---------
At December 31, 2005, inventory consisted of raw materials ($45,000),
work-in-process ($75,000) and finished goods ($29,000) located at our fertilizer
plant in China and is valued at the lower of cost or market.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost, net of accumulated
depreciation, and are depreciated by use of the straight-line method using
estimated asset lives ranging from three to 40 years.
The Company charges maintenance and repairs directly to expense as incurred
while betterments and renewals are generally capitalized. When property is
retired or otherwise disposed of, the cost and applicable accumulated
depreciation, depletion and amortization are removed from the respective
accounts and the resulting gain or loss is reflected in operations.
Intangible Assets
- -----------------
Identifiable intangible assets are stated at cost, net of accumulated
amortization, and are amortized on a straight-line basis over their respective
estimated useful lives, ranging from five to 17 years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
- -----------------------------------------------------------------------
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
In 2003, the Company recorded impairments of long-lived assets of $6,000 in the
Coal Segment and $76,000 in Other operations. There were no such impairments in
2004 or 2005.
In addition, the Company recorded impairments to its investments and other
assets of $4,465,000, $3,087,000 and $2,159,000 related to its investment in
Cibola Corporation ("Cibola") for the years 2005, 2004 and 2003, respectively.
See Note 5 for additional information related to the Company's investment in
Cibola.
Other Long-Term Liabilities
- ---------------------------
Other long-term liabilities consist of various items which are not payable
within the next calendar year.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, other current assets, trade accounts payables, and accrued expenses
approximate fair value because of the short maturity of those instruments. At
December 31, 2005 and 2004, the fair values of the long-term debt and notes
receivable were not significantly different than their carrying values due to
interest rates relating to the instruments approximating market rates on those
dates.
Revenue Recognition
- -------------------
The Company recognizes revenue when it is realized or receivable and earned.
Revenue from the CO2 Segment and from natural gas is recognized in the period of
production. Revenue from Coal Segment projects is recognized in the period the
projects are performed. License fees from the e-Commerce segment are recognized
over the term of the agreement. Revenue from the sale of fertilizer produced by
the China Segment is recognized when the product is shipped or delivered.
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. 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 are expected to be recovered or
settled. The Company provides a valuation allowance for deferred tax assets for
which it does not consider realization of such assets to be more likely than
not. 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.
Stock Option Plans
- ------------------
The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for its stock options.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. SFAS
No. 123, "Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic value method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, neither net earnings (loss)
nor net earnings (loss) per share would have been affected for the years 2003
and 2004 presented in the accompanying financial statements. For the year 2005,
the net loss would have increased $5,000 and net loss per share would not have
been affected, as follows:
For the Year Ended
(in thousands, except per share date)
-------------------------------------------------------
December 31, December 31, December 31,
2005 2004 2003
-------------------------------------------------------
Earnings (loss) from continuing operations,
as reported $ (2,302) $ 937 $ (1,490)
Earnings (loss) from discontinued operations,
as reported 142 -- (121)
------------- ------------- -----------
Net earnings (loss), as reported $ (2,160) $ 937 $ (1,611)
============= ============= ============
Earnings (loss) from continuing operations,
as reported $ (2,302) $ 937 (1,490)
Less: total stock-based employee
compensation determined under fair value
based method for all awards, net of tax (5) -- --
------------- ------------- -----------
Pro forma net earnings (loss) from continuing
operations $ (2,307) $ 937 $ (1,490)
Earnings (loss) from discontinued operations,
as reported 142 -- (121)
------------- ------------- -----------
Pro forma net earnings (loss) $ (2,165) $ 937 $ (1,611)
============= ============= ============
Net earnings (loss) per average common share outstanding, as reported:
Basic:
Earnings (loss) from continuing operations $ (0.39) $ 0.18 $ (0.33)
Earnings (loss) from discontinued operations
0.02 0.00 (0.02)
------------- ------------- -----------
Net earnings (loss), as reported $ (0.37) $ 0.18 $ (0.35)
============= ============= ============
Net earnings (loss) per average common share outstanding, as reported:
Diluted:
Earnings (loss) from continuing operations $ (0.39) $ 0.14 $ (0.33)
Earnings (loss) from discontinued operations
0.02 0.00 (0.02)
------------- ------------- -----------
Net earnings (loss), as reported $ (0.37) $ 0.14 $ (0.35)
============= ============= ============
Net earnings (loss) per average common share outstanding, pro forma:
Basic:
Earnings (loss) from continuing operations $ (0.39) $ 0.18 $ (0.33)
Earnings (loss) from discontinued operations 0.02 0.00 (0.02)
------------- ------------- -----------
Net earnings (loss)-basic, pro forma $ (0.37) $ 0.18 $ (0.35)
============= ============= ============
Net earnings (loss) per average common share outstanding, pro forma:
Diluted:
Earnings (loss) from continuing operations $ (0.39) $ 0.18 $ (0.33)
Earnings (loss) from discontinued operations 0.02 0.00 (0.02)
------------- ------------- -----------
Net earnings (loss) - diluted, pro forma $ (0.37) $ 0.18 $ (0.35)
============= ============= ============
Weighted average common shares outstanding, As reported:
Basic 5,888,000 5,215,000 4,542,000
============= ============= ============
Diluted 5,888,000 6,478,000 4,542,000
============= ============= ============
Weighted average common shares outstanding, Pro forma:
Basic 5,888,000 5,215,000 4,542,000
============= ============= ============
Diluted 5,888,000 6,478,000 4,542,000
============= ============= ============
Convertible Preferred Stock
- ---------------------------
The Company's convertible preferred stock is accounted for at estimated fair
value. Prior to January 1, 2003, the preferred stock had been redeemable and was
carried at its estimated fair value. The excess of the estimated redeemable
value over the fair value at the date of issuance was accreted over the
redemption term. Effective January 1, 2003, the preferred stock ceased to be
mandatorily redeemable and thereafter became convertible at the holder's option
into common stock. Accordingly, it is no longer subject to accretion.
Earnings (Loss) Per Share
- -------------------------
Basic earnings (loss) per share data is computed by dividing earnings (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if the Company's outstanding stock options
(calculated using the treasury stock method) and warrants were exercised and if
the Company's preferred stock, convertible notes and deferred stock compensation
units were converted to common stock.
Diluted earnings (loss) per share from continuing operations in the statements
of operations exclude potential common shares issuable upon conversion of
preferred stock, convertible notes, termination of the deferred stock
compensation plan, or exercise of stock options and warrants as a result of
losses from continuing operations in 2003 and 2005, because such potential
common shares are antidilutive.
The table below contains the components of the common share and common
equivalent share amounts (adjusted to reflect the 2-for-1 stock split effected
on August 6, 2004) used in the calculation of earnings (loss) per share in the
Company's statements of operations:
For the Year Ended
------------------------------------
December 31, December 31, December 31,
2005 2004 2003
------------------------------------
Basic EPS:
- ----------
Weighted average common
shares outstanding 5,219,553 4,708,580 4,375,224
Weighted average shares in deferred
stock compensation plan treated
as common stock equivalents 668,198 506,026 167,254
---------------------------------
5,887,751 5,214,606 4,542,478
=================================
Diluted EPS:
- ------------
Weighted average common
shares outstanding 5,219,553 4,708,580 4,375,224
Weighted average shares in deferred
stock compensation plan treated as
common stock equivalents 668,198 506,026 167,254
Convertible Preferred Shares
considered to be common
stock equivalents -- 287,558 --
Warrants issued in connection
with debt offerings treated
as common stock equivalents -- 975,750 --
---------------------------------
5,887,751 6,477,914 4,542,478
=================================
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts and notes receivable. Accounts
receivable from three parties comprised approximately 85% of the December 31,
2005 balances of accounts receivable. Generally, the Company does not require
collateral to support accounts and notes receivable.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Comprehensive Income
- --------------------
SFAS No. 130 establishes standards for reporting and display of "comprehensive
income" and its components in a set of financial statements. It requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. During 2005,
the Company's only significant items of comprehensive income related to foreign
currency translation adjustments resulting from its equity investment in Xianghe
BH Fertilizer Co., Ltd ("XBH"). The assets and liabilities of XBH, a
wholly-owned subsidiary of BEE/7HBF, LLC, in which Beard owns 50% through Beard
Environmental Engineering, LLC ("BEE"), a wholly-owned subsidiary of Beard, and
Beijing Beard Sino-American Bio-Tech Engineering Co., Ltd. ("BTEC"), a
wholly-owned subsidiary of Beard, are stated in the local currency (the Chinese
yuan renminbi, "RMB") and are translated into U.S. dollars using the current
exchange rate in effect at the balance sheet date, while income and expenses are
translated at average rates for the respective periods. Translation adjustments
have no effect on net loss and are included in accumulated other comprehensive
loss.
Reclassifications
- -----------------
Certain 2004 and 2003 balances have been reclassified to conform to the 2005
presentation.
(2) Ability to Fund Operations and Continue as a Going Concern
- --- ----------------------------------------------------------
Overview
The accompanying financial statements have been prepared based upon the
Company's belief that it will continue as a going concern. The Company's
revenues from continuing operations have increased in each of the years 2003,
2004 and 2005. The Company has incurred operating losses and negative cash flows
from operations during each of the last five years. However, the Company
commenced projects in both its Coal and China Segments in 2005, and both of
these are projected to begin generating positive cash flow during the last half
of 2006. Meanwhile, in addition to the project currently in progress, the Coal
Segment is currently pursuing seven other projects which are in various stages
of development. (See "Additional Details" below). The Company arranged the
financing for its initial fertilizer plant in China in early 2005; the plant
commenced production in October of 2005. Although the Company finalized its
first licensing arrangement in its e-Commerce Segment in March of 2003, the
arrangement did not make the segment profitable in 2004 or 2005 and will not
make it profitable in 2006.
During the three years ended December 31, 2005, the Company took several steps
which reduced its negative cash flow to some degree, including salary deferrals
by its Chairman and President and deferrals of directors' fees into its Deferred
Stock Compensation Plans (the "DSC Plans") and suspension of the Company's 100%
matching contribution (up to a cap of 5% of gross salary) under its 401(k) Plan.
Six private debt placements raised gross proceeds of $4,434,000 during such
period and an additional $193,000 in the first quarter of 2006. In the first
half of 2005 the Company borrowed $850,000 from a related party to finance most
of the cost of the fertilizer plant in China. Starting in the fourth quarter of
2005, the Company borrowed $1,100,000 from the pond owner to begin constructing
the plant for its coal fines recovery project in West Virginia. That funding had
increased to $5,910,000 as of April 12, 2006. In addition, the Company secured a
$350,000 long-term bank credit facility on March 28, 2006. These measures have
enabled the Company to continue operating.
The negative result of the above has been a substantial amount of dilution to
the Company's common equity. From January 1, 2003 through March 31, 2006, a
total of 682,240 warrants (as adjusted for the 2-for-1 stock split effected in
August of 2004) were issued in connection with the private debt placements, and
1,114,000 Stock Units (as adjusted for the 2-for-1 stock split effected in
August of 2004) were accrued in the participants' accounts as a result of salary
and fee deferrals into the various DSC Plans. During such period $3,428,000 of
convertible notes were also issued which were convertible into 2,750,000 shares
of common stock. Additional dilution also occurred due to an adjustment to the
Preferred Stock conversion ratio resulting from the issuance of the warrants,
the convertible notes and the salary deferrals. Termination of two of the DSC
Plans resulted in the issuance of 1,000,000 common shares in 2003 (as adjusted
for the 2-for-1 stock split effected in August of 2004). Termination of the
2003-2 DSC Plan resulted in the issuance of 218,000 common shares in November of
2005 and 56,000 in January of 2006. In addition, 45,000 employee stock options
and 50,000 options to a financial consultant were issued in 2005.
Additional Details
As a result of the private debt placements completed in 2005, the Company
obtained net additional working capital of approximately $4,049,000 while at the
same time financing most of the cost of the initial plant in China plus
$1,100,000 of the coal project in West Virginia. Despite such additions, cash
and cash equivalents only increased from $127,000 at December 31, 2004 to
$363,000 at December 31, 2005.
The Company's principal business is coal reclamation, and this is where
management's operating attention is primarily focused. The Coal Segment has a
signed contract to construct and operate a pond fines recovery project in West
Virginia (the "Pinnacle Project") and commenced construction on the project in
September of 2005. The Company has obtained commitments for (i) $2,800,000 of
equity for the project from a group of investors and (ii) a $9,000,000 bank loan
subject to obtaining a USDA guaranty of 70% of the loan amount. If the guaranty
is not obtained, the pond owner has committed to fund or arrange the funding for
the project. In addition, the segment is actively pursuing a number other
projects which it has under development.
The timing of the projects the Company is actively pursuing is uncertain and
their continuing development is subject to obtaining the necessary financing.
With the exception of the Pinnacle Project, no definitive contracts have as yet
been signed, and there is no assurance that the required financing will be
obtained or that any of the projects will materialize.
At this juncture it is uncertain whether the $9,000,000 loan for the Pinnacle
Project will come from a loan arranged by the pond owner or from the bank if the
USDA guaranty is obtained. We anticipate that this determination will occur no
later than May of 2006, at which point the pond owner will owe us $370,000 for
nine months of overhead charges, plus approximately $277,000 for equipment and
other items for which Beard Technologies has not yet been reimbursed. Regardless
of the source of funding, construction on the project is moving forward rapidly
and we expect to have first coal production and start generating cash flow in
June of 2006.
In addition to the cash infusion from the Pinnacle Project, the Company expects
to generate cash of at least $50,000 from the disposition of the remaining
assets from two of its discontinued segments, and can sell certain other assets
to generate cash if necessary. In addition, the Company expects to receive funds
from the binding arbitration scheduled to be held at the end of June, 2006.
Although the Company believes that it has a strong position in this matter,
there is no assurance that the matters in dispute will be resolved in our favor.
See "Item 3. Legal Proceedings. McElmo Dome Litigation."
The Company believes that the cash infusion from the Pinnacle Project, together
with the funds from the new bank revolving credit facility, will provide
sufficient working capital to sustain the Company's activities until the
operations of the Pinnacle Project and the China fertilizer plant are generating
positive cash flow from operations. If such funds are not sufficient, and if the
McElmo Dome arbitration should not be successful or is only partially
successful, then the Company will need to pursue additional outside financing,
which would likely involve further dilution to our shareholders.
(3) Discontinued Operations
- --- -----------------------
ITF Segment
In 1999 the Company adopted a formal plan to discontinue its ITF (Interstate
Travel Facilities) Segment. Substantially all of the assets were disposed of in
1999, with the remaining assets disposed of through 2003. In 2003, the Company
sold the remaining assets and recorded losses totaling $9,000 for the segment in
2003, and a $5,000 gain on the sale of the remaining assets. In 2004 and 2005,
the segment recorded no earnings, and at December 31, 2005 had no remaining
assets or liabilities.
BE/IM Segment
In 1999, the Management Committee of a joint venture 40%-owned by the Company
adopted a formal plan to discontinue the business and dispose of its assets. The
venture was dissolved in 2000 and the Company took over certain remaining assets
and liabilities. The majority of the assets of the segment were sold prior to
2003. In 2003, the Company recorded no net losses related to this segment. In
2004, the Company recorded $21,000 of earnings related to this segment,
resulting from the sale of equipment in excess of the impaired value on the
books. In 2005, the Company recorded earnings of $44,000 related to this
segment, which included $48,000 in gains from the sale of equipment. The Company
expects no further material charges to earnings related to the remaining assets.
As of December 31, 2005, the significant assets related to the segment's
operations consisted primarily of equipment with no estimated net realizable
value. The segment had no significant liabilities at December 31, 2005. The
Company is actively pursuing opportunities to sell the segment's few remaining
assets and expects the disposition to be completed by December 31, 2006.
WS Segment
In 2001, the Company made the decision to cease pursuing opportunities in Mexico
and the WS Segment was discontinued. The bulk of the segment's assets were sold
in 2001. The net loss of the segment for 2003 was $112,000, including an
impairment provision of $85,000. The net loss of the segment for 2004 was
$21,000. In 2005, the segment recorded earnings of $98,000, which included gains
from the sale of equipment totaling $107,000. As of December 31, 2005, the
significant assets of the WS Segment were fixed assets totaling $19,000. The
Company is actively pursuing the sale of the remaining assets and expects to
have them sold or otherwise disposed of by December 31, 2006. The significant
liabilities of the segment consisted of trade accounts payable and other accrued
expenses totaling $61,000. It is anticipated that all of the liabilities of the
segment will be paid prior to December 31, 2006.
(4) 1993 Restructure; Convertible Preferred Stock
- --- ---------------------------------------------
As the result of a restructure (the "Restructure") effected in 1993, a company
owned by four lenders (the Institutions") received substantially all of the
Company's oil and gas assets, 25% of the Company's then outstanding common
stock, and $9,125,000 stated value (91,250 shares, or 100%) of its preferred
stock. As a result, $101,498,000 of the Company's long-term debt and other
obligations were eliminated.
The Company's preferred stock was mandatorily redeemable through December 31,
2002 from one-third of Beard's consolidated net income. At January 1, 2003, the
stock was no longer redeemable, and each share of Beard preferred stock became
convertible into 4.26237135 (118,655) shares (pre-split) of Beard common stock.
The conversion ratio is adjusted periodically (i) for stock splits, (ii) as
additional warrants or convertible notes are issued, and (iii) as additional
shares of stock are credited to the accounts of the Company's Chairman or
President in the Company's Deferred Stock Compensation Plans, in each case at a
value of less than $1.29165 per share. Fractional shares will not be issued, and
cash will be paid in redemption thereof. At December 31, 2005 (after giving
effect to a 2-for-1 stock split effected in August of 2004) each share of Beard
preferred stock was convertible into 10.30982278 (287,004) shares of Beard
common stock. The preferred stockholder is entitled to one vote for each full
share of common stock into which its preferred shares are convertible. In
addition, preferred shares that have not been converted have preference in
liquidation to the extent of their $100 per share stated value.
From 1995 through 1998 the Company redeemed or repurchased 63,412 of the
preferred shares from the Institutions or from individuals to whom the
Institutions had sold such shares. The last 31,318 of such shares were purchased
for $31.93 per share in 1998.
At December 31, 2005 and 2004, the convertible preferred stock was recorded at
its estimated fair value of $889,000 or $31.93 per share versus its aggregate
stated value of $2,784,000.
(5) Investments and Other Assets
- --- ----------------------------
Investments and other assets consisted of the following:
December 31,
------------
2005 2004
---- ----
Investment in Cibola Corporation $ 7,000 $1,531,000
Investment in real estate limited partnerships 13,000 13,000
Other assets 16,000 16,000
---------- ----------
$ 36,000 $1,560,000
========== ==========
Investment in Cibola Corporation
- --------------------------------
Through November 30, 2005, the Company owned 80% of the outstanding common stock
of Cibola Corporation ("Cibola"), a natural gas marketing company, but did not
consolidate the assets, liabilities, revenues or expenses of Cibola because
Cibola's assets were controlled by its minority common stockholders and
preferred stockholders. According to the terms of an agreement with the minority
common and preferred shareholders of Cibola, the net worth of Cibola would have
had to reach $50,000,000 before Beard could begin to receive its 80% share of
any excess. Beard had issued a $1,439,000 note payable bearing interest at 8.25%
for its common stock of Cibola. The interest charges related to this note
amounted to $109,000 for the eleven months of 2005 and $119,000 for each of the
years 2004 and 2003. This note was due to be repaid on June 30, 2006. The stock
was subject to a call option at the sole discretion of the minority common and
preferred shareholders of Cibola. In recording the Company's share of earnings
according to the agreement, Beard recorded $4,803,000, $3,496,000 and $2,515,000
as earnings from unconsolidated affiliates for the years 2005, 2004 and 2003,
respectively. Since Beard management developed concerns that the net worth of
Cibola would never reach the requisite amount, the Company also recorded
impairments to these earnings amounts of $4,451,000, $3,087,000 and $2,159,000
for 2005, 2004 and 2003, respectively. In 2005, Beard also wrote off $13,000 of
its remaining investment in Cibola. These impairments to earnings from
unconsolidated affiliates and the interest charges on the note payable to Cibola
reduced the net earnings to the Company for its investment in Cibola to the
actual cash distributions of $243,000, $290,000 and $238,000 for the years 2005,
2004 and 2003, respectively. The minority common and preferred shareholders
exercised the call option for the Company's common stock in Cibola in November
of 2005. The stock was surrendered in full payment of the note payable and Beard
ceased to be a shareholder of Cibola effective December 1, 2005.
In making its determination that the Company should account for its investment
in Cibola using the equity method and not consolidate Cibola Corporation, Beard
personnel reviewed the pertinent accounting literature, most especially Emerging
Issues Task Force ("EITF") 96-16 and Financial Accounting Standards Board
("FASB") No. 94, Consolidation of All Majority-Owned Subsidiaries, and noted
that Cibola's corporate governance arrangements, the comparable economic
interests and investments at risk precluded consolidation of the entity.
Specifically, FASB 94 indicates that "consolidation is appropriate when one
entity has a controlling interest in another entity and that the usual condition
for a controlling interest is ownership of a majority voting interest, but the
statement acknowledges that in some circumstances control does not rest with the
majority owner...these (minority) rights may be so restrictive as to call into
question whether control rests with a majority owner." EITF 96-16 lists several
factors to consider in analyzing the rights of the minority shareholders and how
restrictive they are in determining where "control" rests and, in the case of
Cibola, these factors are determinative and conclusive. The minority common
shareholders of Cibola had the right to select three of the five board members
and all major decisions, including the payment of dividends, were made at the
board level, not the shareholder level. All of the Cibola officers were and are
minority shareholders. Any changes to the Cibola Articles of Incorporation or
Bylaws require an affirmative vote of 85% of the common shares outstanding - not
just a simple majority and more than the 80% owned by Beard. The call option
gave the minority shareholders the ability to remove Beard as a shareholder and
this ability was exercised in November of 2005. The $1,439,000 note payable of
Beard to Cibola for its 80% share of the common stock was non-recourse. Beard's
actual total investment in Cibola was less than $15,000. The minority
shareholders' initial investment was more than $2,000,000 - an amount at risk
far greater than Beard's. Therefore, Beard determined that the equity method of
accounting for its investment in Cibola was appropriate.
The summarized financial information of Cibola as of December 31, 2004 and 2003
and for the years ended December 31, 2004 and 2003 is as follows:
2004 2003
------------ ------------
(audited) (unaudited)
Current assets $ 776,000 $ 1,585,000
Current liabilities (480,000) (454,000)
------------ ------------
Working capital 296,000 1,131,000
Restricted assets;
Cash and cash equivalents 3,742,000 2,726,000
Investment securities 11,912,000 11,657,000
Notes receivable and accrued interest 7,662,000 3,893,000
Certificates of deposit -- 122,000
Stockholders' equity:
Common & Preferred stock 2,130,000 2,130,000
Contributed capital 1,474,000 1,474,000
Retained earnings 20,409,000 16,596,000
Accumulated other comprehensive income 1,039,000 768,000
Note receivable - common stock (1,439,000) (1,439,000)
------------ ------------
Total stockholders' equity $ 23,613,000 $ 19,529,000
============ ============
Revenue $ 7,262,000 $ 6,887,000
============ ============
Net earnings $ 3,813,000 $ 2,639,000
Other comprehensive income -
unrealized securities gains 271,000 2,001,000
------------ ------------
Comprehensive income $ 4,804,000 $ 4,640,000
============ ============
Investment in Real Estate Limited Partnerships
- ----------------------------------------------
The Company owns a limited partnership interest in a real estate limited
partnership whose only asset consists of a tract of undeveloped land near
Houston, Texas, most of which was sold in 2004. The Company recorded losses of
$2,000 in 2005 and in 2003 and income of $86,000 in 2004, respectively,
resulting from its share of the limited partnership's operations for those
years. The Company received a distribution of $122,000 from this investment in
2004 as its share of proceeds from the sale of the portion of land sold by the
partnership.
Other assets
- ------------
These assets consist primarily of deposits on hand with various regulatory
agencies. There were no impairments of these assets in 2003, 2004 or 2005.
(6) Notes Receivable
- --- ----------------
At December 31, 2005 and 2004, the Company had a note receivable totaling
$30,000 resulting from the sale of equipment. This note was determined to be
uncollectible in December of 2003 and the note was fully impaired. The $30,000
was charged against an impairment reserve. In addition, at December 31, 2005,
the Company had another note receivable totaling $21,000 from the sale of
equipment.
(7) Property, Plant and Equipment
- --- -----------------------------
Property, plant and equipment consisted of the following:
December 31,
------------
2005 2004
---- ----
Land $ - $ 9,000
Oil and gas leases 124,000 124,000
Proved carbon dioxide properties 1,324,000 1,291,000
Buildings and land improvements 149,000 28,000
Machinery and equipment 2,893,000 460,000
Other 289,000 178,000
---------- ----------
$4,779,000 $2,090,000
========== ==========
The initial evaluation of long-lived assets on a fair value basis, as required
by the implementation of SFAS No. 144, indicated that an impairment existed in
the Coal Segment. Accordingly, an impairment loss of $6,000 was recognized in
2003 to fully impair the coal fines extraction and beneficiation equipment and
certain other long-lived assets of the Coal Segment. The fair value of the
segment was estimated using the expected present value of future cash flows. The
Company also recorded an impairment of $76,000 in 2003 relating to its oil and
gas leases in other operations. The fair values of these assets were estimated
using the expected present value of future cash flows.
The Company incurred $79,000, $71,000, and $58,000 of depreciation expense for
2005, 2004, and 2003, respectively.
(8) Intangible Assets
- --- -----------------
Intangible assets are summarized as follows:
December 31,
------------
2005 2004
---- ----
Debt issuance costs $444,000 $260,000
Patent costs 12,000 1,000
Other 67,000 31,000
-------- --------
$523,000 $292,000
======== ========
Accumulated amortization is summarized as follows:
December 31,
------------
2005 2004
---- ----
Debt issuance costs $236,000 $181,000
Patent costs 2,000 1,000
Other 8,000 7,000
-------- --------
$246,000 $189,000
======== ========
During 2005, the Company capitalized $228,000 of costs associated with the
issuance of the 12% Convertible Subordinated Notes due August 31, 2009, the 12%
Convertible Subordinated Notes due February 15, 2010 and an $850,000 3.83% Note
due February 14, 2010. The costs of the 12% notes due in 2009 will be fully
amortized by the end of August, 2009; the costs of the 12% notes due in 2010 and
the 3.83% note due also in February, 2010, are being amortized over five years
and will be fully amortized by the first quarter of 2010, all as a result of
such notes having been paid off.
The Company incurred $57,000, $21,000, and $111,000 of amortization expense for
2005, 2004 and 2003, respectively. In addition, in 2005 the Company wrote off
another $51,000 of previously unamortized costs associated with an unsuccessful
effort to obtain funding for either or both of the China or Coal Segments. If no
capital assets are added, amortization expense is expected to be as follows.
Year Amount
---- ------
2006 $ 69,000
2007 56,000
2008 56,000
2009 53,000
2010 11,000
-------------
$ 245,000
=============
(9) Long-term Debt
- --- --------------
Long-term debt is summarized as follows:
December 31,
------------
2005 2004
---- ----
Coal<F1> $1,149,000 $ --
e-Commerce<F2> -- 3,000
10% Participating Notes due November, 2006<F3><F8> 520,000 1,347,000
12% Convertible Subordinated Notes due February, 2010<F3><F4> 2,100,000 255,000
12% Convertible Subordinated Notes due August, 2009<F5> 1,135,000 --
3.83% Loan due February, 2010<F6> 850,000 --
Loans including accrued interest - affiliated entities<F7> 2,915,000 4,562,000
--------- ---------
8,669,000 6,167,000
Less current maturities 1,631,000 774,000
--------- -------
Long-term debt $7,038,000 $5,393,000
========== ==========
<FN>
<F1>
At December 31, 2005, the Company's Coal Segment had two notes payable with
total balances due of $49,000. The notes bear interest at zero% and 8.5%,
require monthly payments of principal and interest totaling $1,100 and
mature in 2009 and 2010, respectively. The notes are secured by automobiles
with approximate book value of $48,000 at December 31, 2005.
At December 31, 2005, the Coal Segment also had a $1,100,000 note payable
to a related party for the construction the Pinnacle Project in West
Virginia (see Note 2). The note bears interest at Wall Street Prime plus 2%
and is due July 1, 2006. The note is now subject to an agreement (the
"February 8 Agreement") between Beard Technologies, Inc. ("BTI") and Beard
Pinnacle, LLC, ("BPLLC"), the operator of the plant, and PinnOak Resources,
LLC ("PinnOak"), a partner in BPLLC and the owner of the note. See Note 17
below for additional details. At December 31, 2005, the Company had accrued
interest on this note totaling $19,000 which had been capitalized as a cost
of the Project.
<F2>
At December 31, 2004, the Company's e-Commerce Segment had one note payable
with a balance due of $3,000. The note bore interest at 12%, required
monthly payments of interest and principal and was paid in full in July
2005.
<F3>
In June of 2004, the Company completed the sale of $1,200,000 of its 10%
Participating Notes (the "10% Notes") raising a net of $1,163,000 of
working capital after reductions for expenses. The 10% Notes were
accompanied by warrants to purchase a total of 480,000 shares of Beard
Company stock at exercise prices ranging from $0.135 to $0.23 per share.
The 10% Notes bear interest at an annual rate equal to the Wall Street
Journal Prime Rate plus 4%, with a floor of 10% and will mature on November
30, 2006. The Company paid interest only until November 30, 2004. The
Company then began amortizing the 10% Notes with equal payments of
principal and interest over the ensuing eight quarters. The note holders
will also collectively receive at maturity a bonus/production payment
equivalent to approximately $1 per ton for the coal expected to be
recovered during the term of the 10% Notes from a coal project described in
the offering document. The total amount of the bonus/production payment is
expected to equal $568,000. The amount of the production payment accrued
was $147,000 and $366,000 on December 31, 2004 and 2005, respectively. As a
result of the estimated bonus/production payment, the 10% Notes have an
effective interest rate of 29%. Related entities purchased a total of
$700,000 of these notes. One of the related parties, which purchased
$500,000 of the notes, borrowed the funds for the purchase from an
unrelated third party which received a 15% interest rate on its loan and
also received the 200,000 warrants which would otherwise have gone to the
related party. As further consideration, the third party was also granted a
security interest in the Company's McElmo Dome property pari passu with the
related party. (See footnote (7) below). The related party purchased the
notes for the Company's benefit in order to facilitate the sale of the
remainder of the offering, which was subsequently fully subscribed. The
Company prepaid $280,000 of the 10% Notes, along with accrued interest
totaling $14,000, on February 10, 2005. None of the note to the related
party was prepaid. In June and July, 2005, certain noteholders holding
$624,000 of the notes exchanged their 10% Notes for a like amount of the
Company's 12% Convertible Subordinated Notes due August 31, 2009. The
unrelated third party, which held $388,818 of the 10% Notes, participated
in the exchange.
<F4>
In September of 2004, the Company arranged for an investment firm to sell
$1,800,000 of 9% convertible subordinated notes (the "9% Notes") in a
private placement. As of December 15, 2004, a total of $255,000 of the
offering had been subscribed and closed, including $150,000 by directors of
the Company, and the offering was terminated. On December 29, 2004, a new
private placement of the Company's 12% Convertible Subordinated Notes (the
"12% Notes") was commenced. In December of 2004 the 9% Notes were exchanged
for a like amount of 12% Notes and the holders forgave all accrued interest
on the 9% Notes, totaling $5,000. An additional $1,845,000 of the 12% Notes
were subscribed and closed in January bringing the total offering amount to
$2,100,000. The Company will pay interest only on a semi-annual basis
beginning August 15, 2005 until the February 15, 2010 maturity date, at
which time the Company will make a balloon payment of the outstanding
principal balance plus accrued and unpaid interest. The Company has granted
a security interest in Beard Technologies' equipment to the holders of the
12% Notes. The security interest will be released in the event the Company
raises sufficient funds to proceed with the Pinnacle Project. The notes are
convertible into shares of the Company's stock at an initial conversion
price of $1.00 per share. The Company may force conversion of the notes
after February 15, 2007 if the weighted average sales price of the
Company's common stock has been more than two times the conversion price
for more than sixty (60) consecutive trading days.
<F5>
In June of 2005, the Company arranged for an investment banking firm to
commence a private debt placement of up to $2,004,102 of its 12%
Convertible Subordinated Notes (the "2009 Notes") due August 31, 2009. As
part of the offering, holders of the remaining $804,102 of 10% Notes due
November 30, 2006 were given the right to exchange such notes for the 2009
Notes. Holders of $624,000 of the 10% Notes did exchange their notes and
the Company sold an additional $511,000 of the 2009 Notes bringing the
total of the 2009 Notes outstanding to $1,135,000 at December 31, 2005. The
2009 Notes bear interest at an annual rate of 12% with the initial interest
payment due February 28, 2006 and payable semi-annually thereafter. Only
interest will be paid until the maturity date of the 2009 Notes, which are
convertible into shares of the Company's common stock. The conversion price
for the 2009 Notes was determined by the weighted average price of Beard
common stock during the 90-day period preceding the date each subscription
was received by the Company, subject to the proviso that all notes issued
in connection with subscriptions received on or before July 15, 2005, would
have a conversion price of $2.25. The Company has the right to force
conversion of the 2009 Notes after February 28, 2007 if the weighted
average sales price of its common stock has been more than two times the
conversion price for more than 60 consecutive trading days. These notes are
convertible into 504,444 shares of the Company's common stock. The
unrelated third party which purchased $500,000 of the 10% Notes---see
footnote (3) above---was allowed to retain its security interest in the
McElmo Dome collateral to the extent of $388,818 (the remaining principal
balance of such notes). In February of 2006, the Company sold another
$193,000 of the 2009 Notes. These notes are convertible into 145,415 shares
of the Company's common stock.
<F6>
On February 14, 2005, the Company borrowed $850,000 from its 50%-partner in
the U.S limited liability company which owns Xianghe BH Fertilizer Co.,
Ltd. ("XBH"), the owner and operator of the China Segment's fertilizer
plant. XBH was formed in and operates solely in China. The note bears
interest at 3.83%, which was the Applicable Federal Mid Term rate on the
date of the note. Interest is payable annually commencing on February 14,
2006 and will be paid until the maturity of the note, February 14, 2010. At
December 31, 2005, the Company had accrued interest totaling $24,000 on
this unsecured note.
<F7>
At December 31, 2005, the Company had borrowed $2,783,000 from an
affiliated entity of the Chairman of the Company under terms of a note that
bears interest at 10%. Such borrowings are subject to a Deed of Trust,
Assignment of Production, Security Agreement and Financing Statement
recorded against the Company's working and overriding royalty interests in
the McElmo Dome Field. At December 31, 2005, the Company owed $132,000 of
accrued interest on this note. The note, which was due to be repaid on
April 1, 2007, has been extended to April 1, 2008.
At December 31, 2004, the Company had borrowed $1,439,000 from Cibola. See
Note 5. The note bore interest at 8.25%, payable semiannually on April 1
and October 1. The note was due to be repaid on June 30, 2006. The note was
secured by the Company's stock in Cibola. On December 1, 2005, the minority
common and preferred shareholders of Cibola exercised a call option for the
Company's 80% share of Cibola common stock and the stock was surrendered in
full payment of the note.
On December 31, 2004, the Company borrowed $200,000 from an unconsolidated
subsidiary. The note bore interest at 15% and was repaid in April, 2005.
The note was unsecured.
<F8>
The number and exercise prices of the warrants shown in footnote (3) have
been adjusted to reflect the 2-for-1 stock split effected as of August 6,
2004.
</FN>
At December 31, 2005, the annual maturities of long-term debt were $1,631,000 in
2006 (which includes $366,000 of the production payment accrued as of December
31, 2005), $11,000 in 2007, $2,927,000 in 2008, $1,144,000 in 2009 and
$2,956,000 in 2010.
The Company incurred $713,000, $455,000 and $370,000 of interest expense
relating to debt to related parties in 2005, 2004 and 2003, respectively. The
Company paid $464,000, $189,000 and $48,000 of those amounts for 2005, 2004, and
2003, respectively.
The weighted average interest rates for the Company's short-term borrowings were
9% and 15% as of December 31, 2005 and 2004, respectively.
(10) Operating Leases
- ---- ----------------
Noncancelable operating leases relate principally to office space, vehicles and
operating equipment. Gross future minimum payments under such leases as of
December 31, 2005 are summarized as follows:
Year Amount
---- ------
2006 $ 291,000
2007 213,000
2008 133,000
----------
$ 637,000
==========
Rent expense under operating leases aggregated $296,000, $281,000, and $313,000,
in 2005, 2004, and 2003, respectively.
(11) Income Taxes
- ---- ------------
Total income tax expense (benefit) was allocated as follows:
Year ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Continuing operations $ 35,000 $ 118,000 $ -
Discontinued operations - -
----------- ----------- -----------
$ 35,000 $ 118,000 $ -
=========== =========== ===========
Current income tax expense (benefit) from continuing operations consisted of:
Year ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
U. S. federal $ 35,000 $ 118,000 $ -
Various states - - -
----------- ----------- -----------
$ 35,000 $ 118,000 $ -
=========== =========== ===========
Total income tax expense (benefit) allocated to continuing operations differed
from the amounts computed by applying the U. S. federal income tax rate to loss
from continuing operations before income taxes as a result of the following:
Year ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Computed U. S. federal statutory expense
(benefit) $ (815,000) $ 401,000 $ (566,000)
Federal alternative minimum tax (benefit) 35,000 118,000 -
Increase (decrease) in the valuation allowance
for deferred tax assets 815,000 (401,000) 566,000
State income tax (benefit) - - -
----------- ----------- -----------
$ 35,000 $ 118,000 $ -
=========== =========== ===========
The components of deferred tax assets and liabilities are as follows:
December 31,
------------
2005 2004
---- ----
Deferred tax assets - tax effect of:
Net operating loss carryforwards $ 17,073,000 $ 17,782,000
Statutory depletion and investment tax credit
carryforwards 1,275,000 1,275,000
Other, principally investments and property, plant and
equipment 328,000 116,000
------------ ------------
Total gross deferred tax assets 18,676,000 19,173,000
Less valuation allowance (18,629,000) (19,126,000)
Deferred tax liabilities (47,000) (47,000)
------------ ------------
Net deferred tax asset/liability $ -- $ --
============ ============
In assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
At December 31, 2005, the Company had federal regular tax operating loss
carryforwards (the "NOL's") of approximately $44.9 million and tax depletion
carryforwards of approximately $3.45 million. The NOL's will expire from 2006 to
2008. These carryforwards may be limited if the Company undergoes a significant
ownership change.
(12) Stock Option and Deferred Compensation Plans
- ---- --------------------------------------------
The Company reserved 175,000 shares of its common stock for issuance to key
management, professional employees and directors under The Beard Company 1993
Stock Option Plan (the "1993 Plan") adopted in August 1993. In April 1998 the
Board of Directors voted to increase the number of shares authorized under the
1993 Plan to 275,000, and the shareholders approved the increase in June 1998.
As a result of the 3-for-4 reverse stock split effected in September 2000 and
the 2-for-1 stock split effected in August 2004, the number of shares authorized
under the 1993 Plan was increased to 412,500. The 1993 Plan terminated on August
26, 2003. At December 31, 2005, there were 26,250 options outstanding under the
1993 Plan.
The Company reserved 100,000 shares of its common stock for issuance to key
management, professional employees and directors under The Beard Company 2005
Stock Option Plan (the "2005 Plan") adopted in June 2005. At December 31, 2005,
there were 45,000 options outstanding under the 2005 Plan. No options were
granted in 2003 or 2004.
The per share weighted-average fair value of stock options granted during 1997
was $2.67 on the date of grant using the Black-Scholes option pricing model with
the following assumptions: no expected dividend yield; risk-free interest rate
of 6.5%; expected life of ten years; and expected volatility of 39%.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
----------- ----------------
Balance at December 31, 2002 81,742 $1.58
Granted - -
Exercised - -
Forfeited - -
Expired - -
----------- ----------------
Balance at December 31, 2003 81,742 $1.58
Granted - -
Exercised - -
Forfeited - -
Expired 55,492 -
----------- ----------------
Balance at December 31, 2004 26,250 $2.08
Granted 45,000 2.70
Exercised - -
Forfeited - -
Expired - -
----------- ----------------
Balance at December 31, 2005 71,250 $2.47
=========== ================
At December 31, 2005, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.75 - $2.92 and 3.25
years, respectively.
The Company has adopted a series of deferred compensation plans for certain key
executives and the board of directors which provide for payments in the form of
the Company's common stock upon (i) the death, disability, retirement or
termination of the participant or (ii) termination of the plans. Under such
plans, the number of shares of stock credited to each participant's account is
equal to the amount of compensation deferred divided by the fair market value of
the stock on the deferral date. 700,000 shares of stock were issued effective
January 31, 2003, upon termination of the initial plan adopted in 1996. 300,000
shares were issued effective September 30, 2003, upon termination of a second
plan. 800,000 shares of stock were authorized for issuance under the third plan
(the "2003-2 Plan"), adopted in September of 2003 and amended in February of
2004. As of December 31, 2004, there were 712,716 shares reserved for
distribution under the 2003-2 Plan and another 85,095 shares were reserved for
distribution in 2005 before the plan's termination on November 17, 2005. A total
of 217,653 shares from the 2003-2 Plan were distributed to the participants in
2005, along with an immaterial cash payment for fractional shares. The Company
will distribute the remaining 580,155 shares in the following years, according
to the binding elections of the participants:
Year(s) Total Shares
------- ------------
2006 98,612
2007-2009
(66,135 shares per year) 198,405
2010-2011
(66,134 shares per year) 132,268
2012 66,132
2013-2014
(42,369 shares per year) 84,738
----------------
Total 580,155
================
The Company adopted a fourth plan, the 2005 Deferred Stock Compensation Plan, on
November 17, 2005 and 100,000 shares of stock are authorized for issuance under
this plan. As of December 31, 2005, 17,935 shares were reserved for distribution
under this plan, none of which have been issued to date.
The weighted-average fair values of stock units issued under the plans were
$1.887, $0.371, and $0.385 for 2005, 2004 and 2003, respectively.
(13) Employee Benefit Plan
- ---- ---------------------
Employees of the Company participate in either of two defined contribution plans
with features under Section 401(k) of the Internal Revenue Code. The purpose of
the Plans is to provide retirement, disability and death benefits for all
full-time employees of the Company who meet certain service requirements. One of
the plans allows voluntary "savings" contributions up to a maximum of 50%, and
the Company matches 100% of each employee's contribution up to 5% of such
employee's compensation. The second plan covers those employees in the Coal
Segment and allows voluntary "savings" contributions up to a maximum of 40%.
Under this plan, the Company contributes $1.00 per hour of service performed for
hourly employees and up to 6% of compensation for salaried employees regardless
of the employees' contribution. The Company's contributions under both plans are
limited to the maximum amount that can be deducted for income tax purposes.
Benefits payable under the plans are limited to the amount of plan assets
allocable to the account of each plan participant. The Company retains the right
to modify, amend or terminate the plans at any time. Effective July 16, 2002 the
Company notified all participants in the two plans that it was suspending the
100% match until further notice. Accordingly, no contributions were made to the
plans in 2003, 2004, or 2005.
(14) Commitments and Contingencies
- ---- -----------------------------
In the normal course of business various actions and claims have been brought or
asserted against the Company. Management does not consider them to be material
to the Company's financial position, liquidity or future results of operations.
(15) Business Segment Information
- ---- ----------------------------
The Company manages its business by products and services and by geographic
location (by country). The Company evaluates its operating segments' performance
based on earnings or loss from operations before income taxes. The Company had
four reportable segments in 2005, 2004 and 2003: Coal, Carbon Dioxide, China,
and e-Commerce.
The Coal Segment is in the business of operating coal fines reclamation
facilities in the U.S. and provides slurry pond core drilling services, fine
coal laboratory analytical services and consulting services. The CO2 Segment
consists of the production of CO2 gas. The China Segment is focusing on the
construction and operation of organic chemical compound fertilizer plants in
China. The e-Commerce Segment consists of a 71%-owned subsidiary whose current
strategy is to develop business opportunities to leverage a subsidiary's
intellectual property portfolio of Internet payment methods and security
technologies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in note 1.
The following is certain financial information regarding the Company's
reportable segments (presented in thousands of dollars).
General corporate assets and expenses are not allocated to any of the Company's
operating segments; therefore, they are included as a reconciling item to
consolidated total assets and loss from continuing operations before income
taxes reported in the Company's accompanying financial statements.
Carbon
Coal Dioxide China e-Commerce Totals
---- ------- ----- ---------- ------
2005
----
Revenues from external
customers $ 52 $1,172 $ 29 $ 31 $ 1,284
Interest income - - 1 - 1
Interest expense 19 - 24 - 43
Depreciation, depletion and
amortization 9 42 13 3 67
Segment profit (loss) (783) 949 (787) (139) (760)
Segment assets 1,816 522 1,068 13 3,419
Expenditures for segment 1,991 34 587 - 2,612
assets
2004
----
Revenues from external
customers $ 189 $ 754 $ - $ 29 $ 972
Interest income - - - - -
Interest expense - - - 1 1
Depreciation, depletion and
amortization 17 40 1 6 64
Segment profit (loss) (682) 585 (549) (124) (770)
Segment assets 259 485 31 4 779
Expenditures for segment 216 35 1 1 253
assets
2003
----
Revenues from external
customers $ 59 $ 508 $ - $ 25 $ 592
Interest income - - - - -
Interest expense 1 - - 2 3
Depreciation, depletion and
amortization - 38 1 6 45
Segment profit (loss) (516) 363 (724) (100) (977)
Segment assets 37 459 52 11 559
Expenditures for segment 7 33 - 2 42
assets
Reconciliation of reportable segment revenues to consolidated revenues is as
follows (in thousands):
2005 2004 2003
-------------------- -------------------- --------------------
Total revenues for reportable segments $ 1,284 $ 972 $ 592
Revenues from corporate activities not allocated
to segments 95 - 1
-------------------- -------------------- --------------------
Total consolidated revenues $ 1,379 $ 972 $ 593
==================== ==================== ====================
Reconciliation of reportable segment interest expense to consolidated interest
expense is as follows (in thousands):
2005 2004 2003
-------------------- -------------------- --------------------
Total interest expense for reportable segments $ 43 $ 1 $ 3
Interest expense from corporate activities not
allocated to segments 956 693 634
-------------------- -------------------- --------------------
Total consolidated interest expense $ 999 $ 694 $ 637
==================== ==================== ====================
Reconciliation of reportable segment depreciation, depletion and amortization to
consolidated depreciation, depletion and amortization is as follows (in
thousands):
2005 2004 2003
-------------------- -------------------- --------------------
Total depreciation, depletion and amortization
for reportable segments $ 67 $ 64 $ 45
Corporate depreciation and amortization
not allocated to segments 120 28 124
-------------------- -------------------- --------------------
Total consolidated depreciation, depletion and
amortization $ 187 $ 92 $ 169
==================== ==================== ====================
Reconciliation of total reportable segment profit (loss) to consolidated loss
from continuing operations is as follows (in thousands):
2005 2004 2003
-------------------- -------------------- --------------------
Total loss for reportable segments $ (760) $ (770) $ (977)
Net corporate income (costs) not allocated
to segments (1,507) 1,825 (513)
-------------------- -------------------- --------------------
Total consolidated earnings (loss) from
continuing operations $ (2,267) $ 1,055 $ (1,490)
==================== ==================== ====================
Reconciliation of reportable segment assets to consolidated assets is as follows
(in thousands):
2005 2004
--------------- ---------------
Total assets for reportable segments $ 3,419 $ 779
Assets of discontinued operations 20 40
Corporate assets not allocated to segments 1,025 1,893
--------------- ---------------
Total consolidated assets $ 4,464 $ 2,712
=============== ===============
Reconciliation of expenditures for segment assets to total expenditures for
assets is as follows (in thousands):
2005 2004
------------- -------------
Total expenditures for assets for reportable
Segments $ 2,612 $ 253
Corporate expenditures not allocated to segments 277 -
------------- -------------
Total expenditures for assets $ 2,889 $ 253
============= =============
All of 2003 and 2004 segment revenues were derived from customers in the United
States of America. All of the China Segment's revenues for 2005 totaling $29,000
were derived from customers in China. Certain long-lived assets with recorded
values approximating $414,000 at December 31, 2005 were located in China. All
remaining segment assets are located in the United States of America.
During the year 2005, three customers accounted for 87% of the Coal Segment's
and 4% of the Company's revenues. For the year 2004, one customer accounted for
71% of the Coal Segment's and 14% of the Company's revenues. During 2003, two
customers accounted for 90% of the Coal Segment's and 9% of the Company's
revenues. Five customers account for 66% of the China Segment's revenues and 1%
of the Company's revenues for 2005. All of the e-Commerce Segment's 2003, 2004
and 2005 revenues were derived from one customer. The Company's CO2 revenues are
received from two operators in the CO2 Segment who market the CO2 gas to
numerous end users on behalf of the interest owners who elect to participate in
such sales. During 2005, 2004, and 2003, sales by these two operators accounted
for 85%, 78%, and 86%, respectively, of the Company's segment revenues and all
of the Carbon Dioxide Segment's revenues.
(16) Quarterly Financial Data (unaudited)
- ---- ------------------------------------
Three Months Ended
------------------- ------------------- ------------------- -----------------
March 31, June 30, September 30, December 31,
2005 2005 2005 2005
------------------- ------------------- ------------------- -----------------
(in thousands except per share data)
Revenues $ 243 $ 327 $ 344 $ 465
Operating loss (380) (300) (429) (608)
Earnings (loss) from
continuing operations (463) (437) (568) (834)
Earnings (loss) from
discontinued operations 88 62 (6) (2)
Net earnings (loss) (375) (375) (574) (836)
Basic earnings (loss) per
share (0.07) (0.06) (0.10) (0.14)
Diluted earnings (loss)
per share (0.07) (0.06) (0.10) (0.14)
Three Months Ended
------------------- ------------------- ------------------- -----------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
------------------- ------------------- ------------------- -----------------
(in thousands except per share data)
Revenues $ 188 $ 185 $ 249 $ 350
Operating loss (373) (419) (409) (499)
Earnings (loss) from
continuing operations 2,300 (307) (509) (547)
Earnings (loss) from
discontinued operations 3 4 (3) (4)
Net earnings (loss) 2,303 (303) (512) (551)
Basic earnings (loss) per
share 0.47 (0.06) (0.10) (0.13)
Diluted earnings (loss) per
share 0.40 (0.06) (0.10) (0.10)
The quarterly information presented above has been restated to conform to the
final year-end 2005 presentation.
During the fourth quarter of 2003, the Company recorded economic impairment
losses on certain long-lived assets in the Coal Segment and Other operations of
$6,000 and $76,000, respectively. The Company recorded no such economic
impairments in the fourth quarter of 2004 or 2005.
(17) Subsequent events
- ---- -----------------
Loans from and Agreement with PinnOak Resources. On February 8, 2006, the
Company filed a Form 8-K advising that two of its wholly-owned subsidiaries, BTI
and BPLLC, had executed an agreement with PinnOak in connection with the
Pinnacle Project (the "February 8 Agreement"). The 8-K pointed out that (i) the
Company had previously received and accepted a proposal from a lending
institution to provide a $9,000,000 loan for the project and (ii) that
affiliates of PinnOak had agreed to provide $2,800,000 of equity and own 50% of
BPLLC. Both commitments are subject to the condition that the USDA guarantees at
least 70% of the borrowed amount (the "Guaranty"). At this point the Company's
loan application is still being reviewed by the USDA, and there is no assurance
that the Guaranty will be forthcoming.
The agreement provides that if BPLLC has not obtained the Guaranty or a third
party loan in an amount sufficient to complete the Project on or before April 1,
2006, PinnOak has committed to assume control of the project and be responsible
for funding or arranging the funding of the project. If additional funding is
needed prior to receipt of the Guaranty, PinnOak has agreed to provide
additional loans to BPLLC to finance construction of the project, and BTI, BPLLC
and the Company have agreed to provide certain collateral. As of April 12, 2006
(including $1,100,000 advanced in 2005 and an additional $875,000 which had been
advanced prior to the February 8 Agreement) PinnOak had advanced a total of
$5,910,000 to finance the construction. On March 23 the amount of BPLLC's note
was increased from $5,100,000 to $9,000,000 and the "trigger date" for certain
events was extended from April 1, 2006 to May 1, 2006. (See "General development
of business---Recent Developments---Loans from and Agreement with PinnOak
Resources" for complete details).
Fertilizer Sales. To date the production from the Company's fertilizer
manufacturing plant near Beijing has lagged significantly behind its original
projections and it now appears that it will be at least May or June before the
plant will be able to achieve the targeted production rate of the existing
facility. Initial capacity has been lowered because some of the equipment was
downsized to reduce the cost of the facility. Despite the slow start, March
sales have been encouraging and sales are on the uptrend.
Because of the delay in reaching the Company's targeted production rate, the
plant owners have each had to loan an additional US$40,000 to provide the
additional working capital needed until the plant can generate sufficient funds
to sustain its own operations. (See"General development of business---Recent
Developments---Fertilizer Sales" for complete details).
Placement of Convertible Subordinated Notes. During the first quarter of 2006 we
sold another $192,851 of 2009 Notes, generating additional working capital of
approximately $191,000. The notes are convertible into 145,415 shares of the
Company's common stock.
Credit Facility on Colorado Gas Wells. On March 28, 2006, the Company closed on
a $350,000 reducing revolving credit facility with a local bank secured by a
first lien on the production from its eight new gas wells in Yuma County,
Colorado. The new credit facility provides an initial borrowing base of
$350,000, with such commitment reducing at the rate of $10,000 per month. The
loan matures on September 30, 2007, with interest payable monthly at Wall Street
Journal Prime Rate plus 150 basis points. As of April 10, 2006, $260,000 has
been drawn against the facility. $115,000 of such amount was used to repay loans
from related parties; the balance was added to working capital.
(18) Impact of Recently Issued Accounting Pronouncements
- ---- ---------------------------------------------------
In November of 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle
capacity and spoilage costs be excluded from the costs of inventory and expensed
when incurred. This standard is effective for fiscal periods beginning after
June 15, 2005. The Company will adopt SFAS No. 151 effective January 1, 2006.
The adoption of this new standard is not expected to have a material effect on
the Company's consolidated financial statements.
In December of 2004, the FASB issued SFAS No. 123R, Share-Based Payment, a
revision of SFAS No.123, Accounting for Stock-Based Compensation. SFAS 123R
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based upon their fair values. Pro forma disclosure is no longer an
acceptable alternative. As allowed by the Securities and Exchange Commission,
SFAS 123R must be adopted at the beginning of the next fiscal year that begins
after June 15, 2005. The Company will adopt SFAS 123R effective January 1, 2006.
The Company believes that the effects of implementing SFAS 123R will not be
significantly different from the pro forma disclosures shown above.
In May of 2005, the FASB issued FASB No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FADB Statement No. 3. SFAS
154 applies to all voluntary changes in accounting principle and requires
retrospective application to prior periods' financial statements in accounting
principle unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. Adoption of SFAS 154 is required
for accounting changes and error corrections made in fiscal years beginning
after December 15, 2005. The Company will adopt this new standard effective
January 1, 2006. The adoption of this standard is not expected to have a
material effect on the Company's consolidated financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
---------------------
No matters require disclosure here.
Item 9A. Controls and Procedures.
- -------- ------------------------
We, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rule a-15(f) under the Exchange Act) were effective as
of December 31, 2005 to ensure that information required to be disclosed by us
in reports that we file or submit under the 1934 Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms and that such information is accumulated and
communicated to our management as appropriate to allow timely decisions
regarding required disclosures.
There were no changes in our internal control over financial reporting
during our fiscal fourth quarter ended December 31, 2005, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
- -------- ------------------
There was no information required to be disclosed in a report on Form 8-K
during the fourth quarter ended December 31, 2005, that was not reported.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The information regarding our directors will be contained in the definitive
proxy statement which will be filed pursuant to Regulation 14A with the
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and the information to be contained therein is incorporated
herein by reference.
The information regarding our executive officers has been furnished in a
separate item captioned "Executive Officers and Significant Employees of the
Registrant" and included as Item 4a in Part I of this report at pages 22 through
24.
Item 11. Executive Compensation.
- -------- -----------------------
The information regarding executive compensation will be contained in the
definitive proxy statement which will be filed pursuant to Regulation 14A with
the Commission not later than 120 days after the end of the fiscal year covered
by this Form 10-K, and the information to be contained therein is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The information regarding security ownership of certain beneficial owners
and management and related stockholder matters will be contained in the
definitive proxy statement which will be filed pursuant to Regulation 14A with
the Commission not later than 120 days after the end of the fiscal year covered
by this Form 10-K, and the information to be contained therein is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The information regarding transactions with management and others will be
contained in the definitive proxy statement which will be filed pursuant to
Regulation 14A with the Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, and the information to be contained
therein is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
- -------- ---------------------------------------
The information regarding principal accountant fees and services will be
contained in the definitive proxy statement which will be filed pursuant to
Regulation 14A with the Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, and the information to be contained
therein is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
- -------- -------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements. Reference is made to the Index to Financial
Statements and Financial Statement.
2. Financial Statement Schedules. Financial Statement Schedules are omitted
as inapplicable or not required, or the required information is shown in
the financial statements or in the notes thereto.
3. Exhibits. The following exhibits are filed with this Form 10-K and are
identified by the numbers indicated:
3.1 Restated Certificate of Incorporation of Registrant as filed with the
Secretary of State of Oklahoma on September 20, 2000. (This Exhibit has
been previously filed as Exhibit 3(i) to Registrant's Form 10-Q for the
period ended September 30, 2000, filed on November 20, 2000, and same is
incorporated herein by reference).
3.2 Amended Certificate of Incorporation of Registrant as filed with the
Secretary of State of Oklahoma on July 20, 2004, effective on the close
of business August 6, 2004.
3.3 Registrant's By-Laws as currently in effect. (This Exhibit has been
previously filed as Exhibit 3(ii) to Registrant's Form 10-K for the
period ended December 31, 1997, filed on March 31, 1998, and same is
incorporated herein by reference).
4 Instruments defining the rights of security holders:
4.1 Certificate of Designations, Powers, Preferences and Relative,
Participating, Option and Other Special Rights, and the Qualifications,
Limitations or Restrictions Thereof of the Series A Convertible Voting
Preferred Stock of the Registrant. (This Exhibit has been previously
filed as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to
Registrant's Registration Statement on Form S-4, File No. 33-66598, and
same is incorporated herein by reference).
10 Material contracts:
10.1* Amendment No. One to The Beard Company 1993 Stock Option Plan dated
August 27, 1993, as amended June 4, 1998. (The Amended Plan supersedes
the original Plan adopted on August 27, 1993. This Exhibit has previously
been filed as Exhibit A, filed on April 30, 1998 to Registrant's Proxy
Statement dated April 30, 1998, and same is incorporated herein by
reference).
10.2* The Beard Company 2005 Stock Option Plan adopted on June 9, 2005. (This
Exhibit has been previously filed as Exhibit 10.3 to the Registrant's
Form 10-Q for the period ended June 30, 2005, filed on August 19, 2005,
and same is incorporated herein by reference).
10.3* Form of Indemnification Agreement dated December 15, 1994, by and between
Registrant and eight directors. (This Exhibit has been previously filed
as Exhibit 10(b) to Registrant's Form 10-K for the period ended December
31, 2000, filed on April 2, 2001, and same is incorporated herein by
reference).
10.4* Amendment No. One to The Beard Company 2003-2 Deferred Stock Compensation
Plan, adopted by the Board of Directors effective February 13, 2004.
(This Amendment, which supersedes the original Plan adopted on September
30, 2003, has been previously filed as Exhibit 10.5 to Registrant's Form
10-K for the period ended December 31, 2003, filed on March 30, 2004, and
same is incorporated herein by reference).
10.5* The Beard Company 2005 Deferred Stock Compensation Plan, adopted on
November 17, 2005.
10.6* Incentive Stock Option Agreement by and between Philip R. Jamison and
Beard Technologies, Inc. ("BTI"), dated May 18, 1998. (This Exhibit has
been previously filed as Exhibit 10(k) to Registrant's Form 10-K for the
period ended December 31, 1998, filed on April 15, 1999, and same is
incorporated herein by reference).
10.7 Tax Sharing Agreement by and among Registrant, Cibola and the Cibola
shareholders, dated April 10, 1996. (This Exhibit has been previously
filed as Exhibit 10.4 to Registrant's Form 10-Q for the period ended June
30, 1996, filed on August 14, 1996, and same is incorporated herein by
reference).
10.8 Cibola Corporation financial statements for the three years ended
December 31, 2004. (This Exhibit has been previously filed as Exhibit
10.9 to Registrant's Form 10-K/A for the period ended December 31, 2004,
filed April 17, 2006, and same is incorporated herein by reference.)
10.9 Notice letter by and among the Shareholders of Cibola and Registrant
dated November 14, 2005. (This Exhibit has been previously filed as
Exhibit 99 to the Registrant's Form 8-K, Current Report, filed on
December 1, 2005, and same is incorporated herein by reference).
10.10 Dredging Services Agreement by and between DTE Dickerson LLC and BTI,
dated July 14, 2004. (This Exhibit has been previously filed as Exhibit
10.4 to Registrant's Form 10-Q for the period ended September 30, 2004,
filed on Nov 16, 2004, and same is incorporated herein by reference).
10.11 Restated and Amended Letter Loan Agreement by and between Registrant and
the Unitrust dated March 26, 2004. (This Exhibit, which superseded all
prior Letter Loan Agreements between the parties, has been previously
filed as Exhibit 10.13 to Registrant's Form 10-K for the period ended
December 31, 2003, filed on March 30, 2004, and same is incorporated
herein by reference).
10.12 Amendment to Restated and Amended Letter Loan Agreement by and between
Registrant and the Unitrust dated June 25, 2004. (This Exhibit has been
previously filed as Exhibit 10.11 to Registrant's Form 10-K for the
period ended December 31, 2004, filed on March 31, 2005, and same is
incorporated herein by reference).
10.13 Restated and Amended Letter Loan Agreement by and between Registrant and
the Unitrust dated April 1, 2005. (This Exhibit, which superseded the
March 26, 2004 Letter Loan Agreement and the June 25, 2004 Amendment
between the parties, has been previously filed as Exhibit 10.1 to
Registrant's Form 10-Q for the period ended June 30, 2005, filed on
August 19, 2005, and same is incorporated herein by reference).
10.14 Renewal and Extension Promissory Note from Registrant to the Trustees of
the Unitrust dated March 26, 2004. (This Exhibit, which superseded all
prior Notes between the parties, has been previously filed as Exhibit
10.16 to Registrant's Form 10-K for the period ended December 31, 2003,
filed on March 30, 2004, and same is incorporated herein by reference).
10.15 Replacement Renewal and Extension Promissory Note from Registrant to the
Trustees of the Unitrust dated March 26, 2004. (This Exhibit, which
superseded all prior Notes between the parties, has been previously filed
as Exhibit 10.14 to Registrant's Form 10-K for the period ended December
31, 2004, filed on March 31, 2005, and same is incorporated herein by
reference).
10.16 Replacement Renewal and Extension Promissory Note from Registrant to the
Trustees of the Unitrust dated February 14, 2005. (This Exhibit, which
superseded all prior Notes between the parties, has been previously filed
as Exhibit 10.2 to Registrant's Form 10-Q for the period ended June 30,
2005, filed on August 19, 2005, and same is incorporated herein by
reference).
10.17 Form of 2002 Warrant. (This Exhibit has been previously filed as Exhibit
10(d) to Registrant's Form 10-Q for the period ended June 30, 2002, and
same is incorporated herein by reference).
10.18 Form of 2003 Warrant. (This Exhibit has been previously filed as Exhibit
10(c) to Registrant's Form 10-Q for the period ended March 31, 2003,
filed on May 15, 2003, and same is incorporated herein by reference).
10.19 Form of Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement dated as of February 21, 2003. (This Exhibit has been
previously filed as Exhibit 10(d) to Registrant's Form 10-Q for the
period ended March 31, 2003, filed on May 15, 2003, and same is
incorporated herein by reference).
10.20 Subordination and Nominee Agreement dated February 21, 2003. (This
Exhibit has been previously filed as Exhibit 10.26 to Registrant's Form
10-K for the period ended December 31, 2003, filed on March 30, 2004, and
same is incorporated herein by reference).
10.21 Form of 10% Participating Note due November 30, 2006. (This Exhibit has
been previously filed as Exhibit 10.1 to Registrant's Form 10-Q for the
period ended June 30, 2004, filed on August 16, 2004, and same is
incorporated herein by reference).
10.22 Promissory Note from Registrant to Bank of Nichols Hills dated February
27, 2004. (This Exhibit has been previously filed as Exhibit 10.30 to
Registrant's Form 10-K for the period ended December 31, 2004, filed on
March 31, 2005, and same is incorporated herein by reference).
10.23 Form of 2004 Warrant. (This Exhibit has been previously filed as Exhibit
10.2 to Registrant's Form 10-Q for the period ended June 30, 2004, filed
on August 16, 2004, and same is incorporated herein by reference).
10.24 Form of 2004 Production Payment. (This Exhibit has been previously filed
as Exhibit 10.3 to Registrant's Form 10-Q for the period ended June 30,
2004, filed on August 16, 2004, and same is incorporated herein by
reference).
10.25 Form of Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement by and between Registrant and McElmo Dome Nominee,
LLC, dated as of May 21, 2004. (This Exhibit has been previously filed as
Exhibit 10.25 to Registrant's Form 10-K for the period ended December 31,
2004, filed on March 31, 2005, and same is incorporated herein by
reference).
10.26 Subordination and Nominee Agreement dated May 21, 2004, by and between
the Unitrust and Boatright Family, L.L.C. ("Boatright") (This Exhibit has
been previously filed as Exhibit 10.27 to Registrant's Form 10-K for the
period ended December 31, 2004, filed on March 31, 2005, and same is
incorporated herein by reference).
10.27 Form of 12% Convertible Subordinated Promissory Note due February 15,
2010. (This Exhibit has been previously filed as Exhibit 10.1 to
Registrant's Form 10-Q for the period ended March 31, 2005, filed on May
16, 2005, and same is incorporated herein by reference).
10.28 Security and Collateral Agent Agreement, by and among Registrant,
InvesTrust, N.A. and Beard Technologies, Inc., dated as of January 26,
2005. (This Exhibit has been previously filed as Exhibit 10.2 to
Registrant's Form 10-Q for the period ended March 31, 2005, filed on May
16, 2005, and same is incorporated herein by reference).
10.29 Form of 2005 Warrant. (This Exhibit has been previously filed as Exhibit
10.3 to Registrant's Form 10-Q for the period ended March 31, 2005, filed
on May 16, 2005, and same is incorporated herein by reference).
10.30 Letter Agreement by and among Registrant, Pinnacle Mining Company, LLC,
PinnOak Resources, LLC and BTI, dated July 29, 2005, with attached
Exhibits "A", "A-1", "A-2" and "A-3".
10.31 Advancing Term Promissory Note from Registrant to Cibola dated December
1, 2004. (This Exhibit has been previously filed as Exhibit 10.31 to
Registrant's Form 10-K for the period ended December 31, 2004, filed on
March 31, 2005, and same is incorporated herein by reference).
10.32 Letter Agreement by and between 7HBF, Ltd. ("7HBF") and Registrant dated
February 7, 2005. (This Exhibit has been previously filed as Exhibit 10.4
to Registrant's Form 10-Q for the period ended March 31, 2005, filed on
May 16, 2005, and same is incorporated herein by reference).
10.33 Unsecured Promissory Note from BEE/7HBF, LLC to 7HBF dated February 14,
2005. (This Exhibit has been previously filed as Exhibit 10.5 to
Registrant's Form 10-Q for the period ended March 31, 2005, filed on May
16, 2005, and same is incorporated herein by reference).
10.34 Beard Boatright 12% Convertible Subordinated Promissory Note due August
31, 2009. (This Exhibit has been previously filed as Exhibit 99.1 to the
Registrant's Form 8-K, Current Report, filed on July 25, 2005, and same
is incorporated herein by reference).
10.35 Form of 12% Convertible Subordinated Promissory Note due August 31, 2009
issued to all other 2009 Note purchasers. (This Exhibit has been
previously filed as Exhibit 99.2 to the Registrant's Form 8-K, Current
Report, filed on July 25, 2005, and same is incorporated herein by
reference).
10.36 Note Assumption Agreement and Release by and among the Unitrust,
Registrant and Boatright. (This Exhibit has been previously filed as
Exhibit 99.3 to the Registrant's Form 8-K, Current Report, filed on July
25, 2005, and same is incorporated herein by reference).
10.37 Amended and Restated Promissory Note in the amount of $1,100,000 by and
between Beard Pinnacle, LLC and PinnOak Resources, LLC dated October 7,
2005. This Exhibit superseded and replaced a prior Note between the
parties dated September 29, 2005, in the amount of $400,000.
10.38 Subordination and Nominee Agreement dated as of July 22, 2005, by and
among the Unitrust, Boatright and Nominee. (This Exhibit has been
previously filed as Exhibit 99.4 to the Registrant's Form 8-K, Current
Report, filed on July 25, 2005, and same is incorporated herein by
reference).
10.39 Form of Amended and Restated Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement by and between Registrant, the
Public Trustee of ______ County, Colorado, for the benefit of Nominee,
dated as of July 22, 2005. (This Exhibit has been previously filed as
Exhibit 99.5 to the Registrant's Form 8-K, Current Report, filed on July
25, 2005, and same is incorporated herein by reference).
14 Code of Ethics (This Exhibit has been previously filed as Exhibit 14 to
Registrant's Form 10-K for the period ended December 31, 2002, filed on
April 8, 2003, and same is incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel:
23.1 Consent of Cole & Reed, P.C.
31 Rule 13a-14(a)/15d-14(a) Certifications:
31.1 Chief Executive Officer Certification required by Rule 13a-14(a) or Rule
15d-14(a).
31.2 Chief Financial Officer Certification required by Rule 13a-14(a) or Rule
15d-14(a).
32 Section 1350 Certifications:
32.1 Chief Executive Officer Certification required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
32.2 Chief Financial Officer Certification required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
_______________
* Compensatory plans or arrangements.
The Company will furnish to any shareholder a copy of any of the above
exhibits upon the payment of $.25 per page. Any request should be sent to The
Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma
City, Oklahoma 73112.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE BEARD COMPANY
(Registrant)
/s/ Herb Mee, Jr.
DATE: April 12, 2006 By Herb Mee, Jr., President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated below.
Signature Title Date
- --------- ----- ----
/s/ W. M. Beard
By W.M. Beard Chief Executive Officer April 12, 2006
/s/ Herb Mee, Jr.
By Herb Mee, Jr. President and Chief April 12, 2006
Financial Officer
/s/ Jack A. Martine
By Jack A. Martine Controller and April 12, 2006
Chief Accounting Officer
/s/ W. M. Beard
By W. M. Beard Chairman of the Board April 12, 2006
/s/ Herb Mee, Jr.
By Herb Mee, Jr. Director April 12, 2006
/s/ Allan R. Hallock
By Allan R. Hallock Director April 12, 2006
/s/ Harlon E. Martin, Jr.
By Harlon E. Martin, Jr. Director April 12, 2006
/s/ Ford C. Price
By Ford C. Price Director April 12, 2006
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT METHOD OF FILING
--- ---------------------- ----------------
3.1 Restated Certificate of Incorporation of Incorporated herein by reference
Registrant as filed with the Secretary
of State of Oklahoma on September 20,
2000.
3.2 Amended Certificate of Incorporation of Filed herewith electronically
Registrant as filed with the Secretary
of State of Oklahoma on July 20, 2004,
effective on the close of business
August 6, 2004.
3.3 Registrant's By-Laws as currently in Incorporated herein by reference
effect.
4.1 Certificate of Designations, Powers, Incorporated herein by reference
Preferences and Relative, Participating,
Option and Other Special Rights, and the
Qualifications, Limitations or
Restrictions Thereof of the Series A
Convertible Voting Preferred Stock of
the Registrant.
10.1 Amendment No. One to The Beard Company Incorporated herein by reference
1993 Stock Option Plan dated August 27,
1993, as amended June 4, 1998.
10.2 The Beard Company 2005 Stock Option Plan Incorporated herein by reference
adopted on June 9, 2005.
10.3 Form of Indemnification Agreement dated Incorporated herein by reference
December 15, 1994, by and between
Registrant and eight directors.
10.4 Amendment No. One to The Beard Company Incorporated herein by reference
2003-2 Deferred Stock Compensation Plan,
adopted by the Board of Directors
effective February 13, 2004.
10.5 The Beard Company 2005 Deferred Stock Filed herewith electronically
Compensation Plan, adopted on November
17, 2005.
10.6 Incentive Stock Option Agreement by and Incorporated herein by reference
between Philip R. Jamison and Beard
Technologies, Inc. ("BTI"), dated May
18, 1998.
10.7 Tax Sharing Agreement by and among Incorporated herein by reference
Registrant, Cibola and the Cibola
shareholders, dated April 10, 1996.
10.8 Cibola Corporation financial statements Incorporated herein by reference
for the three years ended December 31,
2004.
10.9 Notice letter by and among the Incorporated herein by reference
Shareholders of Cibola and Registrant
dated November 14, 2005.
10.10 Dredging Services Agreement by and Incorporated herein by reference
between DTE Dickerson LLC and BTI, dated
July 14, 2004.
10.11 Restated and Amended Letter Loan Incorporated herein by reference
Agreement by and between Registrant and
the Unitrust dated March 26, 2004.
10.12 Amendment to Restated and Amended Letter Incorporated herein by reference
Loan Agreement by and between Registrant
and the Unitrust dated June 25, 2004.
10.13 Restated and Amended Letter Loan Incorporated herein by reference
Agreement by and between Registrant and
the Unitrust dated April 1, 2005.
10.14 Renewal and Extension Promissory Note Incorporated herein by reference
from Registrant to the Trustees of the
Unitrust dated March 26, 2004.
10.15 Replacement Renewal and Extension Incorporated herein by reference
Promissory Note from Registrant to the
Trustees of the Unitrust dated March 26,
2004.
10.16 Replacement Renewal and Extension Incorporated herein by reference
Promissory Note from Registrant to the
Trustees of the Unitrust dated February
14, 2005.
10.17 Form of 2002 Warrant. Incorporated herein by reference
10.18 Form of 2003 Warrant. Incorporated herein by reference
10.19 Form of Deed of Trust, Assignment of Incorporated herein by reference
Production, Security Agreement and
Financing Statement dated as of February
21, 2003.
10.20 Subordination and Nominee Agreement Incorporated herein by reference
dated February 21, 2003.
10.21 Form of 10% Participating Note due Incorporated herein by reference
November 30, 2006.
10.22 Promissory Note from Registrant to Bank Incorporated herein by reference
of Nichols Hills dated February 27,
2004.
10.23 Form of 2004 Warrant. Incorporated herein by reference
10.24 Form of 2004 Production Payment. Incorporated herein by reference
10.25 Form of Deed of Trust, Assignment of Incorporated herein by reference
Production, Security Agreement and
Financing Statement by and between
Registrant and McElmo Dome Nominee, LLC,
dated as of May 21, 2004.
10.26 Subordination and Nominee Agreement Incorporated herein by reference
dated May 21, 2004, by and between the
Unitrust and Boatright Family, L.L.C.
("Boatright")
10.27 Form of 12% Convertible Subordinated Incorporated herein by reference
Promissory Note due February 15, 2010.
10.28 Security and Collateral Agent Agreement, Incorporated herein by reference
by and among Registrant, InvesTrust,
N.A. and Beard Technologies, Inc., dated
as of January 26, 2005.
10.29 Form of 2005 Warrant. Incorporated herein by reference
10.30 Letter Agreement by and among Filed herewith electronically
Registrant, Pinnacle Mining Company,
LLC, PinnOak Resources, LLC and BTI,
dated July 29, 2005, with attached
Exhibits "A", "A-1", "A-2" and "A-3".
10.31 Advancing Term Promissory Note from Incorporated herein by reference
Registrant to Cibola dated December 1,
2004.
10.32 Letter Agreement by and between 7HBF, Incorporated herein by reference
Ltd. ("7HBF") and Registrant dated
February 7, 2005.
10.33 Unsecured Promissory Note from BEE/7HBF, Incorporated herein by reference
LLC to 7HBF dated February 14, 2005.
10.34 Beard Boatright 12% Convertible Incorporated herein by reference
Subordinated Promissory Note due August
31, 2009.
10.35 Form of 12% Convertible Subordinated Incorporated herein by reference
Promissory Note due August 31, 2009
issued to all other 2009 Note
purchasers.
10.36 Note Assumption Agreement and Release by Incorporated herein by reference
and among the Unitrust, Registrant and
Boatright.
10.37 Amended and Restated Promissory Note in Filed herewith electronically
the amount of $1,100,000 by and between
Beard Pinnacle, LLC and PinnOak
Resources, LLC dated October 7, 2005.
This Exhibit superseded and replaced a
prior Note between the parties dated
September 29, 2005, in the amount of
$400,000.
10.38 Subordination and Nominee Agreement Incorporated herein by reference
dated as of July 22, 2005, by and among
the Unitrust, Boatright and Nominee.
10.39 Form of Amended and Restated Deed of Incorporated herein by reference
Trust, Assignment of Production,
Security Agreement and Financing
Statement by and between Registrant, the
Public Trustee of ______ County,
Colorado, for the benefit of Nominee,
dated as of July 22, 2005.
14 Code of Ethics. Incorporated herein by reference
21 Subsidiaries of the Registrant. Filed herewith electronically
23.1 Consent of Cole & Reed, P.C. Filed herewith electronically
31.1 Chief Executive Officer Certification Filed herewith electronically
required by Rule 13a-14(a) or Rule
15d-14(a).
31.2 Chief Financial Officer Certification Filed herewith electronically
required by Rule 13a-14(a) or Rule
15d-14(a).
32.1 Chief Executive Officer Certification Filed herewith electronically
required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63
of Title 18 of the United States Code.
32.2 Chief Financial Officer Certification Filed herewith electronically
required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63
of Title 18 of the United States Code.