UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
AMENDMENT NO. 2
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 001-12396
THE BEARD COMPANY
-----------------
(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
----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 842-2333
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of May 15, 2005.
Common Stock $.0006665 par value - 5,255,315
EXPLANATORY NOTE
The purpose of this Amendment No. 2 to the Form 10-Q of The Beard Company (the
"Company") for the quarterly period ended March 31, 2005 is to respond to
comments received from the Securities and Exchange Commission. Specifically, the
Company has amended its disclosure regarding the effectiveness of its disclosure
controls and procedures contained in Item 4 pursuant to Item 307 of Regulation
S-K and amended the Section 302 certifications filed as Exhibits 31.1 and 31.2.
THE BEARD COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements.............................................
Balance Sheets - March 31, 2005 (Unaudited) and
December 31, 2004...................................................
Statements of Operations - Three Months ended March 31, 2005
and 2004 (Unaudited)................................................
Statements of Shareholders' Equity (Deficiency) - Year ended
December 31, 2004 and Three Months ended March 31, 2005 (Unaudited).
Statements of Cash Flows - Three Months ended
March 31, 2005 and 2004 (Unaudited).................................
Notes to Financial Statements (Unaudited)..............................
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......
Item 4. Controls and Procedures..........................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......
Item 3. Defaults Upon Senior Securities..................................
Item 4. Submission of Matters to a Vote of Security Holders..............
Item 5. Other Information................................................
Item 6. Exhibits.........................................................
Signatures.................................................................
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE BEARD COMPANY AND SUBSIDIARIES
Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004
March 31, December 31,
Assets 2005 2004
------ ------------------- -------------------
(Restated - See Note 1) (Restated - See Note 1)
Current assets:
Cash and cash equivalents $ 965,000 $ 127,000
Accounts receivable, less allowance for doubtful
receivables of $97,000 in 2005 and 2004 180,000 167,000
Prepaid expenses and other assets 24,000 32,000
Current maturities of notes receivable 6,000 -
Assets of discontinued operations held for resale 103,000 40,000
------------------- -------------------
Total current assets 1,278,000 366,000
------------------- -------------------
Note receivable, less allowance for doubtful receivable of
$30,000 in 2005 and 2004 19,000 -
Restricted certificate of deposit 50,000 50,000
Investments and other assets, net of impairment of
$17,945,000 in 2005 and $17,064,000 in 2004 1,563,000 1,560,000
Property, plant and equipment, at cost 2,192,000 2,090,000
Less accumulated depreciation, depletion and amortization 1,447,000 1,457,000
------------------- -------------------
Net property, plant and equipment 745,000 633,000
------------------- -------------------
Intangible assets, at cost 445,000 292,000
Less accumulated amortization 200,000 189,000
------------------- -------------------
Net intangible assets 245,000 103,000
------------------- -------------------
$ 3,900,000 $ 2,712,000
=================== ===================
Liabilities and Shareholders' Equity (Deficiency)
-------------------------------------------------
Current liabilities:
Trade accounts payable $ 126,000 $ 177,000
Accrued expenses 259,000 314,000
Short-term debt - related entities 92,000 200,000
Current maturities of long-term debt 109,000 241,000
Current maturities of long-term debt - related entities 284,000 333,000
Liabilities of discontinued operations held for resale 84,000 95,000
------------------- -------------------
Total current liabilities 954,000 1,360,000
------------------- -------------------
Long-term debt less current maturities 415,000 367,000
Long-term debt - related entities 6,553,000 4,879,000
Other long-term liabilities 305,000 250,000
Minority interest in consolidated subsidiary 20,000 -
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 par value per share; 15,000,000
shares authorized; 5,255,315 and 4,839,565 shares
issued and outstanding in 2005 and 2004, respectively 4,000 3,000
Capital in excess of par value 38,364,000 38,193,000
Accumulated deficit (43,589,000) (43,214,000)
Accumulated other comprehensive loss (15,000) (15,000)
------------------- -------------------
Total common shareholders' equity (deficiency) (4,347,000) (4,144,000)
------------------- -------------------
Commitments and contingencies (note 7)
$ 3,900,000 $ 2,712,000
=================== ===================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Operations
(Unaudited)
For the Three Months Ended
---------------------------------------
March 31, March 31,
2005 2004
------------------ ------------------
(Restated) (Restated)
(See Note 1) (See Note 1)
Revenues:
Coal reclamation $ - $ -
Carbon dioxide 218,000 163,000
China - -
e-Commerce 25,000 25,000
Other - -
------------------ ------------------
243,000 188,000
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Expenses:
Coal reclamation 176,000 136,000
Carbon dioxide 47,000 31,000
China 124,000 134,000
e-Commerce 37,000 28,000
Selling, general and administrative 207,000 199,000
Depreciation, depletion and amortization 27,000 23,000
Other 5,000 10,000
------------------ ------------------
623,000 561,000
------------------ ------------------
Operating profit (loss):
Coal reclamation (178,000) (135,000)
Carbon dioxide 161,000 122,000
China (124,000) (134,000)
e-Commerce (13,000) (5,000)
Other, primarily corporate (226,000) (221,000)
------------------ ------------------
(380,000) (373,000)
Other income (expense):
Interest income 5,000 1,000
Interest expense (233,000) (151,000)
Equity in net earnings of unconsolidated affiliates 995,000 857,000
Impairment of investment in unconsolidated affiliate (881,000) (759,000)
Gain on settlement - 2,826,000
Gain on sale of assets 21,000 3,000
Other (1,000) (7,000)
Minority interest in operations of consolidated subsidiary 30,000 -
------------------ ------------------
Earnings (loss) from continuing operations before income taxes (444,000) 2,397,000
Income tax benefit (expense) (note 6) (19,000) (97,000)
------------------ ------------------
Earnings (loss) from continuing operations (463,000) 2,300,000
Earnings from discontinued operations (note 3) 88,000 3,000
------------------ ------------------
Net earnings (loss) $ (375,000) $ 2,303,000
================== ==================
Net earnings (loss) per average common share outstanding:
Basic
Earnings (loss) from continuing operations $ (0.08) $ 0.47
Earnings from discontinued operations 0.01 0.00
------------------ ------------------
Net earnings (loss) $ (0.07) $ 0.47
================== ==================
Net earnings (loss) per average common share outstanding:
Diluted
Earnings (loss) from continuing operations $ (0.08) $ 0.40
Earnings from discontinued operations 0.01 0.00
------------------ ------------------
Net earnings (loss) $ (0.07) $ 0.40
================== ==================
Weighted average common shares outstanding:
Basic 5,685,000 4,924,000
================== ==================
Diluted 5,685,000 5,687,000
================== ==================
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 Equity
Shares Stock Shares Stock Par Value Deficit Loss (Deficiency)
----------------- ------------------ ----------- ----------- ------------- ---------------
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 - - - - - - - -
-----------------
Comprehensive earnings - - - - - - - 937,000
-----------------
Issuance of stock for warrants
exercised - - 181,875 - 50,000 - - 50,000
Reservation of shares pursuant to
deferred compensation plan - - - - 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 (unaudited) - - - - - (375,000) - (375,000)
Comprehensive loss (unaudited):
Foreign currency translation
adjustment (unaudited) - - - - - - - -
-----------------
Comprehensive loss (unaudited) - - - - - - - (375,000)
-----------------
Issuance of stock for warrants
exercised (unaudited) - - 415,750 1,000 122,000 - - 123,000
Reservation of shares pursuant to
deferred compensation plan
(unaudited) - - - - 49,000 - - 49,000
----------------- ------------------ ------------ ------------ ------------- ---------------
Balance, March 31, 2005 (unaudited) 27,838 $ 889,000 5,255,315 $ 4,000 $38,364,000 $(43,589,000) $(15,000) $(4,347,000)
================= ================== ============ ============ ============= ===============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Three Months Ended
-----------------------------------------
March 31, 2005 March 31, 2004
-----------------------------------------
(Restated - see Note 1) (Restated - see Note 1)
Operating activities:
Cash received from customers $ 155,000 $ 159,000
Gain on settlement - 2,826,000
Cash paid to suppliers and employees (512,000) (539,000)
Interest received 4,000 1,000
Interest paid (199,000) (559,000)
Taxes paid (119,000) -
Operating cash flows of discontinued operations (16,000) (38,000)
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Net cash provided by (used in) operating activities (687,000) 1,850,000
------------------ -------------------
Investing activities:
Acquisition of property, plant and equipment (130,000) (8,000)
Acquisition of intangibles (149,000) -
Proceeds from sale of assets 30,000 -
Proceeds from sale of assets of discontinued operations 70,000 43,000
Other 219,000 30,000
------------------ -------------------
Net cash provided by investing activities 40,000 65,000
------------------ -------------------
Financing activities:
Proceeds from term notes 90,000 125,000
Payments on line of credit and term notes (203,000) (1,242,000)
Proceeds from related party debt 1,868,000 15,000
Payments on related party debt (248,000) (873,000)
Proceeds from exercise of warrants 123,000 -
Loan to buyer (30,000) -
Capitalized costs associated with issuance of
subordinated debt (114,000) -
Other (1,000) -
------------------ -------------------
Net cash provided by (used in) financing activities 1,485,000 (1,975,000)
------------------ -------------------
Net increase (decrease) in cash and cash equivalents 838,000 (60,000)
Cash and cash equivalents at beginning of period 127,000 216,000
------------------ -------------------
Cash and cash equivalents at end of period $ 965,000 $ 156,000
================== ===================
Continued
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
Reconciliation of Net earnings (loss) to Net Cash Provided by (Used in) Operating Activities
For the Three Months Ended
-----------------------------------------
March 31, 2005 March 31, 2004
-----------------------------------------
(Restated - see Note 1) (Restated - see Note 1)
Net earnings (loss) $ (375,000) $ 2,303,000
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 27,000 24,000
Gain on sale of assets (9,000) -
Gain on sale of assets of discontinued operations (91,000) -
Equity in operations of unconsolidated affiliates (995,000) (857,000)
Impairment of investment in unconsolidated affiliate 881,000 759,000
Increase in impairment reserve - 12,000
Non cash compensation expense 16,000 50,000
Net cash used by discontinued operations offsetting
accrued impairment loss (12,000) (2,000)
Minority interest in consolidated subsidiary (30,000) -
Increase in accounts receivable, prepaid expenses
other current assets (32,000) (12,000)
Decrease in accounts payable, accrued
expenses and other liabilities (67,000) (427,000)
------------------ -------------------
Net cash provided by (used in) operating activities $ (687,000) $ 1,850,000
================== ===================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes to Financial Statements
March 31, 2005 and 2004
(Unaudited)
(1) Summary of Significant Accounting Policies
- --- ------------------------------------------
Basis of Presentation
---------------------
The accompanying financial statements and notes thereto have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain disclosures normally prepared in
accordance with accounting principles generally accepted in the United
States of America have been omitted. The accompanying financial statements
and notes thereto should be read in conjunction with the audited
consolidated financial statements and notes thereto included in The Beard
Company's 2004 annual report on Form 10-K/A.
The accompanying financial statements include the accounts of The Beard
Company and its wholly and majority-owned subsidiaries in which The Beard
Company has a controlling financial interest (the "Company"). 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.
The financial information included herein is unaudited; however, such
information reflects solely normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim periods presented.
The results of operations for the three-month period ended March 31, 2005,
are not necessarily indicative of the results to be expected for the full
year.
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 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
pursuing environmental opportunities in China, focusing on the financing,
construction and operation of organic chemical compound fertilizer ("OCCF")
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.
All share, per share and exercise price figures referred to have been
adjusted to reflect the 2-for-1 stock split effected as of the close of
business on August 6, 2004.
Reclassifications
-----------------
Certain 2004 balances have been reclassified to conform to the 2005
presentation.
Restatement of Previously Issued Financial Statements
-----------------------------------------------------
This Form 10-Q/A is a restatement of the previously issued Form 10-Q for
the three-month periods ended March 31, 2005 and 2004. It is prepared to
present the results of the Company's investment in Cibola on a "gross"
rather than "net" basis. While the Company owns 80% of the common stock of
Cibola Corporation, it does not have financial or operating control of this
gas marketing subsidiary. According to the terms of an agreement with the
minority common and preferred shareholders of Cibola, the net worth of
Cibola would have to reach $50,000,000 before Beard could begin to receive
its 80% share of any excess. Beard has issued a $1,439,000 note payable
bearing interest at 8.25% for its common stock of Cibola. The interest
charges amounted to approximately $30,000 per quarter and were previously
netted against against the distributions from Cibola but are now included
in interest expense. The note is due on June 30, 2006. The stock is subject
to a call option at the sole discretion of the minority common and
preferred shareholders of Cibola. The Company had previously recorded as
earnings from unconsolidated affiliates the net cash distributions received
from Cibola which amounted to $84,000 and $68,000 for the three-month
periods ended March 31, 2005 and 2004, respectively. In recording the
Company's share of Cibola earnings according to the Agreement, these
amounts are increased to $995,000 and $857,000 for the three-month periods
ended March 31, 2005 and 2004, respectively. Since Beard management felt it
was unlikely that the net worth of Cibola would reach the requisite amount,
the Company also recorded impairments totaling $881,000 and $759,000 for
the three-month periods ended March 31, 2005 and 2004, respectively. These
impairments and the interest charges on the note payable to Cibola reduce
the net earnings to the Company from its investment in Cibola to the actual
cash distributions received and previously presented as earnings from
unconsolidated affiliates. The effect of these changes on the Balance
Sheets is to increase both investments and other assets and long-term debt
- related entities by $1,439,000 as of March 31, 2005 and December 31,
2004. There is no change to either net income (loss) or net earnings (loss)
per share for any of the periods presented as a result of these
restatements. The impact of these changes on the Statements of Cash Flows
is to decrease net cash provided by (used in) operating activities and to
increase net cash provided by (used in) investing activities by the $30,000
interest charges for each of the quarters ended March 31, 2005 and 2004.
(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 are on an uptrend; they increased in
2003 and 2004. Although the Company incurred operating losses and negative
cash flows from operations during each of the last six years, it
anticipates commencing a project in both its Coal and China Segments in
2005. During the 2005 first quarter the Company successfully arranged the
financing for its initial fertilizer manufacturing facility in China.
Additionally, the Coal Segment is currently pursuing eight different
projects, and anticipates commencing at least one of these projects prior
to year end. (See "Additional Details" below). The Company received the
second installment of the McElmo Dome Settlement (the "Settlement"),
totaling $2,826,000, in March of 2004, enabling 2004 to become a profitable
year while at the same time enhancing the Company's liquidity. The
Settlement has also resulted in better pricing and higher profit margins
for the CO2 Segment.
During the 15 month period ended March 31, 2005, the Company continued
efforts, commenced in the prior two years, to reduce its negative cash
flow. The Company's Chairman and President continued to defer a portion of
their base salary into the Company's 2003-2 Deferred Stock Compensation
Plan (the "DSC Plan") and its outside directors continued to defer their
directors' fees into the DSC Plan. The Chairman of Beard Technologies
continued to defer a portion of his salary during such period. The Company
also continued to suspend its 100% matching contribution (up to a cap of 5%
of gross salary) under its 401(k) Plan.
The Company also completed three private debt placements, raising gross
proceeds of $3,300,000, during such period; of which $1,845,000 was raised
during the 2005 first quarter. The Company also borrowed $200,000 from an
unconsolidated subsidiary during the fourth quarter of 2004. The negative
result of the debt placements has been a substantial amount of dilution to
the Company's common equity. During the 15 month period the Company issued
602,240 warrants (as adjusted for the 2-for-1 stock split effected in
August of 2004) in connection with the private debt placements, accrued
578,000 Stock Units in the participants' accounts as a result of deferrals
of salary into the DSC Plan, and issued 50,000 options to a financial
consultant. An aggregate of $2,100,000 of convertible notes were also
issued in connection with the private debt placement that are convertible
into 2,100,000 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 options, the convertible notes and the
salary deferrals.
Additional Details
As a result of the private debt placement completed during the first
quarter of 2005 the Company obtained net additional working capital
totaling approximately $1,721,000, and working capital increased from
$(944,000) at December 31, 2004 to $374,000 at March 31, 2005. Most of the
net proceeds were used to fund operations; however, part was used to repay
a portion of the Company's debt.
In February of 2005, the Company announced that it had arranged the
financing for its initial fertilizer manufacturing facility in China, where
it expects to commence production during the last four months of 2005. The
Company and an investor will each have 50% ownership and equity in the
plant, which is initially targeted to produce about 32,000 metric tons per
year of OCCF with estimated revenues of more than US$5,000,000 annually.
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") which it expects to commence in the
third quarter of 2005 if it can successfully arrange the financing
therefor. The segment is actively pursuing seven other projects and has a
number of other projects in the pipeline for follow up once these eight
projects have come to a resolution.
The timing of the coal projects the Company is actively pursuing is
uncertain but, subject to obtaining the necessary financing, they are
considered to have a high probability of activity. 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.
In addition, proceeds to the Company from the sales of assets during the
first quarter of 2005 totaled $134,500. Total proceeds from April 1 through
May 16 of 2005 from the sale of assets totaled $68,500. The Company expects
to generate cash of approximately $35,000 from the disposition of the
remaining assets of two of its discontinued segments, and can sell certain
other assets to generate cash if necessary.
The Company believes that if the current efforts to finance the coal
projects are successful, they will provide sufficient working capital to
sustain the Company's activities until the operations of the projects under
development in the Coal and China Segments have commenced operations and
the Company is generating positive cash flow from operations. If such
efforts are not successful or are only partially successful, then the
Company will need to pursue additional outside financing, which would
likely involve further dilution to shareholders.
(3) Discontinued Operations
- --- -----------------------
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 joint venture was dissolved in 2000 and the Company took
over certain remaining assets and liabilities.
The Company recorded no revenues for either of the three-month periods
ended March 31, 2005 or 2004. The Company recorded $48,000 and $15,000 in
earnings as a result of the sale of equipment and charged operating losses
of $39,000 and $3,000 against an accrual for anticipated expenses related
to the shutdown of one of its plants during the 2005 and 2004 first
quarters, respectively.
As of March 31, 2005, the significant assets related to the segment's
operations consisted primarily of equipment with no estimated net
realizable value and accounts receivable of $48,000. The significant
liabilities related to remaining operations consisted primarily of accrued
expenses totaling $14,000 related to the shutdown of operations. The
Company is actively pursuing opportunities to sell the segment's remaining
assets and expects the disposition to be completed by December 31, 2005.
WS Segment
In August 2001 the Company made the decision to cease pursuing
opportunities in Mexico and the WS Segment was discontinued. In December
2001 all of the sand separators owned by the 100%-owned company in the WS
Segment were sold for $100,000. The Company is now pursuing the sale of all
remaining equipment owned by the segment.
The segment recorded no revenues for either the first quarter of 2005 or
2004. The Company recorded earnings of $40,000 as its share of operating
results for the discontinued segment for the first quarter of 2005, which
included gains on the sale of equipment totaling $43,000. The Company's
share of operating results from the discontinued segment for the first
quarter of 2004 was a loss of $12,000.
As of March 31, 2005, the significant assets of the WS Segment were fixed
assets and accounts receivable totaling $55,000. The significant
liabilities of the entity consisted of trade accounts payable and accrued
expenses totaling $78,000. It is anticipated that all liabilities of the
segment will be paid prior to December 31, 2005.
(4) Convertible Preferred Stock
- --- ---------------------------
Effective January 1, 2003, the Company's preferred stock became convertible
into common stock. On May 15, 2005, each share of the Company's preferred
stock was convertible into 10.31114354 (287,041) shares of common stock.
The conversion ratio is adjusted periodically (i) for stock splits, (ii) as
additional warrants/options 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 2003-2 Deferred Stock Compensation
Plan (the "DSC Plan"), 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.
(5) 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. Included in the weighted
average number of common shares outstanding are the shares issuable
according to the terms of the DSC Plan. These shares are considered common
stock equivalents because the covered individuals may resign their
positions at will which would also terminate their participation in the DSC
Plan resulting in the issuance of the shares. Diluted earnings per share
reflect the potential dilution that could occur if the Company's
outstanding options and warrants were exercised (calculated using the
treasury stock method) and if the Company's preferred stock and convertible
notes were converted to common stock.
Diluted earnings (loss) per share from continuing operations in the
statements of operations for the three month period ended March 31, 2005
exclude all potential common shares issuable upon conversion of convertible
preferred stock, convertible notes, or exercise of options and warrants as
the effect would be anti-dilutive due to the Company's losses from
continuing operations. Weighted average shares of 5,687,000 for the diluted
earnings per share calculation for the three months ended March 31, 2004
are composed of basic common shares of 4,924,198; 27,838 shares of
preferred stock converted to 266,892 common shares; and 495,750 warrants
assumed exercised and converted to common shares.
(6) Income Taxes
- --- ------------
In accordance with the provisions of the Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the
Company's net deferred tax asset is being carried at zero book value, which
reflects the uncertainties of the Company's utilization of the future net
deductible amounts. The Company recorded provisions of $19,000 and $97,000
for federal alternative minimum taxes for the three months ended March 31,
2005 and 2004, respectively.
At March 31, 2005, the Company estimates that it had the following income
tax carryforwards available for both income tax and financial reporting
purposes (in thousands):
Expiration
Date Amount
---- ------
Federal regular tax operating loss carryforwards 2006-2008 $46,000
Tax depletion carryforward Indefinite $ 3,000
(7) 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 results of
operations.
The Company has an indemnity obligation to its institutional preferred
stockholder and one of its assignees for certain losses (i) arising out of
the ownership and/or operation of Beard Oil's former oil and gas assets,
including environmental liabilities; (ii) arising under any employee
benefit or severance plan; or (iii) relating to any misrepresentation or
inaccuracy in any representation made by the Company or Beard Oil in
connection with a restructure effected in 1993.
The Company has no liability under the indemnity obligation unless the
accumulated damage or loss incurred by the Buyer or its assignees in
connection with such Claims exceeds $250,000 in the aggregate. The maximum
amount of future payments that could be required under the indemnity has no
limitation. The principal exposure under the obligation would have been for
any environmental problems which existed, at the time of the sale, on the
oil and gas properties sold. If any Claims were to be made at this point
they would presumably need to be made first against any and all of the
subsequent owners of the properties involved; if any liability was then
determined to exist it would presumably be assigned first to such
subsequent owners. In the event the Company should be required to pay an
amount under this obligation, it does not believe any of such amount could
be recovered from third parties. However, during the more than 11 years
subsequent to the date of the Restructure there have been no Claims, and
the Company has no reason to believe that there will be any. For these
reasons, no reserve has ever been established for the liability, because
none is believed to exist.
(8) 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 the first quarter of 2005 and
2004: 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
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 the subsidiary's
intellectual property portfolio of Internet payment methods and security
technologies.
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
---- ------- ----- ---------- ------
Three months ended
------------------
March 31, 2005
--------------
Revenues from
external customers $ - $ 218 $ - $ 25 $ 243
Segment profit (loss) (178) 161 (124) (13) (154)
Segment assets 331 467 203 28 1,029
Three months ended
------------------
March 31, 2004
--------------
Revenues from
external customers $ - $ 163 $ - $ 25 $ 188
Segment profit (loss) (135) 122 (134) (5) (152)
Segment assets 36 460 57 9 562
Reconciliation of total reportable segment loss to consolidated loss from
continuing operations before income taxes is as follows for the three
months ended March 31, 2005 and 2004 (in thousands):
2005 2004
-------------- --------------
Total loss for reportable segments $ (154) $ (152)
Net corporate income (costs) not allocated to segments (290) 2,549
-------------- --------------
Total consolidated earnings (loss) from continuing
operations $ (444) $ 2,397
============== ==============
THE BEARD COMPANY AND SUBSIDIARIES
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 OUR 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 WE BELIEVE THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "ITEM 2. 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 US, OR PERSONS ACTING ON OUR BEHALF, ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. WE ASSUME NO DUTY TO
UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL
ESTIMATES OR EXPECTATIONS OR OTHERWISE.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion focuses on material changes in our financial
condition since December 31, 2004 and results of operations for the quarter
ended March 31, 2005, compared to the prior year first quarter. Such discussion
should be read in conjunction with our financial statements including the
related footnotes.
In preparing the discussion and analysis, we have presumed readers have
read or have access to the discussion and analysis of the prior year's results
of operations, liquidity and capital resources as contained in our 2004 Form
10-K/A.
Overview
- --------
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 pursuing
environmental opportunities in China focusing on the installation, construction
and operation of plants that manufacture environmentally friendly organic
chemical compound fertilizer. The e-Commerce Segment consists of a 71%-owned
subsidiary whose current strategy is to develop business opportunities to
leverage the subsidiary's intellectual property portfolio of Internet payment
methods and security technologies.
Our revenues from continuing operations are on an uptrend; they increased
in 2003 and 2004, and are expected to increase again in 2005. We anticipate
higher revenues in the CO2 Segment due to better pricing resulting from
implementation of the McElmo Dome Settlement Agreement (the "Settlement"). Six
new gas wells are expected to come on stream in Colorado beginning in June,
resulting in our first oil and gas revenues in many years. We expect the first
production from our initial fertilizer manufacturing plant in China to occur
during the last four months of 2005.
Although we incurred operating losses and negative cash flows from
operations during each of the last six years, we expect to commence a project in
both our Coal and China Segments in 2005, and believe that we will reverse this
trend in late 2005 or early 2006.
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. We are now in the final stage of disposing
of the segments' remaining assets. Such dispositions resulted in income of
$88,000 and $3,000 for the three months ended 2005 and 2004, respectively, as a
result of the sale of equipment.
Material changes in financial condition - March 31, 2005 as compared with
December 31, 2004.
- -------------------------------------------------------------------------
The following table reflects changes in our financial condition during the
periods indicated:
March 31, December 31, Increase
2005 2004 (Decrease)
---- ---- ----------
Cash and cash equivalents $ 965,000 $ 127,000 $ 838,000
Working capital $ 324,000 $ (994,000) $ 1,318,000
Current ratio 1.34 to 1 0.27 to 1
During the first quarter of 2005, our working capital increased by
$1,318,000 from $(994,000) as of December 31, 2004. In January 2005 we completed
the private placement of $2,100,000 of convertible subordinated notes, $255,000
of which were exchanged for notes issued in a prior offering. Net proceeds from
the offering amounted to approximately $1,700,000. Our CO2 Segment provided cash
of $171,000. We used $538,000 to repay debt and accrued interest, including
$328,000 to related parties. We used $178,000 of working capital to help fund
the operations of the Coal Segment. We utilized a total of $124,000 in the
pursuit of environmental opportunities in China. Also, we used $30,000 to fund
the activities of the e-Commerce Segment. We utilized the remainder of the
working capital to fund other operations.
In March of 2004, following receipt of the second installment of the
Settlement, our long-term line of credit from an affiliate of the Chairman was
paid down to $2,785,000 and ceased to be a revolving credit line. We also
terminated our $375,000 short-term line of credit from the same party. The
remaining loan from the related party was supplemented by three private
placements completed in 2004 and January of 2005 which raised proceeds of
$3,300,000, and additional borrowings of $200,000 in November of 2004 from an
unconsolidated subsidiary. Such funds were needed to provide additional working
capital, improve liquidity and to "bridge the gap" until we receive the funds
necessary to proceed with a coal project. In addition, we have been disposing of
the remaining assets from our discontinued segments as opportunities have become
available and are continuing to pursue the sale of the few remaining assets.
Receipt of the settlement 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 of the settlement, we were
able to eliminate $2,635,000 of our total indebtedness.
Our principal business is coal reclamation, and this is where management's
operating attention is primarily focused. The Coal Segment has a signed contract
on the Pinnacle Project on which we are currently pursuing financing, and is
actively pursuing seven other projects. We have a number of other projects in
the pipeline once these projects have come to a resolution. The timing of the
projects we are actively pursuing is uncertain but, subject to obtaining the
necessary financing, they are considered to have a high probability of activity.
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.
We are diligently pursuing both debt and equity financing through several
different sources. We have retained three different firms who are currently
seeking financing for our coal projects: (i) a New York City-based firm which
specializes in energy financing that is pursuing both debt and equity financing
for the projects; (ii) a Maryland-based firm that has already obtained a terms
sheet from a bank for the USDA-guaranteed portion of the financing needed for
the Pinnacle Project; and (iii) a third firm that specializes in USDA-guaranteed
financing. Accordingly, we believe that we will be successful in arranging
financing for at least one or two coal projects during the third quarter of
2005.
We achieved a major breakthrough in February of 2005 with the announcement
that a private investor had agreed to finance the cost of the China Segment's
initial fertilizer manufacturing facility in China. We and the investor have
each contributed US$50,000 to the LLC that has been formed to own and operate
the enterprise. We and the investor each own 50% of the LLC, and the investor,
as of April 15, 2005, has already loaned the agreed US$850,000 to the LLC to
fund the additional capital costs and pre-operating costs of the facility. A
building has been leased, equipment is in the process of being ordered, and
production is expected to commence in the fourth quarter of 2005. The plant is
initially targeted to produce estimated revenues of more than US$5,000,000
annually.
We completed a private debt placement of $2,100,000 of convertible notes in
January of 2005. $255,000 of the notes were exchanged for notes we had
previously issued. The notes are convertible into 2,100,000 shares of our common
stock. Net proceeds of approximately $1,700,000 are being used to provide the
working capital necessary to fund our operations until the financing for the
Pinnacle Project has been obtained.
We believe that if the current financing efforts are successful, they will
provide sufficient working capital to sustain our activities until the
operations of the projects under development in the Coal Segment have been
established and we are generating positive cash flow from operations. If such
efforts are not successful or are only partially successful, then a major
restructuring of our operations will become necessary in the near term in order
that we can continue as a going concern.
Material changes in results of operations - Quarter ended March 31, 2005 as
compared with the Quarter ended March 31, 2004.
- ---------------------------------------------------------------------------
The Company recorded a $375,000 loss for the first quarter of 2005 compared
to the $2,303,000 of income reported for the first quarter of 2004. The
operating loss in the Coal Segment increased by $43,000. The China Segment
incurred an operating loss of $124,000 for the first quarter of 2005 compared to
$134,000 for the same period in 2004. The operating profit in the CO2 Segment
increased $39,000. The e-Commerce Segment incurred operating losses of $13,000
for the first quarter of 2005 compared to $5,000 in the first quarter of 2004.
The operating loss in Other activities for the first quarter of 2005 increased
$5,000 compared to the same period in 2004. As a result, the operating loss for
the current quarter increased $7,000 to $380,000 versus $373,000 in the
corresponding quarter of the prior year.
Operating results of the Company's primary operating Segments are reflected
below:
2005 2004
---- ----
Operating profit (loss):
Coal reclamation $ (178,000) $ (135,000)
Carbon dioxide 161,000 122,000
China (124,000) (134,000)
e-Commerce (13,000) (5,000)
--------------- -------------
Subtotal (154,000) (152,000)
Other (226,000) (221,000)
--------------- --------------
$ (380,000) $ (373,000)
=============== ==============
The "Other" in the above table reflects primarily general and corporate
activities, as well as our other activities.
Coal reclamation
The segment recorded no revenues in either the first quarter of 2005 or
2004. Operating costs increased $40,000 to $176,000 for the first quarter of
2005 compared to $136,000 for the same period in 2004, as the segment expanded
its marketing efforts in view of the dramatic increase in coal prices. The net
result was a corresponding increase in the segment's operating loss.
Carbon dioxide
First quarter 2005 operations reflected an operating profit of $161,000
compared to $122,000 for the 2004 first quarter. The sole component of revenues
for this segment is the sale of CO2 gas from the working and overriding royalty
interests of our carbon dioxide producing unit in Colorado. Operating revenues
in this segment increased $55,000 or 34% to $218,000 for the first three months
of 2005 compared to $163,000 for the same period in 2004. The increase in
revenue, which was primarily due to an increase in pricing, was partially offset
by a slight decrease in paid volumes to our interest for CO2 gas during the
quarter, and by a $16,000 increase in lifting costs for the current quarter.
China
The China Segment incurred an operating loss of $124,000 for the first
three months of 2005 compared to $134,000 for the same period in 2004. The
segment had higher SG&A expenses in 2005 compared to 2004, as it geared up for
the installation and construction of its initial fertilizer manufacturing plant.
The higher SG&A was partially offset by the fact that one-half, or $30,000 thru
March 31, 2005, of the operating expenses of our new LLC that will manufacture
OCCF were passed through to our investor. See "Other income and expenses' below.
e-Commerce
The e-Commerce Segment incurred an operating loss of $13,000 for the first
quarter of 2005 versus an operating loss of $5,000 in the prior year quarter.
The segment recorded revenues of $25,000 of patent license fees in both the
prior and current year quarter. The segment incurred $8,000 more in SG&A costs
in the 2005 first quarter than it did in the comparable 2004 quarter. The
increased loss primarily reflects an increase in legal expenses related to
starpay's current litigation against Visa.
Other activities
Other operations, consisting primarily of general and corporate activities,
generated a $5,000 larger operating loss for the first quarter of 2005 as
compared to the same period last year. The increased loss for the first quarter
of 2005 compared to the same period in 2004 was the cumulative result of
numerous minor increases and decreases in selling, general and administrative
("SG&A").
Selling, general and administrative expenses
Our selling, general and administrative expenses ("SG&A") in the current
quarter increased to $207,000 from $199,000 in the 2004 first quarter. Other
activities incurred a total of $8,000 more in SG&A costs, which was the sum of
many minor increases and decreases in numerous SG&A accounts. Insurance and
benefit costs, for instance, increased a total of $5,000. Rent, on the other
hand, decreased $2,000 for the first quarter of 2005 compared to the same period
in 2004.
Depreciation, depletion and amortization expenses
Depreciation, depletion and amortization expenses ("DD&A") increased $4,000
for the first quarter of 2005 compared to the same period of 2004. The
capitalized costs associated with the three debt issues completed in 2002 and
2003 were almost completely amortized prior to the start of the first quarter of
2004. The increase was primarily due to the amortization of capitalized costs
associated with the three debt issues completed in 2004 and 2005 and
depreciation on additional equipment purchased for the anticipated Coal Segment
projects.
Other income and expenses
The other income and expenses for the first quarter of 2005 netted to a
loss of $64,000 compared to earnings of $2,770,000 for the same period in 2004.
We received the second installment of the McElmo Dome settlement totaling
$2,826,000 in March of 2004 with no comparable receipt in the first quarter of
2005. Interest income was $5,000 for the first quarter of 2005 compared to
$1,000 for the same period in 2004. Interest expense was $82,000 higher in the
first quarter of 2005 compared to the first quarter of 2004 reflecting the three
debt offerings completed in 2004 and 2005. Our equity in earnings of
unconsolidated affiliates reflected net income of $114,000 for the first quarter
of 2005 compared to $98,000 for the same period in 2004. The Company recorded
$995,0000 as its share of earnings from its investment in Cibola Corporation
compared to $857,000 for the prior year quarter. While the Company owns 80% of
the common stock of Cibola, it does not have financial or operating control of
this gas marketing subsidiary. According to the terms of an agreement with the
minority common and preferred shareholders of Cibola, the net worth of Cibola
would have to reach $50,000,000 before Beard could begin to receive its 80%
share of any excess. Since Beard management felt this was unlikely, the Company
also recorded impairments of $881,000 and $759,000 for the three months ended
March 31, 2005 and 2004, respectively. The interest expense totals include
$30,000 to Cibola for each of the three months ended March 31, 2005 and 2004,
respectively. These impairments and the interest charges reduce the net earnings
to the Company from its investment in Cibola to the actual cash distributions
received of $84,000 and $68,000 for the first quarter of 2005 and 2004,
respectively. We realized gains on sale of assets for the three months ended
March 31, 2005 totaling $21,000 compared to $3,000 for the same period in 2004.
We realized a $30,000 reduction in expenses attributable to our operations in
China as a result of the 50% minority interest held by our investor in the
start-up LLC included as a consolidated subsidiary in these financial
statements.
Income taxes
We recorded a provision of $19,000 for federal alternative minimum taxes
for the first quarter of 2005 compared to $97,000 for the same period in 2004.
The Company has not recorded any financial benefit attributable to its various
tax carryforwards due to uncertainty regarding their utilization and
realization.
Discontinued operations
As mentioned in the Overview above, our financial results for the three
months ended 2005 and 2004 benefited from earnings of $88,000 and $3,000,
respectively, as a result of the discontinuance of four of our segments. The
first quarter of 2005 benefited from the disposition of assets which generated
gains of $91,000 compared to $15,000 for the same period in 2004, offset by
expenses of $3,000 and $12,000 respectively. As of March 31, 2005, assets of
discontinued operations held for resale totaled $103,000 and liabilities of
discontinued operations totaled $84,000. We believe that all of the assets of
the discontinued segments have been written down to their realizable value. We
are actively pursuing opportunities to sell the remaining assets and expect the
dispositions to be completed by December 31, 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At March 31, 2005, we had total debt of $7,655,000 which included $92,000
of short-term debt to a related party and $35,000 of accrued interest to a
related party which was treated as a long-term obligation. Included in the
remaining $7,327,000 of debt was $6,464,000 of long-term debt which had fixed
interest rates rates; therefore, our interest expense and operating results
would not be affected by an increase in market interest rates for this portion
of the debt. At March 31, 2005, a 10% increase in market interest rates would
have reduced the fair value of our debt by $86,000.
The Company has no other market risk sensitive instruments.
Item 4. Controls and Procedures.
RESTATEMENT
As discussed in Note 1 to the consolidated financial statements in this
restatement, we have amended our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005, to present the results of operations of our investment in
Cibola Corporation ("Cibola") on a "gross" rather than a "net" basis. While we
own 80% of the common stock of Cibola Corporation, we do not have financial or
operating control of this gas marketing subsidiary. According to the terms of an
agreement (the "Agreement") with the minority common and preferred shareholders
of Cibola, the net worth of Cibola would have to reach $50,000,000 before we
could begin to receive our 80% share of any excess. We have issued a $1,439,000
note payable bearing interest at 8.25% for its common stock of Cibola. These
interest charges amounted to approximately $30,000 per quarter and were
previously netted against the distributions from Cibola. The note is due on June
30, 2006. The stock is subject to a call option at the sole discretion of the
minority common and preferred shareholders of Cibola. We had previously recorded
as earnings from unconsolidated affiliates the net cash distributions received
from Cibola which amounted to $84,000 and $68,000 for the three-month periods
ended March 30, 2005 and 2004, respectively. In recording our share of Cibola
earnings according to the Agreement, these amounts are increased to $995,000 and
$857,000 for the three-month periods ended March 30, 2005 and 2004,
respectively. Since we felt it was unlikely that the net worth of Cibola would
reach the requisite amount, we also recorded impairments totaling $881,000 and
$759,000 for the three-month periods ended March 31, 2005 and 2004,
respectively. These impairments and the interest charges on the note payable to
Cibola reduce the net earnings to us from our investment in Cibola to the actual
cash distributions received and previously presented as earnings from
unconsolidated affiliates. The effect of these changes on the Balance Sheets is
to increase investments and other assets and long-term debt - related entities
by $1,439,000 as of March 31, 2005 and December 31, 2004. There is no change to
either net income (loss) or net earnings (loss) per share for either of the
periods presented as a result of this restatement. The effect of these
adjustments on the Statements of Cash Flows is to decrease net cash provided by
(used in) operating activities and to increase net cash provided by (used in)
investing activities by the $30,000 interest charges for each of the quarters
ended March 31, 2005 and 2004.
EVALUATION OF INTERNAL CONTROLS AND PROCEDURES AND THE RESTATEMENT
As a result of the restatement discussed above, we, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, have re-evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based on that
re-evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of March
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 (the "Commission") rules and forms. We researched the proper
accounting treatment and presentation of these transactions at the time we
initially entered into the agreement with the minority common and preferred
shareholders of Cibola. Our accounting treatment and presentation was reviewed
by legal counsel (presentation only) and an independent international public
accounting firm and found to be proper at that time. That treatment was
subsequently reviewed by another independent public accounting firm and its
conclusion was the same. The Commission disagreed with the accounting treatment
and required that we restate our financials. Nonetheless, we believe that we had
performed sufficient due diligence in reaching our conclusions regarding the
accounting treatment of this transaction. In coming to the conclusion that our
disclosure controls and procedures and internal control over financial reporting
were effective as of March 31, 2005, our management took into consideration that
the restatement adjustments did not have a material impact on the financial
statements, inasmuch as there were no changes to the net earnings (loss) or net
earnings (loss) per share amounts, as originally reported and that the
restatement, when regarded in its entirety, did not constitute a material
weakness.
As a result of the internal control deficiency resulting in the restatement
discussed above, we intend to implement more standardized procedures affecting
the compilation, review and reporting process in order to prevent such
occurrences in the future. We believe that these corrective steps will remedy
the control deficiency cited above. We will, however, continue to review this
process and will make any other changes and take action that we determine to be
appropriate.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
McElmo Dome Litigation
- ----------------------
The McElmo Dome Settlement became final in July of 2003. We received our
$1,151,000 share of the first installment of the Settlement in July of 2003, a
second installment totaling $2,826,000 in March of 2004 and a third installment
of $117,000 in May of 2004. We have expensed our entire 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 McElmo Dome
litigation. A mediation held in Denver on March 31, 2005, was unsuccessful.
However, the Plaintiffs and the defendants have agreed to submit letter briefs
to the party who served as the court-appointed fairness expert during the
proceedings concerning the Settlement Agreement who will render an advisory
opinion consisting of a decision on the merits relating to the current disputes
on or about July 29, 2005. The parties have agreed that if his decision fails to
resolve the matter the parties will proceed to arbitration. We estimate that, in
the event all three of the matters in dispute should be resolved in the
Plaintiffs favor, we could receive as much as $540,000 for our share of the
money in dispute.
Coalition Managers' Litigation
- ------------------------------
In a separate suit, in which we are not a defendant, two parties who
objected to the Settlement have sued the managers of the Coalition alleging
various claims which defendants have denied. The Coalition has held back
approximately $800,000 as a litigation reserve until this matter is resolved to
pay for defense of the case and winding up costs of the Coalition. One of the
parties has subsequently withdrawn from the suit. We expect that this matter
will be resolved in favor of the defendants, and that we will ultimately receive
an additional $100,000 to $125,000 from the holdback in addition to the three
installments described above.
Visa Litigation
- ---------------
In May of 2003 the Company's 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. On July 25, 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.
On February 23, 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 aupplement thereto detailing Visa's alleged infringement of
the majority of the patent claims depicted in the VIMachine Patent.
Subsequently, in May 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 VIMachine Patent claims. A hearing regarding patent claim construction (a
"Markman hearing") was held on October 21 and 29, 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. It is
anticipated the Court will rule on these issues during the second quarter of
2005.
Both sides anticipate filing dispositve motions in the late summer or fall
of 2005. Trial is slated to begin in February 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Default upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(a) The following exhibits are filed with this Form 10-Q and are identified
by the numbers indicated:
3.1 Certificate of Incorporation of The New Beard Company as filed with the
Secretary of State of Oklahoma on September 20, 2000. (This Exhibit has
been previously filed as Exhibit 3(ii) 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 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).
4.2 Settlement Agreement, with Certificate of Amendment attached thereto, by
and among Registrant, Beard Oil, New York Life Insurance Company, New York
Life Insurance and Annuity Company, John Hancock Mutual Life Insurance
Company, Memorial Drive Trust and Sensor Oil & Gas, Inc., dated as of April
13, 1995. (This Exhibit has been previously filed as Exhibit 4(g) to
Registrant's Form 10-K for the period ended December 31, 1994 and same is
incorporated herein by reference).
10 Material Contracts:
10.1 Form of 12% Convertible Subordinated Promissory Note.
10.2 Security and Collateral Agent Agreement, by and among Registrant,
InvesTrust, N.A. and Beard Technologies, Inc., dated as of January 26,
2005.
10.3 Form of 2005 Warrant.
10.4 Letter Agreement by and between 7HBF, Ltd. ("7HBF") and Registrant dated
February 7, 2005.
10.5 Unsecured Promissory Note from BEE/7HBF, LLC to 7HBF dated February 14,
2005.
10.6 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.)
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, Attention: Rebecca G. Voth, Secretary.
SIGNATURES
Pursuant to the requirements 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.
(Registrant) THE BEARD COMPANY
/s/ Herb Mee, Jr.
(Date) June 2, 2006 ___________________________________
Herb Mee, Jr., President and
Chief Financial Officer
/s/ Jack A. Martine
(Date) June 2, 2006 ___________________________________
Jack A. Martine, Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation of The New Incorporated herein by reference
Beard Company as filed with the Secretary
of State of Oklahoma on September 20,
2000
3.2 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
4.2 Settlement Agreement, with Certificate of Incorporated herein by reference
Amendment attached thereto, by and among
Registrant, Beard Oil, New York Life
Insurance Company, New York Life
Insurance and Annuity Company, John
Hancock Mutual Life Insurance Company,
Memorial Drive Trust and Sensor Oil &
Gas, Inc., dated as of April 13, 1995
10.1 Form of 12% Convertible Subordinated Filed herewith electronically
Promissory Note
10.2 Security and Collateral Agent Agreement, Filed herewith electronically
by and among Registrant, InvesTrust,
N.A. and Beard Technologies, Inc.,
dated as of January 26, 2005
10.3 Form of 2005 Warrant Filed herewith electronically
10.4 Letter Agreement by and between 7HBF, Filed herewith electronically
Ltd. ("7HBF") and Registrant dated
February 7, 2005
10.5 Unsecured Promissory Note from BEE/7HBF, Filed herewith electronically
LLC to 7HBF dated February 14, 2005
10.6 Cibola Corporation financial statements Incorporated herein by reference
for the three years ended December
31, 2004.
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