UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
AMENDMENT NO. 2
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-12396
THE BEARD COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-0970298
- ------------------------------- ----------------
(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 August 12, 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 June 30, 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 - June 30, 2005 (Unaudited) and
December 31, 2004................................................
Statements of Operations - Three Months and Six Months
ended June 30, 2005 and 2004 (Unaudited).........................
Statements of Shareholders' Equity (Deficiency) - Year
ended December 31, 2004 and Six Months ended
June 30, 2005 (Unaudited)........................................
Statements of Cash Flows - Six Months ended
June 30, 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
June 30, 2005 (Unaudited) and December 31, 2004
June 30, December 31,
Assets 2005 2004
------ -------------- ----------------
(Restated - see Note 1) (Restated - see Note 1
Current assets:
Cash and cash equivalents $ 884,000 $ 127,000
Accounts receivable, less allowance for doubtful
receivables of $97,000 in 2005 and 2004 209,000 167,000
Prepaid expenses and other assets 35,000 32,000
Current maturities of notes receivable 6,000 -
Assets of discontinued operations held for sale 89,000 40,000
-------------- --------------
Total current assets 1,223,000 366,000
-------------- --------------
Note receivable, less allowance for doubtful receivable of
$30,000 in 2005 and 2004 17,000 -
Restricted certificate of deposit 50,000 50,000
Investments and other assets, net of impairment of
$18,778,000 in 2005 and $17,064,000 in 2004 1,565,000 1,560,000
Property, plant and equipment, at cost 2,632,000 2,090,000
Less accumulated depreciation, depletion and amortization 1,463,000 1,457,000
-------------- --------------
Net property, plant and equipment 1,169,000 633,000
-------------- --------------
Intangible assets, at cost 495,000 292,000
Less accumulated amortization 215,000 189,000
-------------- --------------
Net intangible assets 280,000 103,000
-------------- --------------
$ 4,304,000 $ 2,712,000
============== ==============
Liabilities and Shareholders' Equity (Deficiency)
-------------------------------------------------
Current liabilities:
Trade accounts payable $ 102,000 $ 177,000
Accrued expenses 349,000 314,000
Short-term debt - related entities - 200,000
Current maturities of long-term debt 175,000 241,000
Current maturities of long-term debt - related entities 1,756,000 333,000
Liabilities of discontinued operations held for sale 54,000 95,000
-------------- --------------
Total current liabilities 2,436,000 1,360,000
-------------- --------------
Long-term debt less current maturities 453,000 428,000
Long-term debt - related entities 5,967,000 4,965,000
Other long-term liabilities 103,000 103,000
Minority interest in consolidated subsidiary 16,000 -
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 38,415,000 38,193,000
Accumulated deficit (43,964,000) (43,214,000)
Accumulated other comprehensive loss (15,000) (15,000)
-------------- --------------
Total shareholders' equity (deficiency) (4,671,000) (4,144,000)
-------------- --------------
Commitments and contingencies (note 7)
$ 4,304,000 $ 2,712,000
============== ==============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Operations
(Unaudited)
For Three Months Ended For Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Restated) (Restated) (Restated) (Restated)
(See Note 1) (See Note 1) (See Note 1) (See Note 1)
Revenues:
Coal reclamation $ 39,000 $ 18,000 $ 39,000 $ 18,000
Carbon dioxide 283,000 163,000 501,000 326,000
China - - - -
e-Commerce 5,000 4,000 30,000 29,000
Other - - - -
----------- ----------- ----------- -----------
327,000 185,000 570,000 373,000
----------- ----------- ----------- -----------
Expenses:
Coal reclamation 143,000 138,000 319,000 274,000
Carbon dioxide 28,000 45,000 75,000 76,000
China 147,000 143,000 271,000 277,000
e-Commerce 45,000 30,000 82,000 58,000
Other 2,000 2,000 7,000 12,000
Selling, general and administrative 231,000 231,000 438,000 430,000
Depreciation, depletion & amortization 31,000 15,000 58,000 38,000
----------- ----------- ----------- -----------
627,000 604,000 1,250,000 1,165,000
----------- ----------- ----------- -----------
Operating profit (loss):
Coal reclamation (106,000) (121,000) (284,000) (256,000)
Carbon dioxide 244,000 108,000 405,000 230,000
China (148,000) (144,000) (272,000) (278,000)
e-Commerce (42,000) (27,000) (55,000) (32,000)
Other, primarily corporate (248,000) (235,000) (474,000) (456,000)
----------- ----------- ----------- -----------
(300,000) (419,000) (680,000) (792,000)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 5,000 - 10,000 1,000
Interest expense (247,000) (168,000) (480,000) (319,000)
Equity in operations of unconsolidated affiliates 947,000 907,000 1,942,000 1,764,000
Impairment in investment in unconsolidated affiliate (833,000) (807,000) (1,714,000) (1,566,000)
Gain on settlement - 117,000 - 2,943,000
Gain on sale of assets - 73,000 21,000 76,000
Minority interest in operations of
consolidated subsidiary 4,000 - 34,000 -
Other 1,000 2,000 - (5,000)
----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before income tax benefit (expense) (423,000) (295,000) (867,000) 2,102,000
Income tax benefit (expense) (14,000) (12,000) (33,000) (109,000)
----------- ----------- ----------- -----------
Earnings (loss) from continuing operations (437,000) (307,000) (900,000) 1,993,000
Earnings from discontinued operations 62,000 4,000 150,000 7,000
----------- ----------- ----------- -----------
Net earnings (loss) $ (375,000) $ (303,000) $ (750,000) $2,000,000
=========== =========== =========== ===========
Net earnings (loss) per average common share outstanding:
Basic:
Earnings (loss) from continuing operations $ (0.07) $ (0.06) $ (0.15) $ 0.40
Earnings from discontinued operations 0.01 0.00 0.02 0.00
----------- ----------- ----------- -----------
Net earnings (loss) $ (0.06) $ (0.06) $ (0.13) $ 0.40
=========== =========== =========== ===========
Net earnings (loss) per average common share outstanding:
Diluted:
Earnings (loss) from continuing operations $ (0.07) $ (0.06) $ (0.15) $ 0.34
Earnings from discontinued operations 0.01 0.00 0.02 0.00
----------- ----------- ----------- -----------
Net earnings (loss) $ (0.06) $ (0.06) $ (0.13) $ 0.34
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 6,010,000 5,161,000 5,880,000 5,043,000
=========== =========== =========== ===========
Diluted 6,010,000 5,161,000 5,880,000 5,941,000
=========== =========== =========== ===========
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Shareholders' Equity (Deficiency)
Total
Accumulated Common
Preferred Common Capital in Other Shareholders'
---------------- ------------------ 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) - - - - - (750,000) - (750,000)
Comprehensive loss (unaudited):
Foreign currency translation
adjustment (unaudited) - - - - - - - -
-----------
Comprehensive loss (unaudited) - - - - - - - (750,000)
-----------
Issuance of stock for warrants
exercised (unaudited) - - 415,750 1,000 122,000 - - 123,000
Reservation of shares pursuant
to deferred compensation plan
(unaudited) - - - - 100,000 - - 100,000
------ -------- ---------- ------- ----------- ----------- -------- -----------
Balance, June 30, 2005 (unaudited) 27,838 $889,000 5,255,315 $ 4,000 $38,415,000 $(43,964,000) $ (15,000) $(4,671,000)
====== ======== ========= ======= =========== ============ ========= ===========
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Six Months Ended
------------------------------------
June 30, 2005 June 30, 2004
------------- -------------
(Restated - See Note 1) (Restated - See Note 1)
Operating activities:
Cash received from customers $ 461,000 $ 359,000
Gain on settlement - 2,943,000
Cash paid to suppliers and employees (1,058,000) (1,383,000)
Interest received 9,000 1,000
Interest paid (333,000) (666,000)
Taxes (paid) refunded (119,000) -
Operating cash flows of discontinued operations (65,000) 14,000
------------- -------------
Net cash provided by (used in) operating activities (1,105,000) 1,268,000
------------- -------------
Investing activities:
Acquisition of property, plant and equipment (542,000) (20,000)
Acquisition of intangibles (41,000) -
Proceeds from sale of assets 30,000 126,000
Proceeds from sale of assets of discontinued operations 110,000 49,000
Other 216,000 (73,000)
------------- -------------
Net cash provided by (used in) investing activities (227,000) 82,000
------------- -------------
Financing activities:
Proceeds from term notes 90,000 650,000
Payments on line of credit and term notes (207,000) (1,393,000)
Proceeds from related party debt 2,605,000 715,000
Payments on related party debt (306,000) (1,073,000)
Capitalized costs associated with issuance of debt (191,000) (36,000)
Proceeds from exercise of warrants 123,000 -
Other (25,000) 1,000
------------- -------------
Net cash provided by (used in) financing activities 2,089,000 (1,136,000)
------------- -------------
Net increase in cash and cash equivalents 757,000 215,000
Cash and cash equivalents at beginning of period 127,000 216,000
------------- -------------
Cash and cash equivalents at end of period $ 884,000 $ 431,000
============= =============
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 Six Months Ended
------------------------------------
June 30, 2005 June 30, 2004
------------- -------------
(Restated - See Note 1) (Restated - See Note 1)
Net earnings (loss) $ (750,000) $ 2,000,000
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 58,000 38,000
Gain on sale of assets (21,000) (76,000)
Gain on sale of assets of discontinued operations (155,000) (21,000)
Equity in operations of unconsolidated affiliates (1,942,000) (1,764,000)
Impairment of investment in unconsolidated affiliate 1,714,000 1,566,000
Noncash compensation expense 100,000 104,000
Net cash used by discontinued operations offsetting
accrued impairment loss (50,000) (3,000)
Minority interest in consolidated subsidiary (34,000) -
Other (2,000) 9,000
Increase in accounts receivable, prepaid expenses
and other current assets (51,000) (56,000)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 28,000 (529,000)
------------- -------------
Net cash provided by (used in) operating activities $ (1,105,000) $ 1,268,000
============= =============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes to Financial Statements
June 30, 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 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 ("Beard" or the "Company").
Subsidiaries and investees in which Beard 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 and six-month periods ended June
30, 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
activities are aimed at developing business opportunities to leverage
starpay.com, l.l.c.'s intellectual property portfolio of Internet payment
methods and security technologies.
In December, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure", which amended SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
compliance with SFAS No. 148, the Company elected to continue the intrinsic
value method to account for its stock-based employee compensation
arrangement as defined by Accounting Principles Board Opinion ("APB") No.
25. Accordingly, no compensation cost has been recognized for stock options
in the accompanying consolidated financial statements.
The following pro forma information (in thousands, except per share data)
is calculated net of tax as if compensation cost for the Company's
stock-based compensation awards was determined based upon the fair value
at the date of grant consistent with the methodology prescribed under
SFAS No. 123.
For the Three Months For the Six Months
Ended Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Earnings (loss) from continuing operations,
as reported $ (437) $ (307) $ (900) $ 1,993
Earnings from discontinued operations,
as reported 62 4 150 7
-------------- -------------- -------------- --------------
Net earnings (loss), as reported $ (375) $ (303) $ (750) $ 2,000
============== ============== ============== ==============
Earnings (loss) from continuing operations,
as reported $ (437) $ (307) $ (900) $ 1,993
Less: total stock-based employee
compensation determined under fair value
based method for all awards, net of tax (5) - (5) -
-------------- -------------- -------------- --------------
Pro forma net earnings (loss) from continuing
operations $ (442) $ (307) $ (905) $ 1,993
Earnings from discontinued operations,
as reported 62 4 150 7
-------------- -------------- -------------- --------------
Pro forma net earnings (loss) $ (380) $ (303) $ (755) $ 2,000
============== ============== ============== ==============
Net earnings (loss) per average common share outstanding, as reported:
Basic:
Earnings (loss) from continuing operations $ (0.07) $ (0.06) $ (0.15) $ 0.40
Earnings from discontinued operations 0.01 0.00 0.02 0.00
-------------- -------------- -------------- --------------
Net earnings (loss), as reported $ (0.06) $ (0.06) $ (0.13) $ 0.40
============== ============== ============== ==============
Net earnings (loss) per average common share outstanding, as reported:
Diluted:
Earnings (loss) from continuing operations $ (0.07) $ (0.06) $ (0.15) $ 0.34
Earnings from discontinued operations 0.01 0.00 0.02 0.00
-------------- -------------- -------------- --------------
Net earnings (loss), as reported $ (0.06) $ (0.06) $ (0.13) $ 0.34
============== ============== ============== ==============
Net earnings (loss) per average common share outstanding, pro forma:
Basic:
Earnings (loss) from continuing operations $ (0.07) $ (0.06) $ (0.15) $ 0.40
Earnings from discontinued operations 0.01 0.00 0.02 0.00
-------------- -------------- -------------- --------------
Net earnings (loss)-basic, pro forma $ (0.06) $ (0.06) $ (0.13) $ 0.40
============== ============== ============== ==============
Net earnings (loss) per average common share outstanding, pro forma:
Diluted:
Earnings (loss) from continuing operations $ (0.07) $ (0.06) $ (0.15) $ 0.34
Earnings from discontinued operations 0.01 0.00 0.02 0.00
-------------- -------------- -------------- --------------
Net earnings (loss) - diluted, pro forma $ (0.06) $ (0.06) $ (0.13) $ 0.34
============== ============== ============== ==============
Weighted average common shares outstanding,
As reported:
Basic 6,010,000 5,161,000 5,880,000 5,043,000
============== ============== ============== ==============
Diluted 6,010,000 5,161,000 5,880,000 5,941,000
============== ============== ============== ==============
Weighted average common shares outstanding,
Pro forma:
Basic 6,010,000 5,161,000 5,880,000 5,043,000
============== ============== ============== ==============
Diluted 6,010,000 5,161,000 5,880,000 5,941,000
============== ============== ============== ==============
All share, per share and exercise price figures referred to have been
adjusted to reflect the 2-for-1 stock split effected at the close of
business on August 6, 2004.
Reclassifications
-----------------
Certain 2004 balances have been reclassified to conform to the 2005
presentation.
Restatements of Previously Issued Financial Statements
------------------------------------------------------
This Form 10-Q/A is a restatement of the previously issued Form 10Q for the
three and six-month periods ended June 30, 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 and $59,000 for each of the three
and six-month periods ended June 30, 2005 and 2004, respectively. These
amounts were previously netted against the distributions from Cibola but
are reclassified to 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 $85,000 and $70,000
for the three-month periods ended June 30, 2005 and 2004, respectively, and
$169,000 and $138,000 for the six-month periods ending on the same dates,
respectively. In recording the Company's share of Cibola earnings according
to the Agreement, these amounts were increased to $947,000 and $907,000 for
the three-month periods ended June 30, 2005 and 2004, respectively. These
earnings amounts were increased to $1,942,000 and $1,764,000 for the
six-month periods ended June 30, 2005 and 2004, respectively. Since Beard
management felt its was unlikely that the net worth of Cibola would reach
the requisite amount, the Company also recorded impairments totaling
$833,000 and $807,000 for the three-month periods ended June 30, 2005
and 2004, respectively. The impairments totaled $1,714,000 and $1,566,000
for the six-month periods ended June 30, 2005 and 2004, respectively. These
impairments and the interest charges on the note payable to Cibola reduced
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 current
maturities of long-term debt - related entities by $1,439,000 as of
June 30, 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 this restatement. 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 $59,000 for each of the six-month periods ended
June 30, 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 first half of 2005 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 18 month period ended June 30, 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 first quarter of 2005. 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 18 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 601,000 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 completed in the
2005 first quarter of 2005 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 $276,000 at June 30, 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 a private investor had
agreed to finance the cost of the China Segment's initial fertilizer
manufacturing facility in China. The Company and the investor have each
contributed US$50,000 to the limited liability company (the "LLC") that has
been formed to own and operate the enterprise. The Company and the investor
each own 50% of the LLC, and the investor has loaned 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 has been ordered, and
production is expected to commence in September of 2005. The LLC has
organized a wholly foreign-owned enterprise ("WFOE"), Xianghe BH Fertilizer
Co., Ltd., to operate the business. The plant is initially targeted to
produce about 32,000 metric tons per year of organic chemical compound
fertilizer ("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
last four months 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 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.
In addition, proceeds to the Company from the sales of assets during the
first half of 2005 totaled $203,000. The Company expects to generate cash
of approximately $43,000 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.
Subsequent Developments
-----------------------
As a result of another private debt placement currently underway, the
Company has, to date during the third quarter of 2005, exchanged $624,000
of 10% notes due November 2006 for an equivalent amount of 12% convertible
notes due August 2009 (the "12% Notes"), and has also sold $386,000 of the
12% Notes. The note exchange resulted in a $385,000 improvement in working
capital by eliminating $250,000 of current maturities of long-term debt to
related parties and $135,000 of current maturities of long-term debt. The
$386,000 of 12% Notes sold for cash added approximately $363,000 to working
capital, net of expenses. The sale and exchange of the convertible notes
has created additional dilution to shareholders as the outstanding 12%
Notes are convertible into an aggregate of 448,888 shares of common stock.
During the third quarter we have also received and accepted a proposal from
a lending institution indicating that it will provide us with a $9,000,000
loan for the Pinnacle Project assuming that the USDA guarantees at least
70% of the borrowed amount. The proposal is only a quotation and not a
commitment to extend credit. Credit will not be extended until credit has
been approved by the lending institution and we can provide no assurance
that any financing will be provided from this lending institution. In
addition, a group of investors has agreed to provide $2,800,000 of equity
for the Pinnacle Project provided the USDA-guaranteed loan is secured. The
agreement for this commitment was executed on August 12, 2005.
On July 29, 2005, the party who served as the court-appointed fairness
expert in the McElmo Dome Litigation rendered his advisory opinion
consisting of a decision on the merits relating to several issues that are
currently in dispute concerning implementation of the Settlement Agreement.
According to the Plaintiffs' attorney, the advisory opinion, which is not
binding on the Plaintiffs or defendants, was favorable to the Plaintiffs on
most issues. If the advisory opinion 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. (See Part II - Item 1. Legal Proceedings - McElmo Dome
Litigation).
Vista Resources has advised that pipeline connections for its six new gas
wells drilled during the first half of 2005 in eastern Colorado are now
being finalized. The Company has a 22.5% working interest in these wells
which are targeted to come on stream by the end of August and generate
initial cash flow of approximately $25,000 per month to the Company's
interest.
(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. As a result, Beard's share of the venture's operating results
has been reported as discontinued for all periods presented in the
accompanying statements of operations. The joint venture was dissolved in
2000 and the Company took over the remaining assets and liabilities.
The Company recorded no revenues for this segment for either of the three
or six-month periods ended June 30, 2005 or 2004. For the three and
six-month periods ending June 30, 2005, the Company recorded $35,000 and
$48,000 in earnings, respectively, for this segment primarily as a result
of the sale of equipment, and charged $13,000 and $38,000 against an
accrual for anticipated expenses related to the shutdown of one of its
plants for the same periods, respectively. The Company recorded $6,000 and
$21,000 in earnings for the three and six-month periods ending June 30,
2004 primarily as a result of the sale of equipment, and charged operating
losses of $1,000 and $4,000 against an accrual for anticipated expenses
related to the shutdown of one of its plants during the 2004 three and
six-month periods, respectively.
As of June 30, 2005, the significant assets related to the operations
consisted primarily of equipment with no estimated net realizable value.
The significant liabilities related to remaining operations consisted
primarily of accrued expenses totaling $6,000 related to the shutdown of
operations. The Company is actively pursuing opportunities to sell the
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 Company recorded no revenues for this segment for either the first half
of 2005 or 2004. Beard's share of operating results from the discontinued
segment were earnings of $40,000 and $102,000 for the three and six-month
periods ended June 30, 2005, respectively. Included in these results were
gains of $43,000 and $107,000 from the sale of equipment for the three and
six-month periods, respectively. Beard recorded losses of $1,000 and
$13,000 for the three and six-month periods ended June 30, 2004,
respectively, for this segment.
As of June 30, 2005, the significant assets of the WS Segment consisted of
accounts receivable and fixed assets with a recorded value of $89,000. The
significant liabilities of the entity consisted of trade accounts payable
and accrued expenses totaling $48,000. 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 Beard common stock. Each share of Beard preferred stock was
convertible into 10.31114354 shares on August 12, 2005 (total of 287,041
shares). The conversion ratio will be adjusted if additional warrants or
convertible notes are issued or if additional shares of stock are credited
to the accounts of the Company's Chairman or President in the Company's
Deferred Stock Compensation Plan, in each case at an exercise, conversion
or grant price below $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 loss per share from continuing operations in the statements of
operations for the three and six-month periods ended June 30, 2005 and the
three month period ended June 30, 2004 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 5,941,000 for the diluted earnings per share calculation for the
six months ended June 30, 2004 are composed of basic common shares of
5,042,565; 27,838 shares of preferred stock convertible to 288,149 common
shares; and 610,000 warrants assumed exercised and converted to common
shares.
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 Three Months Ended For the Six Months Ended
------------------------------------- --------------------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------------------------------- --------------------------------------
Basic EPS:
Weighted average common
shares outstanding 5,255,315 4,657,690 5,137,636 4,657,690
Weighted average shares in
deferred stock compensation
plan treated as common stock
equivalents 755,085 503,242 742,466 384,875
------------------------------------- --------------------------------------
6,010,400 5,160,932 5,880,102 5,042,565
===================================== ======================================
Diluted EPS:
Weighted average common
shares outstanding 5,255,315 4,657,690 5,137,636 4,657,690
Weighted average shares in
deferred stock compensation
plan treated as common stock
equivalents 755,085 503,242 742,466 384,875
Convertible Preferred Shares
considered to be common
stock equivalents - - - 288,149
Warrants issued in connection
with debt offerings treated
as common stock equivalents - - - 610,000
------------------------------------- --------------------------------------
6,010,400 5,160,932 5,880,102 5,940,714
===================================== ======================================
(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 $14,000 and $33,000
for federal alternative minimum taxes for the three and six-month periods
ended June 30, 2005, respectively, and $12,000 and $109,000 for federal
alternative minimum taxes for the same periods in 2004, respectively.
At June 30, 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 10 years
since 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 no
liability 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 six months 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
installation, and operation of plants that manufacture environmentally
friendly organic chemical compound fertilizer. The e-Commerce Segment
consists of a 71%-owned subsidiary whose activities are aimed at
developing business opportunities to leverage starpay.com, l.l.c.'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
June 30, 2005
-------------------
Revenues from
external customers $ 39 $ 286 $ - $ 5 $ 330
Segment profit (loss) (106) 244 (148) (42) (52)
Three months ended
June 30, 2004
-------------------
Revenues from
external customers $ 18 $ 163 $ - $ 4 $ 185
Segment profit (loss) (121) 108 (144) (27) (184)
Six months ended
June 30, 2005
-------------------
Revenues from
external customers $ 39 $ 505 $ - $ 30 $ 574
Segment profit (loss) (284) 405 (272) (55) (206)
Segment assets 480 488 859 20 1,847
Six months ended
June 30, 2004
-------------------
Revenues from
external customers $ 18 $ 326 $ - $ 29 $ 373
Segment profit (loss) (256) 230 (278) (32) (336)
Segment assets 38 467 49 8 562
Reconciliation of total reportable segment loss to consolidated earnings
(loss) from continuing operations before income taxes is as follows for the
three and six months ended June 30, 2005 and 2004 (in thousands):
For the Three Months For the Six Months
Ended Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------- -------- -------- --------
Total loss for reportable segments $ (52) $ (184) $ (206) $ (336)
Net corporate income (expenses) not allocated
to segments (371) (111) (661) 2,438
------ ------ ------ ------
Total consolidated earnings (loss) for
continuing operations $ (423) $ (295) $ (867) $2,102
====== ====== ====== ======
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 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 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 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion focuses on material changes in the Company's
financial condition since December 31, 2004 and results of operations for the
quarter ended June 30, 2005, compared to the prior year second quarter and the
six months ended June 30, 2005 compared to the prior year six months. Such
discussion should be read in conjunction with the Company's financial statements
including the related footnotes.
In preparing the discussion and analysis, the Company has 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 the
Company's 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 a sharp uptrend. They
increased 26% in 2003, 64% in 2004, and 53% for the first six months of 2005
versus the comparable six months of 2004. 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 August, 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
$150,000 and $7,000 for the six months ended June 30, 2005 and 2004,
respectively, as a result of the sale of equipment.
Material changes in financial condition - June 30, 2005 as compared with
December 31, 2004.
- ------------------------------------------------------------------------
The following table reflects changes in the Company's financial condition
during the periods indicated:
June 30, December 31, Increase
2005 2004 (Decrease)
---- ---- ----------
Cash and cash equivalents $ 884,000 $ 127,000 $ 757,000
Working capital $ (1,213,000) $ (994,000) $ (219,000)
Current ratio 0.50 to 1 0.27 to 1
During the first six months of 2005, the Company decreased its working
capital by $219,000 from $(994,000) as of December 31, 2004 to $(1,213,000) at
June 30, 2005. The Company placed an additional $1,845,000 of its 12%
Convertible Subordinated Notes due 2010, which infused over $1,676,000 in
working capital in the first half of 2005. Related entities purchased $1,755,000
of the 12% Notes. The Company utilized $513,000 to pay down its outstanding
debt, including $306,000 to related parties. Purchases of property, plant and
equipment totaled $542,000 for the first half of 2005, including $147,000,
$150,000, and $227,000 for its Coal and China Segments and its share of the cost
for six oil and gas wells, respectively. Proceeds from the sale of assets
totaled $140,000 during the first half of 2005. Net revenue from the Company's
interest in its CO2 producing properties provided $426,000 of working capital
for the first half of 2005. $284,000 of working capital were used to help fund
the operations of the Coal Segment. The China Segment utilized over $272,000 of
working capital. $55,000 were used to fund the startup activities of the
e-Commerce Segment. The Company received distributions of $162,000 from other
investments, including Cibola. The remainder of the working capital was utilized
to fund other operations. In addition, based upon the maturity date, the note
payable to Cibola totaling $1,439,000 was reclassified as a current liability at
June 30, 2005.
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
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. (See "Subsequent
Developments - Pinnacle Financing" below).
In addition to the above, we are continuing to pursue both debt and equity
financing through several different sources on our other coal projects. We have
retained three different firms who are currently seeking financing: (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.
In February of 2005 we announced 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
limited liability Company (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
has loaned 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 has
been ordered, and production is expected to commence in September of 2005. The
LLC has organized a wholly foreign-owned enterprise ("WFOE"), Xianghe BH
Fertilizer Co., Ltd., to operate the business. The plant is initially targeted
to produce about 32,000 metric tons per year of organic chemical compound
fertilizer ("OCCF"), with 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 completed.
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.
Subsequent Developments
Private Debt Placement. As a result of another private debt placement
currently underway, the Company has, to date during the third quarter of 2005,
exchanged $624,000 of 10% notes due November 2006 for an equivalent amount of
12% convertible notes due August 2009 (the "12% Notes"), and has also sold
$386,000 of the 12% Notes. The note exchange resulted in a $385,000 improvement
in working capital by eliminating $250,000 of current maturities of long-term
debt to related parties and $135,000 of current maturities of long-term debt.
The $386,000 of 12% Notes sold for cash added approximately $363,000 to working
capital, net of expenses. The sale and exchange of the convertible notes has
created additional dilution to shareholders as the $985,000 of outstanding 12%
Notes is convertible into an aggregated of 448,888 shares of common stock.
Pinnacle Financing. During the third quarter we have also received and
accepted a proposal from a lending institution indicating that it will provide
us with a $9,000,000 loan for the Pinnacle Project assuming that the USDA
guarantees at least 70% of the borrowed amount. The proposal is only a quotation
and not a commitment to extend credit. Credit will not be extended until credit
has been approved by the lending institution and we can provide no assurance
that any financing will be provided from this lending institution. In addition,
a group of investors has agreed to provide $2,800,000 of equity for the Pinnacle
Project provided the USDA-guaranteed loan is secured. The agreement for this
commitment was executed on August 12, 2005.
McElmo Dome Litigation. On July 29, 2005, the party who served as the
court-appointed fairness expert in the McElmo Dome Litigation rendered his
advisory opinion consisting of a decision on the merits relating to several
issues that are currently in dispute concerning implementation of the Settlement
Agreement. According to the Plaintiffs' attorney, the advisory opinion, which is
not binding on the Plaintiffs or defendants, was favorable to the Plaintiffs on
most issues. If the advisory opinion 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. (See Part II - Item
1. Legal Proceedings - McElmo Dome Litigation).
New Gas Wells. Vista Resources has advised us that pipeline connections for
its six new gas wells drilled during the first half of 2005 in eastern Colorado
are now being finalized. The Company has a 22.5% working interest in these wells
which are targeted to come on stream by the end of August and generate initial
cash flow of approximately $25,000 per month to the Company's interest.
Material changes in results of operations - Quarter ended June 30, 2005 as
compared with the Quarter ended June 30, 2004.
- --------------------------------------------------------------------------
The net loss for the second quarter of 2005 was $375,000 compared to
$303,000 for the 2004 second quarter. Continuing operations posted a net loss of
$437,000 compared to a loss from continuing operations of $307,000 for the same
period in 2004. In addition, the Company's discontinued operations had income of
$62,000 for the second quarter of 2005 compared to $4,000 for the second quarter
of 2004.
The Coal Segment's $21,000 increase in revenues to $39,000 accounted for
most of the decrease in the segment's operating loss which amounted to $106,000
in the second quarter of 2005 versus $121,000 in the 2004 second quarter. The
operating profit in the CO2 Segment more than doubled, increasing to $244,000
compared to $108,000 a year earlier. The China Segment's loss for the second
quarter of 2005 totaled $148,000 compared to $144,000 for the same period in
2004. The e-Commerce Segment incurred operating losses of $42,000 for the second
quarter of 2005 compared to $27,000 in the second quarter of 2004. The operating
loss in Other activities for the second quarter of 2005 increased $13,000
compared to the same period in 2004. As a result, the operating loss for the
current quarter decreased $119,000 to $300,000 versus $419,000 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 $(106,000) $(121,000)
Carbon dioxide 244,000 108,000
China (148,000) (144,000)
e-Commerce (42,000) (27,000)
--------------- --------------
Subtotal (52,000) (184,000)
Other (248,000) (235,000)
--------------- --------------
Total $(300,000) $(419,000)
=============== ==============
The "Other" in the above table reflects primarily general and corporate
activities, as well as other activities of the Company.
Coal reclamation
The segment recorded revenues of $39,000 for the second quarter of 2005
compared to $18,000 for the same period in 2004 as a result of performing
several consulting and coring jobs in 2005. Operating costs increased $5,000 to
$143,000 for the second quarter of 2005 compared to $138,000 for the same period
in 2004. The increased costs were incurred in performing the services for the
billed work in 2005.
Carbon dioxide
Second quarter 2005 operations reflected an operating profit of $244,000
compared to $108,000 for the 2004 second quarter. The sole component of revenues
for this segment is the sale of CO2 gas from the working and overriding royalty
interests of the Company's carbon dioxide producing unit in Colorado. Operating
revenues in this segment increased $120,000 to $283,000 for the second quarter
of 2005 compared to $163,000 for the same period in 2004. The increase in
revenue for the current quarter was due to both increased pricing and volumes,
with the Company receiving an average of $0.60 per mcf sold in the 2005 quarter
versus $0.50 per mcf in the year earlier quarter while production increased
118MMCF to the Company's interest reflecting increased demand for CO2 gas.
China
The China Segment incurred an operating loss of $148,000 for the second
quarter of 2005 compared to $144,000 for the same period in 2004. The segment
had $4,000 more in SG&A expenses in 2005 compared to 2004 as it geared up for
the installation and construction of its initial fertilizer manufacturing plant.
e-Commerce
The e-Commerce Segment incurred an operating loss of $42,000 for the second
quarter of 2005 versus an operating loss of $27,000 in the prior year quarter.
The segment received $5,000 in revenue for the second quarter of 2005 compared
to $4,000 for the same period in 2004. This was more than offset by a $15,000
increase in operating expenses due primarily to increased legal expenses related
to the VISA litigation.
Other corporate activities
Other corporate activities include general and corporate activities, as
well as assets unrelated to the Company's operating segments or held for
investment. These activities generated operating losses of $248,000 for the
second quarter of 2005 as compared to $235,000 for the same period of 2004. This
increase in operating losses was due primarily to a $14,000 increase in
amortization expense associated with the costs of issuing the 10% and 12% debt
capitalized in the latter portion of 2004 and the first half of 2005.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") in the
current quarter remained static at $231,000 for the second quarter of 2005 and
2004.
Depreciation, depletion and amortization expenses
DD&A expense increased $16,000 from $15,000 in the second quarter of 2004
to $31,000 in the same period of 2005. The increase reflected the increased
amortization expense associated with the capitalized costs of issuing the 10%
participating and 12% subordinated debt in 2004 and 2005.
Other income and expenses
The other income and expenses for the second quarter of 2005 netted to a
loss of $123,000 compared to income of $124,000 for the second quarter of 2004.
Interest income was up $5,000 for the second quarter of 2005 versus the same
period in 2004. Interest expense was $80,000 higher as a result of the increase
in debt, primarily to related parties and the issuance of the subordinated and
participating debt. The Company received a $117,000 gain on settlement in the
second quarter of 2004 with no such receipt in the same period of 2005.
The Company's equity in operations of unconsolidated affiliates reflected
income of $115,000 for the second quarter of 2005 compared to $100,000 for the
same period in 2004. The Company recorded $947,000 as its share of earnings from
its investment in Cibola Corporation compared to $907,000 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 $833,000 and
$807,000 for the three months ended June 30, 2005 and 2004, respectively. The
interest expense totals include $29,000 to Cibola for each of the three months
ended June 30, 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 $85,000 and $70,000 for the second
quarter of 2005 and 2004, respectively. Improved operating results for Cibola
Corporation accounted for the increase. In addition, the second quarter of 2005
reflected a minority interest in the operations of the Company's consolidated
subsidiary in China in the amount of $4,000 with no such amount in the second
quarter of 2004.
Income taxes
The Company recorded a provision for federal alternative minimum taxes of
$14,000 in the second quarter of 2004 compared to $12,000 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 in 2005 and 2004 benefited from earnings of $62,000 and $4,000,
respectively, as a result of activities in two of our four discontinued
segments. The second quarter of 2005 benefited from the disposition of assets
which generated gains of $77,000 compared to $6,000 for the same period in 2004,
offset by expenses of $15,000 and $2,000 respectively. As of June 30, 2005,
assets of discontinued operations held for resale totaled $89,000 and
liabilities of discontinued operations totaled $54,000. 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.
Material changes in results of operations - Six months ended June 30, 2005 as
compared with the Six months ended June 30, 2004.
- -----------------------------------------------------------------------------
The Company recorded a loss of $750,000 for the first half of 2005 compared
to $2,000,000 in net income for the first six months of 2004. Continuing
operations reflected losses of $900,000 compared to earnings of $1,993,000 for
the same period in 2004. In addition, the Company had income of $150,000 and
$7,000 from discontinued operations for the first half of 2005 and 2004,
respectively.
Operating results of the Company's primary operating segments are reflected
below:
2005 2004
---------------- ----------------
Operating profit (loss):
Coal reclamation $ (284,000) $ (256,000)
Carbon dioxide 405,000 230,000
China (272,000) (278,000)
e-Commerce (55,000) (32,000)
---------------- ----------------
Subtotal (206,000) (336,000)
Other (474,000) (456,000)
---------------- ----------------
Total $ (680,000) $ (792,000)
================ ================
The "Other" in the above table reflects primarily general and corporate
activities, as well as other activities and investments of the Company.
Coal reclamation
As was the case in 2004, all of the Coal Segment's revenues for the
six-month periods ended on June 30th were recorded in the second quarter of the
year. Revenues increased $21,000 to $39,000 for the first six months of 2005
compared to $18,000 for the same period in 2004 as the result of several
consulting and coring jobs in the year 2005. Operating costs increased $45,000
to $319,000 for the first six months of 2005 compared to $274,000 for the same
period in 2004 as a result of increased labor, expendable supplies, advertising,
travel and other costs. As a result, the operating loss for the first six months
of 2005 increased $28,000 to $284,000 compared to $256,000 in the first six
months of 2004.
Carbon dioxide
Operations for the first six months of 2005 resulted in an operating profit
of $405,000 compared to a $230,000 operating profit for the 2004 first half. The
sole component of revenues for this segment is the sale of CO2 gas from the
working and overriding royalty interests of the Company's carbon dioxide
producing unit in Colorado. Segment operating revenues increased $175,000 or 54%
to $501,000 for the first six months of 2005 compared to $326,000 for the same
period in 2004. The Company recorded $1,000 less in operating costs associated
with the properties in the first half of 2005 compared to the same period in
2004. Production volumes for the McElmo Dome field increased for the first six
months of 2005 compared to the same period in 2004. The increase in revenue for
the current six months was due to higher volumes to the Company's interest
accompanied by an increase in pricing, with the Company receiving an average of
$0.52 per mcf sold in the first six months of 2005 versus $0.39 per mcf in the
year earlier period. Paid volumes were up 127,000 mcf in the current six months
versus a year ago.
China
The China Segment incurred an operating loss of $272,000 for the first
half months of 2005 compared to $278,000 for the same period in 2004. The higher
losses in 2004 were attributable to higher SG&A expenses as the Company looked
for projects to demonstrate its composting technology. See "Other income and
expense" detail below.
e-Commerce
The e-Commerce Segment incurred an operating loss of $55,000 for the first
half of 2005 versus an operating loss of $32,000 in the prior year period. A
$22,000 increase in legal fees accounted for the majority of the change as the
segment continued its suit against VISA.
Other corporate activities
Other corporate activities include general and corporate operations, as
well as assets unrelated to the Company's operating segments or held for
investment. These activities generated operating losses of $474,000 for the
first half of 2005 as compared to $456,000 in the same period of 2004. The
Company charged $14,000 more in DD&A costs for the six-month period in 2005
compared to the same period in 2004 because of the amortization of capitalized
costs associated with the issuance of the participating and subordinated debt in
2004 and 2005. The Company also incurred several smaller increases in numerous
other expense accounts.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") in the
first half of 2005 increased $8,000 to $438,000 from $430,000 for the 2004 six
months. Minor increases in numerous SG&A expense accounts accounted the
increase.
Depreciation, depletion and amortization expenses
DD&A expense increased $20,000 from $38,000 for the six months ended June
30, 2004 to $58,000 for the same period in 2005. The increase was due primarily
to increased amortization expense associated with the capitalized costs of the
10% participating and 12% subordinated debt issued in late 2004 and early 2005.
Other income and expense
The other income and expenses for the first six months of 2005 netted to a
loss of $187,000 compared to income of $2,894,000 for the same period in 2004.
The Company received $2,826,000 of the McElmo Dome Settlement in March of 2004
and another $117,000 in May of 2004 with no comparable receipts in the first six
months of 2005. The Company used $2,620,000 of these funds to pay down its debt
and associated interest in 2004. In the first six months of 2005, the Company
has incurred a net increase in debt of $2,074,000 and total debt at June 30,
2005 is approximately $2,639,000 greater than at June 30, 2004. As a result,
interest expense for the first six months of 2005 is $421,000 compared to
$259,000 for the same period in 2004. The Company invested a portion of these
additional funds in short-term instruments and, as a result, interest income is
$9,000 greater for the first six months of 2005 than it was in 2004. The Company
realized gains on sale of assets for the first six months of 2005 totaling
$21,000 compared to $76,000 in the prior year period. We realized a $34,000
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.
The Company's equity in the operations of unconsolidated affiliates netted
to income of $229,000 for the first six months of 2005 compared to $198,000 for
the same period in 2004. These amounts reflect the improved operating results of
Cibola Corporation. The Company recorded $1,942,000 as its share of earnings
from its investment in Cibola Corporation compared to $1,764,000 for the prior
year six months. 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
$1,714,000 and $1,566,000 for the six-month periods ended June 30, 2005 and
2004, respectively. The interest expense totals include approximately $59,000 to
Cibola for each of the six-month periods ended June 30, 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 $169,000 and $138,000 for the six-month periods ended June 30, 2005
and 2004, respectively.
Income taxes
The Company recorded provisions of $33,000 and $109,000 for federal
alternative minimum taxes for the six-month periods ended June 30, 2005 and
2004, respectively.
Discontinued operations
As mentioned in the Overview above, our financial results for the six
months ended in 2005 and 2004 benefited from earnings of $150,000 and $7,000,
respectively, as a result of activities in two of our four discontinued
segments. The second quarter of 2005 benefited from the disposition of assets
which generated gains of $77,000 compared to $6,000 for the same period in 2004,
offset by expenses of $6,000 and $3,000 respectively. As of June 30, 2005,
assets of discontinued operations held for resale totaled $89,000 and
liabilities of discontinued operations totaled $54,000. 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 June 30, 2005, the Company had long-term debt of $8,351,000, including
accrued interest to related entities of $93,000. Debt in the amount of
$7,198,000 has fixed interest rates; therefore, the Company's interest expense
and operating results would not be affected by an increase in market interest
rates for this amount. The Company's $804,000 of 10% Participating Notes bear
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 and the Company then began amortizing the notes with equal payments of
principal and interest over the remaining eight quarters. A 10% increase in
market interest rates would have increased the Company's interest expense by
approximately $5,000. At June 30, 2005, a 10% increase in market interest rates
would have reduced the fair value of the Company's long-term debt by $89,000.
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 three and
six-month periods ended June 30, 2005 and 2004, 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.
We have 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
and $59,000 for each of the three and six-month periods ending June 30,
respectively. These amounts were previously netted against the distributions
from Cibola but are reclassified to 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. We had previously recorded
as earnings from unconsolidated affiliates the net cash distributions received
from Cibola which amounted to $85,000 and $70,000 for the three-month periods
ended June 30, 2005 and 2004, respectively, and $169,000 and $138,000 for the
six-month periods ending on the same dates, respectively. In recording our share
of Cibola earnings according to the Agreement, these amounts are increased to
$947,000 and $907,000 for the three-month periods ended June 30, 2005 and 2004,
respectively. These earnings amounts are increased to $1,942,000 and $1,764,000
for the six-month periods ended June 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 $833,000 and $807,000 for the
three-month periods ended June 30, 2005 and 2004, respectively, and $1,714,000
and $1,566,000 for the six-month periods ended June 30, 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 both our investment and notes payable-related entities by the
$1,439,000 amount. 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 this
restatement. 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 $59,000 for each of the
six-month periods ended June 30, 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 June
30, 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 June 30, 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 agreed to submit letter briefs to the
party who served as the court-appointed fairness expert during the proceedings
concerning the Settlement Agreement who agreed to render an advisory opinion
consisting of a decision on the merits relating to the current disputes. The
fairness expert rendered his advisory opinion, which is not binding on the
Plaintiffs or defendants, on July 29, 2005. According to the Plaintiffs'
attorney, the advisory opinion was favorable to the Plaintiffs on most issues.
The parties have agreed that if his decision fails to resolve the matter they
will proceed to arbitration. To date we have had no reaction from the defendants
as to whether they might be willing to settle the dispute or wish to 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 supplement 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 third quarter of
2005.
Both sides anticipate filing dispositve motions in the 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.
Commencing on April 29, 2005, proxies were solicited on behalf of the Board
of Directors of the Company in connection with the Annual Meeting of
Stockholders.
(a) The annual meeting was held on June 9, 2005.
(b) The business of the meeting included the election of W. M. Beard to
serve as director for a three-year term or until his successor has been elected
and qualified.
In addition, the following persons continue to serve as directors for terms
expiring on the dates indicated or until their successors have been elected and
qualified:
Allan R. Hallock (2006) Ford C. Price (2006)
Harlon E. Martin, Jr. (2007) Herb Mee, Jr. (2007)
To date the preferred stockholder has not elected to fill the vacancy
created by the resignation of Michael E. Carr who resigned effective February 1,
2002.
The table below sets forth the voting for election of director:
Votes Votes Votes Broker
Name of Nominee For Against Withheld Abstentions Non-Votes
--------------- --- ------- -------- ----------- ---------
W. M. Beard 4,927,833 -0- 13,340 -0- 601,183
(c) At the meeting the stockholders also voted to ratify the appointment of
Cole & Reed, P.C. as our independent auditors for fiscal year 2005. The table
below sets forth the voting for such proposal:
Votes Votes Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
4,938,849 2,078 246 601,183
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 Restated and Amended Letter Loan Agreement by and between
Registrant and The William M. Beard and Lu Beard 1988 Charitable
Unitrust (the "Unitrust") dated April 1, 2005.
10.2 Replacement Renewal and Extension Promissory Note from Registrant to
the Trustees of the Unitrust dated as of February 14, 2005.
10.3 The Beard Company 2005 Stock Option Plan adopted on June 9, 2005*
10.4 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.
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
INDEX TO EXHIBITS
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 Incorporated herein by reference
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.
10.1 Restated and Amended Letter Loan Filed herewith electronically
Agreement by and between Registrant and
The William M. Beard and Lu Beard 1988
Charitable Unitrust (the "Unitrust")
dated April 1, 2005.
10.2 Replacement Renewal and Extension Filed herewith electronically
Promissory Note from Registrant to the
Trustees of the Unitrust dated as of
February 14, 2005.
10.3 The Beard Company 2005 Stock Option Filed herewith electronically
Plan adopted on June 9, 2005
10.4 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.