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 quarterly period ended September 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 by a check mark whether the registrant is a shell company (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 November 18, 2005.
Common Stock $.0006665 par value - 5,377,046
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 September 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 - September 30, 2005 (Unaudited) and
December 31, 2004..............................................................
Statements of Operations - Three Months and Nine Months
ended September 30, 2005 and 2004 (Unaudited)..................................
Statements of Shareholders' Equity (Deficiency) - Year ended December 31, 2004
and Nine Months ended September 30, 2005 (Unaudited)...........................
Statements of Cash Flows - Nine Months ended
September 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
September 30, 2005 (Unaudited) and December 31, 2004
Assets September 30, December 31,
------ 2005 2004
---------------- ----------------
(Restated - See Note 1) (Restated - See Note 1)
Current assets:
Cash and cash equivalents $ 358,000 $ 127,000
Accounts receivable, less allowance for doubtful
receivables of $80,000 in 2005 and $97,000 in 2004 179,000 167,000
Inventories 98,000 -
Prepaid expenses and other assets 56,000 32,000
Current maturities of notes receivable 6,000 -
Assets of discontinued operations held for sale 20,000 40,000
---------------- ----------------
Total current assets 717,000 366,000
---------------- ----------------
Note receivable, less allowance for doubtful receivable of
$30,000 in 2005 and 2004 15,000 -
Restricted certificate of deposit 50,000 50,000
Investments and other assets, net of impairment of $19,512,000 in 2005 and
$17,064,000 in 2004 1,534,000 1,560,000
Property, plant and equipment, at cost 3,642,000 2,090,000
Less accumulated depreciation, depletion and amortization 1,477,000 1,457,000
---------------- ----------------
Net property, plant and equipment 2,165,000 633,000
---------------- ----------------
Intangible assets, at cost 543,000 292,000
Less accumulated amortization 229,000 189,000
---------------- ----------------
Net intangible assets 314,000 103,000
---------------- ----------------
$ 4,795,000 $ 2,712,000
================ ================
Liabilities and Shareholders' Equity (Deficiency)
-------------------------------------------------
Current liabilities:
Trade accounts payable $ 315,000 $ 177,000
Accrued expenses 716,000 314,000
Short-term debt - related entities - 200,000
Current maturities of long-term debt 53,000 241,000
Current maturities of long-term debt - related entities 1,532,000 333,000
Liabilities of discontinued operations held for sale 45,000 95,000
---------------- ----------------
Total current liabilities 2,661,000 1,360,000
---------------- ----------------
Long-term debt less current maturities 1,265,000 428,000
Long-term debt - related entities 5,954,000 4,965,000
Other long-term liabilities 103,000 103,000
Minority interest in consolidated subsidiary 12,000 -
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 38,464,000 38,193,000
Accumulated deficit (44,538,000) (43,214,000)
Accumulated other comprehensive loss (19,000) (15,000)
---------------- ----------------
Total shareholders' equity (deficiency) (5,200,000) (4,144,000)
---------------- ----------------
Commitments and contingencies (note 7)
$ 4,795,000 $ 2,712,000
================ ================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Operations
(Unaudited)
For Three Months Ended For Nine Months Ended
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
(Restated) (Restated) (Restated) (Restated)
(See Note 1) (See Note 1) (See Note 1) (See Note 1)
Revenues:
Coal reclamation $ 13,000 $ 52,000 $ 52,000 $ 70,000
Carbon dioxide 310,000 197,000 811,000 523,000
China - - - -
e-Commerce 1,000 - 31,000 29,000
Other 20,000 - 20,000 -
----------- ----------- ------------ ------------
344,000 249,000 914,000 622,000
----------- ----------- ------------ ------------
Expenses:
Coal reclamation 189,000 230,000 508,000 504,000
Carbon dioxide 34,000 27,000 109,000 103,000
China 264,000 134,000 535,000 411,000
e-Commerce 44,000 31,000 126,000 89,000
Other 5,000 6,000 12,000 18,000
Selling, general and administrative 203,000 205,000 641,000 635,000
Depreciation, depletion & amortization 34,000 25,000 92,000 63,000
----------- ----------- ------------ ------------
773,000 658,000 2,023,000 1,823,000
----------- ----------- ------------ ------------
Operating profit (loss):
Coal reclamation (179,000) (185,000) (463,000) (441,000)
Carbon dioxide 266,000 160,000 671,000 390,000
China (268,000) (133,000) (540,000) (411,000)
e-Commerce (43,000) (33,000) (98,000) (65,000)
Other, primarily corporate (205,000) (218,000) (679,000) (674,000)
----------- ----------- ------------ ------------
(429,000) (409,000) (1,109,000) (1,201,000)
Other income (expense):
Interest income 3,000 1,000 13,000 2,000
Interest expense (259,000) (185,000) (739,000) (504,000)
Equity in operations of unconsolidated affiliates 830,000 764,000 2,772,000 2,528,000
Impairment in investment of unconsolidated affiliate (734,000) (662,000) (2,448,000) (2,228,000)
Gain on settlement - - - 2,943,000
Gain on sale of assets 43,000 11,000 64,000 87,000
Impairment of investments (13,000) - (13,000) -
Minority interest in operations of consolidated
subsidiary 4,000 - 38,000 -
Other (13,000) (2,000) (13,000) (7,000)
----------- ----------- ------------ ------------
Earnings (loss) from continuing operations
before income taxes (568,000) (482,000) (1,435,000) 1,620,000
Income taxes - (27,000) (33,000) (136,000)
----------- ----------- ------------ ------------
Earnings (loss) from continuing operations (568,000) (509,000) (1,468,000) 1,484,000
Earnings (loss) from discontinued operations (6,000) (3,000) 144,000 4,000
----------- ----------- ------------ ------------
Net earnings (loss) $ (574,000) $ (512,000) $(1,324,000) $ 1,488,000
=========== =========== ============ ============
Net earnings (loss) per average common share outstanding:
Basic:
Earnings (loss) from continuing operations $ (0.10) $ (0.09) $ (0.25) $ 0.27
Earnings (loss) from discontinued operations (0.00) (0.00) 0.03 0.00
----------- ----------- ------------ ------------
Net earnings (loss) $ (0.10) $ (0.09) $ (0.22) $ 0.27
=========== =========== ============ ============
Net earnings (loss) per average common share outstanding:
Diluted:
Earnings (loss) from continuing operations $ (0.10) $ (0.09) $ (0.25) $ 0.22
Earnings (loss) from discontinued operations (0.00) (0.00) 0.03 0.00
----------- ----------- ------------ ------------
Net earnings (loss) $ (0.10) $ (0.09) $ (0.22) $ 0.22
=========== =========== ============ ============
Weighted average common shares outstanding -
Basic 6,032,000 5,471,000 5,910,000 5,471,000
=========== =========== ============ ============
Diluted 6,032,000 5,471,000 5,910,000 6,736,000
=========== =========== ============ ============
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) - - - - - (1,324,000) - (1,324,000)
Comprehensive loss (unaudited):
Foreign currency translation
adjustment (unaudited) - - - - - - (4,000) (4,000)
------------
Comprehensive loss (unaudited) - - - - - - - (1,328,000)
------------
Issuance of stock for warrants
exercised (unaudited) - - 415,750 1,000 122,000 - - 123,000
Reservation of shares pursuant to
deferred compensation plan
(unaudited) - - - - 149,000 - - 149,000
----------------- ------------------- ------------- ------------- --------- ------------
Balance, September 30, 2005
(unaudited) 27,838 $889,000 5,255,315 $4,000 $38,464,000 $(44,538,000) $(19,000) $(5,200,000)
================= =================== ============= ============= ========= ============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
---------------------------------------
September 30, 2005 September 30, 2004
---------------------------------------
(Restated - See Note 1) (Restated - See Note 1)
Operating activities:
Cash received from customers $ 898,000 $ 586,000
Gain on settlement - 2,943,000
Cash paid to suppliers and employees (1,875,000) (1,917,000)
Interest received 13,000 2,000
Interest paid (570,000) (711,000)
Taxes paid (119,000) -
Operating cash flows of discontinued operations (75,000) 9,000
--------------- ---------------
Net cash provided by (used in) operating activities (1,728,000) 912,000
--------------- ---------------
Investing activities:
Acquisition of property, plant and equipment (1,012,000) (105,000)
Acquisition of intangibles (42,000) (3,000)
Purchase of restricted certificate of deposit - (50,000)
Proceeds from sale of assets 139,000 136,000
Proceeds from sale of assets of discontinued operations 110,000 49,000
Proceeds from redemption of bond - 201,000
Other 336,000 27,000
--------------- ---------------
Net cash provided by (used in) investing activities (469,000) 255,000
--------------- ---------------
Financing activities:
Proceeds from term notes 760,000 650,000
Payments on line of credit and term notes (208,000) (1,396,000)
Proceeds from related party debt 2,321,000 715,000
Payments on related party debt (398,000) (1,070,000)
Capitalized costs associated with issuance of subordinated debt (195,000) (36,000)
Proceeds from sale of stock warrants 123,000 45,000
Member contribution to consolidated partnership 50,000 -
Other (25,000) -
--------------- ---------------
Net cash provided by (used in) financing activities 2,428,000 (1,092,000)
--------------- ---------------
Net increase in cash and cash equivalents 231,000 75,000
Cash and cash equivalents at beginning of period 127,000 216,000
--------------- ---------------
Cash and cash equivalents at end of period $ 358,000 $ 291,000
=============== ===============
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 Nine Months Ended
---------------------------------------
September 30, 2005 September 30, 2004
---------------------------------------
(Restated - See Note 1) (Restated - See Note 1)
Net earnings (loss) $ (1,324,000) $ 1,488,000
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 91,000 63,000
Gain on sale of assets (66,000) (87,000)
Gain on sale of assets of discontinued operations (155,000) (33,000)
Equity in net earnings of unconsolidated affiliates (2,772,000) (2,528,000)
Impairment of investment in unconsolidated affiliate 2,448,000 2,228,000
Net cash used by discontinued operations offsetting
accrued impairment loss (54,000) (6,000)
Noncash compensation expense 149,000 152,000
Minority interest in consolidated partnership (38,000) -
Other - 12,000
Increase in accounts receivable, prepaid expenses
and other current assets (15,000) (52,000)
Increase in inventories (98,000) -
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 106,000 (325,000)
---------------- --------------
Net cash provided by (used in) operating activities $ (1,728,000) $ 912,000
================ ==============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes Financial Statements
September 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, except for the Company's investment
in Cibola which is accounted for on the cost 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 nine-month periods ended
September 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.
Inventories
-----------
Inventories consist of the materials used to manufacture fertilizer to be
sold to third parties by a 50%-owned subsidiary in the China Segment and,
at September 30, 2005, was made up of raw materials of $61,000 and
work-in-process of $37,000. There were no finished goods at September 30,
2005. The inventories are valued at the lower of cost or market on the
first-in, first-out meethod.
Stock-Based Compensation
------------------------
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 Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Earnings (loss) from continuing operations,
as reported $ (568) $ (509) $(1,468) $ 1,484
Earnings (loss) from discontinued operations,
as reported (6) (3) 144 4
----------- ----------- ----------- -----------
Net earnings (loss), as reported $ (574) $ (512) $(1,324) $ 1,488
=========== =========== =========== ===========
Earnings (loss) from continuing operations,
as reported $ (568) $ (509) $(1,468) $ 1,484
Less: total stock-based employee
compensation determined under fair value
based method for all awards, net of tax - - (5) -
----------- ----------- ----------- -----------
Pro forma net earnings (loss) from continuing
operations $ (568) $ (509) $(1,473) $ 1,484
Earnings (loss) from discontinued operations,
as reported (6) (3) 144 4
----------- ----------- ----------- -----------
Pro forma net earnings (loss) $ (574) $ (512) $(1,329) $ 1,488
=========== =========== =========== ===========
Net earnings (loss) per average common share
outstanding, as reported:
Basic:
Earnings (loss) from continuing operations $ (0.10) $ (0.09) $ (0.25) $ 0.27
Earnings from discontinued operations 0.00 0.00 0.03 0.00
----------- ----------- ----------- -----------
Net earnings (loss), as reported $ (0.10) $ (0.09) $ (0.22) $ 0.27
=========== =========== =========== ===========
Net earnings (loss) per average common share
outstanding, as reported:
Diluted:
Earnings (loss) from continuing operations $ (0.10) $ (0.09) $ (0.25) $ 0.22
Earnings from discontinued operations 0.00 0.00 0.03 0.00
----------- ----------- ----------- -----------
Net earnings (loss), as reported $ (0.10) $ (0.09) $ (0.22) $ 0.22
=========== =========== =========== ===========
Net earnings (loss) per average common share
outstanding, pro forma:
Basic:
Earnings (loss) from continuing operations $ (0.10) $ (0.09) $ (0.25) $ 0.27
Earnings from discontinued operations 0.00 0.00 0.03 0.00
----------- ----------- ----------- -----------
Net earnings (loss)-basic, pro forma $ (0.10) $ (0.09) $ (0.22) $ 0.27
=========== =========== =========== ===========
Net earnings (loss) per average common share
outstanding, pro forma:
Diluted:
Earnings (loss) from continuing operations $ (0.10) $ (0.09) $ (0.25) $ 0.22
Earnings from discontinued operations 0.00 0.00 0.03 0.00
----------- ----------- ----------- -----------
Net earnings (loss) - diluted, pro forma $ (0.10) $ (0.09) $ (0.22) $ 0.22
=========== =========== =========== ===========
Weighted average common shares outstanding,
As reported:
Basic 6,032,000 5,471,000 5,910,000 5,471,000
=========== =========== =========== ===========
Diluted 6,032,000 5,471,000 5,910,000 6,736,000
=========== =========== =========== ===========
Weighted average common shares outstanding,
Pro forma:
Basic 6,032,000 5,471,000 5,910,000 5,471,000
=========== =========== =========== ===========
Diluted 6,032,000 5,471,000 5,910,000 6,736,000
=========== =========== =========== ===========
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 nine-month periods ended September 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 $89,000 for each of
the three and nine-month periods ended September 30, 2005 and 2004,
respectively. 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 $66,000 and $73,000 for the three-month periods
ended September 30, 2005 and 2004, respectively, and $235,000 and $211,000
for the nine-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 $830,000 and $764,000 for the
three month periods ended September 30, 2005 and 2004, respectively. The
total earnings for Cibola were $2,772,000 and $2,528,000 for the nine-month
periods ended September 30, 2005 and 2004, respectively. Since Beard
management felt it was unlikely that the net worth of Cibola would reach
the requisite amount, the Company also recorded impairments totaling
$734,000 and $662,000 for the three-month periods ended September 30, 2005
and 2004, respectively. The impairments totaled $2,448,000 and $2,228,000
for the nine-month periods ended September 30, 2005 and 2004, respectively.
These impairments and the interest charges on the note payable to Cibola
reduce the net earnings to the Company from its investment in Cibola to
the actual cash distributions received and previously presented as earnings
from unconsolidated affiliates. The minority common and preferred
shareholders have agreed to exercise the call option for the Company's
common stock in Cibola in November 2005 and the stock will be surrendered
in full payment of the note payable. Beard will cease to be a shareholder
of Cibola Corporation effective December 1, 2005. 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 September 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 $89,000 for each of the
nine-month periods ended September 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, in 2004, and during each of the first three quarters of 2005.
Although the Company incurred operating losses and negative cash flows from
operations during each of the last six years, it successfully arranged the
financing for its initial fertilizer manufacturing facility in China in
February of 2005, and the facility commenced production in September. In
addition, the Company anticipates commencing a project in its Coal Segment
prior to year-end 2005. The Coal Segment is currently pursuing a number of
other projects, and anticipates commencing one of these projects during the
first half of 2006. (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 21 month period ended September 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 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. In addition, as a result of another
private debt placement still in progress, the Company 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 also sold $386,000 of the 12% Notes.
The negative result of the debt placements has been a substantial amount of
dilution to the Company's common equity. During the 21 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 621,000 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. Moreover, the private debt placement completed in the
first quarter of 2005 consisted of $2,100,000 of convertible notes that are
convertible into 2,100,000 shares of common stock. The $1,010,000 of
convertible notes exchanged or sold in the third quarter are convertible
into 448,889 shares of common stock. These offerings have resulted in
additional dilution totaling 2,548,889 shares. Additional dilution also
occurred due to an adjustment to the Preferred Stock conversion ratio
resulting from the issuance of the warrants, the options, the first issue
of convertible notes and part of the salary deferrals.
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 $1,010,000 of 12% Notes are
convertible into an aggregate of 448,889 shares of common stock.
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. As a result
of the private debt placement currently in progress, the notes exchanged in
the third quarter of 2005 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 during such period added approximately
$363,000 to working capital, net of expenses. 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 each
contributed US$50,000 to the limited liability company (the "LLC") formed
to own and operate the enterprise. The Company and the investor each own
50% of the LLC, and the investor loaned US$850,000 to the LLC to fund the
additional capital costs and pre-operating costs of the facility. A
building was leased, equipment was ordered, and fertilizer production
commenced in September of 2005. The LLC organized a wholly foreign-owned
enterprise ("WFOE"), Xianghe BH Fertilizer Co., Ltd. ("XBH"), to operate
the business. The plant is initially targeted to produce about 32,000
metric tons per year of OCCF, with estimated revenues of more than
US$5,000,000 annually.
The Company's principal business is coal reclamation, and this is where
management's operating attention is primarily focused. The Coal Segment has
a signed contract to construct and operate a pond fines recovery project in
West Virginia (the "Pinnacle Project") which it expects to commence prior
to year-end 2005 if it can successfully arrange the financing therefor. The
segment is actively pursuing a number of other projects which it has under
development.
During the third quarter the Company received and accepted a proposal from
a lending institution indicating that it will provide 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 there is 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.
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 nine months of 2005 totaled $256,000. The Company expects to generate
cash of approximately $45,000 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 Pinnacle
Project are successful, it will provide sufficient working capital to
sustain the Company's activities until the fertilizer plant in China has
achieved its targeted production rate and the other projects under
development in the Coal Segment have commenced operation 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.
The Company's liquidity and ability to fund operations improved during the
third quarter as a result of its new oil and gas operations. In September
the Company announced that Vista Resources had drilled and completed two
additional gas wells in eastern Colorado on the acreage farmed out to them.
Production commenced in late September from six of the eight wells in the
field. The Company has a 22.5% back-in interest after payout in the first
well, and a 22.5% working interest in the other seven wells. The wells are
expected to generate initial cash flow of $30,000 to $40,000 per month to
the Company's interest.
Subsequent Developments
-----------------------
Private Debt Placement
During October of 2005 the Company sold an additional $125,000 of the 12%
Convertible Notes for cash, further improving the Company's liquidity. Such
notes are convertible into 55,555 shares of common stock, resulting in
additional dilution.
XBH Start-up Operations
As discussed above, XBH commenced fertilizer production in September, and
is currently seeking market acceptance for its products. The Company
anticipates a slower growth in sales than originally projected, which will
likely result in losses by the China Segment in the fourth quarter of 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.
After consideration by both parties, the advisory opinion, which was not
binding on the Plaintiffs or defendants, failed to resolve the matter and
in October 2005 the parties agreed to proceed to arbitration. The
Plaintiffs and defendants have each selected an arbitrator, and the
arbitrators selected are in the process of selecting a third arbitrator.
Our counsel estimates the arbitration to occur within the next six months.
The Company estimates that, if all of the matters in dispute should be
resolved in the Plaintiffs' favor, the Company could receive as much as
$540,000 for our share of the money in dispute. (See Part II - Item 1.
Legal Proceedings - McElmo Dome Litigation).
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. In March of 2003 the Court
instituted a stay on discovery in the matter. On October 27, 2005,
Defendants filed a motion to lift the stay on discovery in order to move
the case along. The Company expects that this matter will be resolved in
favor of the Defendants, and that the Company will ultimately receive an
additional $100,000 to $125,000 from the litigation reserve. (See Part II -
Item 1. Legal Proceedings - McElmo Dome Litigation).
Visa Litigation
On July 12, 2005, the Federal Circuit Court of Appeals issued an en banc
decision in the patent case of Phillips v. AWH Corp. (the "Phillips Case").
The Federal Circuit attempted to explain how the operative language in
patents is to be interpreted when construing patent claims.
Subsequent to the Federal Circuit's decision in July, Defendants requested
and the Court ordered supplemental briefs to the Court addressing
Magistrate Judge Sanderson's Report and Recommendation respective to the
Markman hearing held in October 2004 in light of the Federal Circuit's
decision in the Phillips Case. Both parties filed their supplemental briefs
in August 2005. Oral arguments regarding these issues were held on November
2, 2005. The Company anticipates a final Markman ruling may occur as early
as mid-March 2006. Thereafter, a revised Scheduling Order will be prepared
setting out a new trial date. (See Part II - Item 1. Legal Proceedings -
Visa Litigation).
(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
the assets in the Brine Extraction/Iodine Manufacturing ("BE/IM") Segment.
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 during any of the three
or nine-month periods ended September 30, 2005 or 2004. For the three and
nine-month periods ended September 30, 2005, the Company recorded a loss of
$4,000 and $44,000 in earnings, respectively, for this segment primarily as
a result of the sale of equipment, and charged $3,000 and $50,000 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 nine-month periods ended September
30, 2004, respectively, primarily as a result of the sale of equipment, and
charged operating losses of $3,000 and $6,000 against an accrual for
anticipated expenses related to the shutdown of one of its plants during
the 2004 three and nine-month periods, respectively.
As of September 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 $2,000 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 segment recorded no revenues for either the first nine months of 2005
or 2004. The Company's share of operating results from the discontinued
segment were losses of $2,000 and earnings of $100,000 for the three and
nine-month periods ended September 30, 2005, respectively. Included in
these results were gains of $107,000 from the sale of equipment for the
nine-month period, all recorded in the first six months of 2005. The
Company recorded losses of $3,000 and $16,000 for the three and nine-month
periods ended September 30, 2004, respectively.
As of September 30, 2005, the significant assets of the WS Segment
consisted of fixed assets with a recorded value of $19,000. The significant
liabilities of the entity consisted of trade accounts payable and accrued
expenses totaling $43,000. 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 September 30, 2005 (total of 287,041
shares). The conversion ratio will be adjusted as: (i) additional warrants
are issued, (ii) additional shares of stock are credited to the accounts of
the Company's Chairman or President in the Company's Deferred Stock
Compensation Plan, or (iii) convertible notes are issued by the Company, at
an exercise price, a grant price or a conversion price, respectively, below
$1.29165 per share. Fractional shares will not be issued, and cash will be
paid in lieu thereof.
(5) Earnings (Loss) Per Share
- -----------------------------
Basic earnings (loss) per share data is computed by dividing earnings
(loss) attributable to common shareholders by the weighted average number
of common shares outstanding for the period. 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 nine-month periods ended September 30, 2005
and the three month period ended September 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 6,735,818 for the diluted earnings per share
calculation for the nine months ended September 30, 2004 are composed of
basic common shares of 4,839,565; 27,838 shares of preferred stock
convertible to 288,932 common shares; 631,571 of shares in the DSC Plan
treated as issued and outstanding, and 975,750 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 Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Basic EPS:
- ----------
Weighted average common
shares outstanding 5,255,315 4,839,565 5,158,398 4,839,565
Shares in deferred stock
compensation plan treated
as common stock equivalents 776,582 631,571 751,212 631,571
------------------------------- -------------------------------
6,031,897 5,471,136 5,909,610 5,471,136
=============================== ===============================
Diluted EPS:
- ------------
Weighted average common
shares outstanding 5,255,315 4,839,565 5,158,398 4,839,565
Shares in deferred stock
compensation plan treated
as common stock equivalents 776,582 631,571 751,212 631,571
Employee stock options
treated as common stock
equivalents 81,742 - - -
Convertible Preferred Shares
considered to be common
stock equivalents - - - 288,932
Warrants issued in connection
with debt offerings treated
as common stock equivalents - - - 975,750
------------------------------- -------------------------------
6,113,639 5,471,136 5,909,610 6,735,818
=============================== ===============================
(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 a provision of $33,000 for federal
alternative minimum taxes for the nine-month period ended September 30,
2005, and $27,000 and $136,000 for federal alternative minimum taxes for
the three and nine-month periods in 2004, respectively.
At September 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 $ 45,500
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 believe any
such claim will have a material effect on 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 nine 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 construction of facilities which utilize the proprietary composting
technology of Real Earth United States Enterprises, Inc. 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
-------------------
September 30, 2005
-------------------
Revenues from external
customers $ 13 $ 310 $ - $ 1 $ 324
Segment profit (loss) (179) 266 (328) (43) (284)
Three months ended
-------------------
September 30, 2004
-------------------
Revenues from external
customers $ 52 $ 197 $ - $ - $ 249
Segment profit (loss) (185) 160 (133) (33) (191)
Nine months ended
-------------------
September 30, 2005
-------------------
Revenues from external
customers $ 52 $ 811 $ - $ 31 $ 894
Segment profit (loss) (463) 671 (600) (98) (490)
Segment assets 1,129 481 723 6 2,339
Nine months ended
-------------------
September 30, 2004
-------------------
Revenues from external
customers $ 70 $ 523 $ - $ 29 $ 622
Segment profit (loss) (441) 390 (411) (65) (527)
Segment assets 149 468 48 7 672
Reconciliation of total reportable segment loss to consolidated earnings
(loss) from continuing operations before income taxes is as follows for the
three and nine-month periods ended September 30, 2005 and 2004 (in
thousands):
For the Three Months Ended For the Nine Months Ended
---------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
--------------- ----------------- ---------------- ---------------
Total loss for reportable segments $ (284) $ (191) $ (490) $ (527)
Net corporate income (costs)
not allocated to segments (284) (291) (945) 2,147
--------------- ----------------- ---------------- ---------------
Total consolidated earnings (loss)
from continuing operations before
income taxes $ (568) $ (482) $ (1,435) $ 1,620
=============== ================= ================ ===============
THE BEARD COMPANY AND SUBSIDIARIES
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR FUTURE FINANCIAL
POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES
OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN
ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND,"
"PROJECT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE
THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE
CANNOT ASSURE YOU THAT SUCH EXPECTATIONS WILL OCCUR. OUR ACTUAL FUTURE
PERFORMANCE COULD DIFFER MATERIALLY FROM SUCH STATEMENTS. IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN
THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO US, OR PERSONS ACTING ON OUR BEHALF, ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. WE ASSUME NO DUTY TO UPDATE OR
REVISE OUR FORWARD-LOOKING STATEMENTS AND WE DO NOT INTEND TO REVISE OUR
FORWARD-LOOKING STATEMENTS TO REFLECT CHANGES IN OUR INTERNAL ESTIMATES OR
EXPECTATIONS OR OTHERWISE.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion focuses on material changes in our financial
condition since December 31, 2004 and results of operations for the quarter
ended September 30, 2005, compared to the prior year third quarter and the nine
months ended September 30, 2005 compared to the prior year nine months. Such
discussion should be read in conjunction with our financial statements including
the related footnotes.
In preparing the discussion and analysis, we have presumed readers have
read or have access to the discussion and analysis of the prior year's results
of operations, liquidity and capital resources as contained in our 2004 Form
10-K/A.
Overview
- --------
The Coal Segment is in the business of operating coal fines reclamation
facilities in the U.S. and provides slurry pond core drilling services, fine
coal laboratory analytical services and consulting services. The CO2 Segment
consists of the production of CO2 gas. The China Segment is pursuing
environmental opportunities in China focusing on the installation, construction
and operation of plants that manufacture environmentally friendly organic
chemical compound fertilizer. The e-Commerce Segment consists of a 71%-owned
subsidiary whose current strategy is to develop business opportunities to
leverage the subsidiary's intellectual property portfolio of Internet payment
methods and security technologies.
Our revenues from continuing operations are on a sharp uptrend. They
increased 26% in 2003, 64% in 2004, and 47% for the first nine months of 2005
versus the comparable nine months of 2004. Revenues of the CO2 Segment were up
55% in the nine months compared to the year earlier period due to better pricing
resulting from implementation of the McElmo Dome Settlement Agreement (the
"Settlement"). Six new gas wells came on stream in Colorado at the end of the
third quarter of 2005, resulting in our first oil and gas revenues in many
years. Our initial fertilizer manufacturing plant in China commenced production
in September, and we expect it to record its initial sales in October of 2005.
We incurred operating losses and negative cash flows from operations during
each of the last six years. However, with CO2 revenues on a sharp uptrend, new
oil and gas production coming on stream, fertilizer sales targeted to begin in
the fourth quarter, and a project expected to commence in our Coal Segment prior
to year-end 2005 we anticipate reversing this trend in 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
$64,000 and $87,000 for the nine months ended September 30, 2005 and 2004,
respectively, as a result of the sale of equipment.
Material changes in financial condition - September 30, 2005 as compared with
- -----------------------------------------------------------------------------
December 31, 2004.
- -----------------
The following table reflects changes in our financial condition during the
periods indicated:
September 30, December 31, Increase
2005 2004 (Decrease)
------------- ------------- ------------
Cash and cash equivalents $ 358,000 $ 127,000 $ 231,000
Working capital $(1,944,000) $ (994,000) $ (950,000)
Current ratio 0.27 to 1 0.27 to 1
During the first nine months of 2005, we decreased our working capital by
$950,000 from $(994,000) as of December 31, 2004. In the first half of 2005 we
placed an additional $1,845,000 of our 12% Convertible Subordinated Notes due
2010 (the "2010 Notes"), which infused over $1,676,000 in working capital.
Related entities purchased $1,755,000 of the 2010 Notes. We utilized $513,000 to
pay down outstanding debt, including $306,000 to related parties During the
third quarter of 2005, we exchanged $624,000 of 10% notes due November 2006 for
an equivalent amount of 12% convertible notes due August 2009 (the "2009
Notes"), and sold $386,000 of the 2009 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. Related parties exchanged $384,000 of 10% notes
for the 2009 Notes and purchased $106,000 of the 2009 Notes. The $386,000 of
2009 Notes sold for cash added approximately $363,000 to working capital, net of
expenses. The sale and exchange of the 2010 and 2009 Notes has created
additional dilution to shareholders as the additional $1,845,000 of 2010 Notes
is convertible into an aggregate of 1,845,000 shares of common stock and the
$1,010,000 of 2009 Notes is convertible into an aggregate of 448,889 shares of
common stock. In addition, based upon the maturity date, the note payable to
Cibola totaling $1,439,000 was reclassified as a current liability at September
30, 2005.
Purchases of property, plant and equipment totaled $1,029,000 in the first
nine months of 2005, including $309,000, $408,000, and $274,000 for our Coal and
China Segments and our share of the cost of seven oil and gas wells,
respectively. Proceeds from the sale of assets totaled $249,000 during the first
nine months of 2005. Net revenue from our interest in our CO2 producing
properties provided $811,000 of working capital for the first nine months of
2005. $463,000 of working capital were used to help fund the operations of the
Coal Segment. The China Segment utilized over $540,000 of working capital.
$98,000 were used to fund the startup activities of the e-Commerce Segment. We
received distributions of $235,000 from other investments, including Cibola. The
remainder of the working capital was utilized to fund other operations.
In March of 2004, following receipt of the second installment of the
Settlement, our long-term line of credit from an affiliate of the Chairman was
paid down to $2,785,000 and ceased to be a revolving credit line. We also
terminated our $375,000 short-term line of credit from the same party. The
remaining loan from the related party was supplemented by (i) additional
borrowings of $200,000 in November of 2004 from an unconsolidated subsidiary;
(ii) three private placements completed in 2004 and January of 2005 which raised
proceeds of $3,300,000; and (iii) a fourth private placement currently in
progress which raised proceeds of $1,010,000 during the third quarter and an
additional $125,000 in October. 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
their 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. During the third quarter we 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.
The Coal Segment has a signed contract on the Pinnacle Project on which we
are currently pursuing financing, and is actively pursuing a number of other
projects. No other definitive contracts have as yet been signed, and there is no
assurance that the required financing for the Pinnacle Project or any of the
other projects will be obtained or that any of the projects will materialize.
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.
In February of 2005 a private investor agreed to finance the cost of the
China Segment's initial fertilizer manufacturing facility in China. We and the
investor 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 loaned US$850,000 to the LLC to fund the
additional capital costs and pre-operating costs of the facility. The LLC
organized a wholly foreign-owned enterprise ("WFOE"), Xianghe BH Fertilizer Co.,
Ltd. ("XBH"), to operate the business. XBH's new facility commenced initial
fertilizer production in September of 2005. 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.
During the first nine months of 2005 eight new gas wells were drilled in
eastern Colorado on a farmout we made to Vista Resources. We have a 22.5%
working interest in seven of the wells, and a small override and a backin after
payout in the discovery well. The first six wells came on stream in September,
and the other two wells commenced production in October. The eight wells are
expected to generate initial cash flow of $30,000 to $40,000 per month to the
Company's interest.
We believe that if the private debt placement now in progress is
successful, it 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
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. During October of 2005 the Company sold an
additional $125,000 of the 12% Convertible Notes for cash, further improving the
Company's liquidity. Such notes are convertible into 55,555 shares of common
stock, resulting in additional dilution.
XBH Start-up Operations. As discussed above, XBH commenced fertilizer
production in September, and is currently seeking market acceptance for its
products. We anticipate a slower growth in sales than originally projected,
which will likely result in losses by the China Segment in the fourth quarter of
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. After consideration by both parties, the advisory opinion, which was
not binding on the Plaintiffs or defendants, failed to resolve the matter and in
October 2005 the parties agreed to proceed to arbitration. The Plaintiffs and
defendants have each selected an arbitrator, and the arbitrators selected are in
the process of selecting a third arbitrator. Our counsel estimates the
arbitration to occur within the next six months. We estimate that, if all 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).
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. In March of
2003 the Court instituted a stay on discovery in the matter. On October 27,
2005, Defendants filed a motion to lift the stay on discovery in order to move
the case along. We expect that this matter will be resolved in favor of the
Defendants, and that the Company will ultimately receive an additional $100,000
to $125,000 from the litigation reserve. (See Part II - Item 1. Legal
Proceedings - McElmo Dome Litigation).
Visa Litigation. On July 12, 2005, the Federal Circuit Court of Appeals
issued an en banc decision in the patent case of Phillips v. AWH Corp. (the
"Phillips Case"). The Federal Circuit attempted to explain how the operative
language in patents is to be interpreted when construing patent claims.
Subsequent to the Federal Circuit's decision in July, Defendants requested
and the Court ordered supplemental briefs to the Court addressing Magistrate
Judge Sanderson's Report and Recommendation respective to the Markman hearing
held in October 2004 in light of the Federal Circuit's decision in the Phillips
Case. Both parties filed their supplemental briefs in August 2005. Oral
arguments regarding these issues were held on November 2, 2005. We anticipate a
final Markman ruling may occur as early as mid-March 2006. Thereafter, a revised
Scheduling Order will be prepared setting out a new trial date. (See Part II -
Item 1. Legal Proceedings - Visa Litigation).
Material changes in results of operations - Quarter ended September 30, 2005 as
- -------------------------------------------------------------------------------
compared with the Quarter ended September 30, 2004.
- --------------------------------------------------
The net loss for the third quarter of 2005 was $574,000 compared to
$512,000 for the 2004 third quarter. Continuing operations posted a net loss of
$568,000 compared to a loss from continuing operations of $509,000 for the same
period in 2004. In addition, our discontinued operations had a loss of $6,000
for the third quarter of 2005 compared to $3,000 in the third quarter of 2004.
The Coal Segment's $39,000 decrease in revenues to $13,000 more than
accounted for the decrease in the segment's operating loss which amounted to
$179,000 in the third quarter of 2005 versus $185,000 in the 2004 third quarter.
The operating profit in the CO2 Segment was 66% greater than before, increasing
to $266,000 compared to $160,000 a year earlier. The China Segment's loss for
the third quarter of 2005 totaled $268,000 compared to $133,000 for the same
period in 2004. The e-Commerce Segment incurred operating losses of $43,000 for
the third quarter of 2005 compared to $33,000 in the third quarter of 2004. The
operating loss in Other activities for the third quarter of 2005 decreased
$13,000 to $205,000 compared to $218,000 for the same period in 2004. As a
result, the operating loss for the current quarter increased to $429,000 versus
$409,000 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 $ (179,000) $ (185,000)
Carbon dioxide 266,000 160,000
China (268,000) (133,000)
e-Commerce (43,000) (33,000)
-------------------- --------------------
Subtotal (224,000) (191,000)
Other (205,000) (218,000)
-------------------- --------------------
Total $ (429,000) $ (409,000)
==================== ====================
The "Other" in the above table reflects primarily general and corporate
activities, as well as our other activities, including our new oil and gas
activities.
Coal reclamation
The segment recorded revenues of $13,000 for the third quarter of 2005
compared to $52,000 for the same period in 2004 as the segment performed fewer
consulting and coring jobs in 2005. Operating costs decreased $41,000 to
$189,000 in the third quarter of 2005 compared to $230,000 for the same period
in 2004. The decreased costs reflect the lower level of services performed in
2005.
Carbon dioxide
Third quarter 2005 operations reflected an operating profit of $266,000
compared to $160,000 for the 2004 third quarter. The sole component of revenues
for this segment is the sale of CO2 gas from the working and overriding royalty
interests of our carbon dioxide producing unit in Colorado. Operating revenues
in this segment increased $113,000 to $310,000 for the third quarter of 2005
compared to $197,000 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 $0.61 per mcf sold in the 2005 quarter versus
$0.39 per mcf in the year earlier quarter while production increased 49,000 mcf
to the Company's interest reflecting increased demand for CO2 gas.
China
The China Segment incurred an operating loss of $268,000 for the third
quarter of 2005 compared to $133,000 for the same period in 2004. The segment
had $222,000 more in SG&A expenses in 2005 than it incurred in 2004 as it
finalized the installation and construction of its initial fertilizer
manufacturing plant, geared up for its initial production of fertilizer and
built its first inventory. $237,000 of the loss incurred by the segment during
the quarter were incurred by the LLC which owns our fertilizer manufacturing
operations and by its wholly-owned subsidiary, Xianghe BH Fertilizer Co., Ltd.
Since these companies have incurred losses during the pre-operating period of
the plant, and are in a deficit position, we cannot offset the minority
interest's 50% share of the third quarter loss resulting from such activities
which would have reduced the segment's loss by $119,000. Once such entities
start producing net income, we will be able pick up 100% of their income until
their 50% share of the prior losses has been offset.
e-Commerce
The e-Commerce Segment incurred an operating loss of $43,000 for the third
quarter of 2005 versus an operating loss of $33,000 in the prior year quarter.
The segment received $1,000 of revenue for the third quarter of 2005 versus none
for the same period in 2004. This improvement was more than offset by a $13,000
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 our operating segments or held for investment. These
activities generated operating losses of $205,000 for the third quarter of 2005
compared to $218,000 for the same period in 2004. SG&A expenses remained static
for the two periods. The decrease in the loss was attributed to net income of
$13,000 from six of the eight gas wells that were completed during the second
and third quarters of 2005. Production began at the end of the third quarter of
2005.
Selling, general and administrative expenses
SG&A expenses decreased to $203,000 for the third quarter of 2005 from
$205,000 in the third quarter of 2004. Decreases in some SG&A expenses such as
insurance and subscriptions were nearly offset by increases in others such as
legal and accounting fees, resulting in a net $2,000 decrease.
Depreciation, depletion and amortization expenses
DD&A expense increased $9,000 from $25,000 in the third quarter of 2004 to
$34,000 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% convertible debt in 2004 and 2005.
Other income and expenses
The other income and expenses for the third quarter of 2005 netted to a
loss of $139,000 compared to a loss of $73,000 for the third quarter of 2004.
Interest income was up $2,000 for the third quarter of 2005 versus the same
period in 2004. Interest expense was $73,000 higher as a result of the increase
in debt, primarily to related parties and the issuance of the convertible notes.
We had gains on sale of assets of $43,000 in the third quarter of 2005 compared
to $11,000 in the third quarter of 2004.
Our equity in operations of unconsolidated affiliates reflected income of
$95,000 for the third quarter of 2005 compared to $102,000 for the same period
in 2004. The Company recorded $829,000 as its share of earnings from its
investment in Cibola Corporation compared to $764,000 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 $734,000, including
our remaining investment of $13,000, and $662,000 for the three months ended
March 31, 2005 and 2004, respectively. The interest expense totals include
$30,000 to Cibola for each of the three months ended September 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 $66,000 and $73,000 for the third quarter of 2005 and
2004, respectively. The operating results for Cibola Corporation accounted for
the decrease, reflecting the expiration of its gas purchase and sales contracts
in August of 2005. The minority shareholders have agreed to exercise a call
option to repurchase the common stock of Cibola held by us, and the Company's
note payable for the stock will be forgiven. No gain or loss will be recognized
upon the repurchase other than the $13,000 impairment and we will no longer be a
shareholder of Cibola as of December 1, 2005.
Income taxes
We recorded no provision for federal alternative minimum taxes in the third
quarter of 2005 compared to $27,000 for the same period in 2004. We have not
recorded any financial benefit attributable to its various tax carryforwards due
to uncertainty regarding their utilization and realization.
Discontinued operations
Our financial results for the three months ended September 30, 2005 and
2004, respectively, were burdened by losses of $6,000 and $3,000, respectively,
as a result of activities in two of our four discontinued segments. As of
September 30, 2005, assets of discontinued operations held for resale totaled
$20,000 and liabilities of discontinued operations totaled $45,000. 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 - Nine months ended September 30, 2005
- --------------------------------------------------------------------------------
as compared with the Nine months ended September 30, 2004.
- ----------------------------------------------------------
We recorded a loss of $1,324,000 for the first nine months of 2005 compared
to $1,488,000 in net income for the first nine months of 2004. Continuing
operations reflected losses of $1,468,000 compared to earnings of $1,484,000 for
the same period in 2004. In addition, we had income of $144,000 and $4,000 from
discontinued operations for the first nine months of 2005 and 2004,
respectively.
Operating results of our primary operating segments are reflected below:
2005 2004
------------------- -------------------
Operating profit (loss):
Coal reclamation $ (463,000) $ (441,000)
Carbon dioxide 671,000 390,000
China (540,000) (411,000)
e-Commerce (98,000) (65,000)
------------------- -------------------
Subtotal (430,000) (527,000)
Other (679,000) (674,000)
------------------- -------------------
Total $ (1,109,000) $ (1,201,000)
=================== ===================
The "Other" in the above table reflects primarily general and corporate
activities, as well as our other activities, including our new oil and gas
activities.
Coal reclamation
The Coal Segment's revenues decreased $18,000 to $52,000 for the first nine
months of 2005 compared to $70,000 for the same period in 2004 as the segment
performed fewer consulting and coring jobs in 2005. Operating costs increased
$4,000 to $508,000 for the first nine months of 2005 compared to $504,000 for
the same period in 2004 as the segment geared up to handle the anticipated
Pinnacle Project. As a result, the operating loss for the first nine months of
2005 increased $22,000 to $463,000 compared to $441,000 in the first nine months
of 2004.
Carbon dioxide
Operations for the first nine months of 2005 resulted in an operating
profit of $671,000 compared to a $390,000 operating profit for the 2004 first
nine months. The sole component of revenues for this segment is the sale of CO2
gas from the working and overriding royalty interests of our carbon dioxide
producing unit in Colorado. Segment operating revenues increased $288,000 or 55%
to $811,000 for the first nine months of 2005 compared to $523,000 for the same
period in 2004. We recorded $6,000 more in operating costs associated with the
properties in the nine months of 2005 compared to the same period in 2004.
Production volumes for the McElmo Dome field increased 14% for the first nine
months of 2005 compared to the same period in 2004. The increase in revenue for
the current nine months was due to higher volumes to our interest accompanied by
an increase in pricing. We received an average of $0.56 per mcf sold in the
first nine months of 2005 versus $0.41 per mcf in the year earlier period. Paid
volumes were up 176,000 mcf in the current nine months versus a year ago.
China
The China Segment incurred an operating loss of $540,000 for the first nine
months of 2005 compared to $411,000 for the same period in 2004. The segment had
$366,000 more in SG&A expenses in 2005 than it incurred in 2004 as it finalized
the installation and construction of its initial fertilizer manufacturing plant,
geared up for its initial production of fertilizer and built its first
inventory. $396,000 of the loss incurred by the segment during the nine months
were incurred by the LLC which owns our fertilizer manufacturing operations and
by its wholly-owned subsidiary, Xianghe BH Fertilizer Co., Ltd. Since these
companies have incurred losses during the pre-operating period of the plant, and
are in a deficit position, we cannot offset the minority party's 50% share of
the nine months loss resulting from such activities, which would have reduced
the segment's loss by another $174,000 for the period. Once such entities start
producing net income, we will be able pick up 100% of their income until their
50% share of the prior losses has been offset.
e-Commerce
The e-Commerce Segment incurred an operating loss of $98,000 for the first
nine months of 2005 versus an operating loss of $65,000 in the prior year
period. A $35,000 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 our operating segments or held for investment. These
activities generated operating losses of $679,000 for the first nine months of
2005 as compared to $674,000 in the same period of 2004. We charged $25,000 more
in DD&A costs for the nine months 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 convertible debt in 2004 and 2005. SG&A
decreased approximately $6,000 for the nine months ended September 30, 2005
compared to the same period in 2004; primarily as a result of slightly lower
costs in numerous types of expenses. Additionally, other corporate activities
benefited by approximately $16,000 in net income from eight gas wells in which
we have an interest, six of which began producing at the end of the third
quarter of 2005.
Selling, general and administrative expenses
SG&A expenses increased $6,000 to $641,000 from $635,000 for the 2004 nine
months. Minor increases in numerous SG&A expense accounts accounted for the
increase.
Depreciation, depletion and amortization expenses
DD&A expense increased $29,000 from $63,000 for the nine months ended
September 30, 2004 to $92,000 for the same period in 2005. The increase was due
primarily to increased amortization expense associated with the capitalized
costs of issuing the 10% participating and 12% convertible debt in 2004 and 2005
Other income and expenses
The other income and expenses for the first nine months of 2005 netted to a
loss of $326,000 compared to income of $2,821,000 for the same period in 2004.
We 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 nine
months of 2005. We used $2,620,000 of these funds to pay down its debt and
associated interest in 2004. In the first nine months of 2005, we incurred a net
increase in debt of $2,673,000 and total debt at September 30, 2005 was
approximately $3,230,000 greater than at September 30, 2004. As a result,
interest expense for the first nine months of 2005 was $650,000 compared to
$415,000 for the same period in 2004. We invested a portion of these additional
funds in short-term instruments and, as a result, interest income was $11,000
greater for the first nine months of 2005 than it was in 2004. We realized gains
on sale of assets for the first nine months of 2005 totaling $64,000 compared to
$87,000 in the prior year period. We realized a $38,000 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.
Our equity in the operations of unconsolidated affiliates netted to income
of $324,000 for the first nine months of 2005 compared to $300,000 for the same
period in 2004. These amounts reflect the improved operating results of Cibola
Corporation. The Company recorded $2,772,000 as its share of earnings from its
investment in Cibola Corporation compared to $2,528,000 for the prior year nine
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 $2,435,000 and
$2,228,000 for the nine-month periods ended September 30, 2005 and 2004,
respectively. The interest expense totals include $89,000 to Cibola for each of
the nine-month periods ended September 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 $235,000
and $211,000 for the nine-month periods ended September 30, 2005 and 2004,
respectively. In addition to the impairment for the Cibola earnings, we impaired
our remaining investment of $13,000 in Cibola effective for the third quarter of
2005. The minority common and preferred shareholders have agreed to exercise a
call option to repurchase the common stock of Cibola held by us, and the
Company's note payable for the purchase of the stock will be forgiven. No gain
or loss will be recognized upon the repurchase other than the $13,000 impairment
and we will no longer be a shareholder of Cibola as of December 1, 2005.
Income taxes
We recorded provisions of $33,000 and $136,000 for federal alternative
minimum taxes for the nine-month periods ended September 30, 2005 and 2004,
respectively.
Discontinued operations
As mentioned in the Overview above, our financial results for the nine
months ended in 2005 and 2004 benefited from earnings of $144,000 and $4,000,
respectively, as a result of activities in two of our four discontinued
segments. The nine months of 2005 benefited from the disposition of assets which
generated gains of $156,000 compared to $21,000 for the same period in 2004,
offset by expenses of $12,000 and $17,000 respectively. As of September 30,
2005, assets of discontinued operations held for resale totaled $20,000 and
liabilities of discontinued operations totaled $45,000. 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 September 30, 2005, we had long-term debt of $8,804,000, including
accrued interest to related entities of $107,000. Debt in the amount of
$7,966,000 has fixed interest rates; therefore, our interest expense and
operating results would not be affected by an increase in market interest rates
for this amount. Our $180,000 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 we
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 our interest expense by approximately $6,000. At September 30,
2005, a 10% increase in market interest rates would have reduced the fair value
of our long-term debt by $95,000.
We have 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
nine-month periods ended September 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 $89,000 for each of the three and nine-month periods ended September 30,
2005 and 2004, respectively. 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 $66,000 and $73,000 for the three-month periods ended September 30,
2005 and 2004, respectively, and $235,000 and $211,000 for the nine-month
periods ending on the same dates, respectively. In recording our share of Cibola
earnings according to the Agreement, these amounts were increased to $830,000
and $764,000 for the three-month periods ended September 30, 2005 and 2004,
respectively. The total earnings for Cibola were $2,772,000 and $2,528,000 for
the nine-month periods ended September 30, 2005 and 2004, respectively. Since we
felt its was unlikely that the net worth of Cibola would reach the requisite
amount, we also recorded impairments totaling $734,000 and $662,000 for the
three-month periods ended September 30, 2005 and 2004, respectively. The
impairments totaled $2,448,000 and $2,228,000 for the nine-month periods ended
September 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 minority common and
preferred shareholders have agreed to exercise the call option for our common
stock in Cibola in November of 2005 and the stock will be surrendered in full
payment of the note payable. We will cease to be shareholders of Cibola
Corporation effective December 1, 2005. The effect on these changes on the
Balance Sheets is to increase both our investments and current maturities of
long-term debt-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 $89,000 for each of the nine-month periods ended September 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
September 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 September 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 (the "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. The
Plaintiffs and the defendants then submitted 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, according to the Plaintiffs' attorney, was
favorable to the Plaintiffs on most issues, on July 29, 2005. His decision
failed to resolve the matter and the parties are now proceeding to binding
arbitration. The Plaintiffs and defendants have each selected an arbitrator, and
the parties selected are now in the process of selecting a third arbitrator. Our
counsel estimates the arbitration to occur within the next six months. We
estimate that, if all 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 $730,000 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
plaintiffs has subsequently withdrawn from the suit. The Court on March 11, 2003
instituted a stay on discovery in the matter. Since the case has been pending
for over three years (since April 24, 2002), Defendants on October 27, 2005,
filed a motion to lift the stay on discovery in order to move the case along. 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 our 71%-owned subsidiary, starpay.com, l.l.c., along with
VIMachine, Inc. filed a suit in the U. S. District Court for the Northern
District of Texas, Dallas Division against Visa International Service
Association and Visa USA, Inc., both d/b/a Visa (Case No. CIV:3-03-CV0976-L).
VIMachine is the holder of U.S. Patent No. 5,903,878 (the "VIMachine Patent")
that covers, among other things, an improved method of authenticating the
cardholder involved in an Internet payment transaction. 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.
On July 12, 2005, the Federal Circuit Court of Appeals issued an en banc
decision in the patent case of Phillips v. AWH Corp. (the "Phillips Case"). That
is, instead of relegating the case to a three-judge panel, it was heard by the
entire Federal Circuit bench. The Federal Circuit attempted to explain how the
operative language in patents is to be interpreted. One key question before the
Court was to which sources of information the trial court should refer when
construing patent claims.
Subsequent to the Federal Circuit's decision in July, Defendants requested
and the Court ordered supplemental briefs to the Court addressing Magistrate
Judge Sanderson's Report and Recommendation respective to the Markman hearing in
light of the Federal Circuit's en banc decision in the Phillips Case. Both
parties filed their supplemental briefs in August 2005. Oral arguments regarding
these issues were held on November 2, 2005.
Magistrate Judge Sanderson will soon provide his final Report and
Recommendation on the Markman issues to District Judge Lindsay who will in turn
provide the Court's final ruling on claim construction issues. We anticipate a
final Markman ruling may occur as early as mid-March 2006. Thereafter, a revised
Scheduling Order will be prepared setting out a new trial date.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(a) The following exhibits are filed with this Form 10-Q and are identified
by the numbers indicated:
3.1 Certificate of Incorporation of The New Beard Company as filed with
the Secretary of State of Oklahoma on September 20, 2000. (This
Exhibit has been previously filed as Exhibit 3(ii) to Registrant's
Form 10-Q for the period ended September 30, 2000, filed on November
20, 2000, and same is incorporated herein by reference).
3.2 Registrant's By-Laws as currently in effect. (This Exhibit has been
previously filed as Exhibit 3(ii) to Registrant's Form 10-K for the
period ended December 31, 1997, filed on March 31, 1998, and same is
incorporated herein by reference).
4 Instruments defining the rights of security holders:
4.1 Certificate of Designations, Powers, Preferences and Relative,
Participating, Option and Other Special Rights, and the
Qualifications, Limitations or Restrictions Thereof of the Series A
Convertible Voting Preferred Stock of the Registrant. (This Exhibit
has been previously filed as Exhibit 3(c) to Amendment No. 2, filed on
September 17, 1993 to Registrant's Registration Statement on Form S-4,
File No. 33-66598, and same is incorporated herein by reference).
4.2 Settlement Agreement, with Certificate of Amendment attached thereto,
by and among Registrant, Beard Oil, New York Life Insurance Company,
New York Life Insurance and Annuity Company, John Hancock Mutual Life
Insurance Company, Memorial Drive Trust and Sensor Oil & Gas, Inc.,
dated as of April 13, 1995. (This Exhibit has been previously filed
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. (This Exhibit has been previously
filed as Exhibit 10.1 to the Registrant's Form 10-Q for the period
ended June 30, 2005 and same is incorporated herein by reference).
10.2 Replacement Renewal and Extension Promissory Note from Registrant to
the Trustees of the Unitrust dated as of February 14, 2005. (This
Exhibit has been previously filed as Exhibit 10.2 to the Registrant's
Form 10-Q for the period ended June 30, 2005 and same is incorporated
herein by reference).
10.3 The Beard Company 2005 Stock Option Plan adopted on June 9, 2005*.
(This Exhibit has been previously filed as Exhibit 10.3 to the
Registrant's Form 10-Q for the period ended June 30, 2005 and same is
incorporated herein by reference).
10.4 Call Option Agreement by and between Registrant and Richard R.
Dunning, Larry D. Hartzog and Michael C. Black, dated April 10, 1996.
10.5 Form of 12% Convertible Subordinated Promissory Note due August 31,
2009.
10.6 Cibola Corporation financial statements for the three years ended
December 31, 2004. (This Exhibit has been previously filed as Exhibit
10.9 to Registrant's Form 10-K/A for the period ended December 31,
2004, filed April 17, 2006, and same is incorporated herein by
reference.)
31 Rule 13a-14(a)/15d-14(a) Certifications:
31.1 Chief Executive Officer Certification required by Rule 13a-14(a) or
Rule 15d-14(a).
31.2 Chief Financial Officer Certification required by Rule 13a-14(a) or
Rule 15d-14(a).
32 Section 1350 Certifications:
32.1 Chief Executive Officer Certification required by Rule 13a-14(b) or
Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code
32.2 Chief Financial Officer Certification required by Rule 13a-14(b) or
Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.
_______________
* Compensatory plans or arrangements.
The Company will furnish to any shareholder a copy of any of the above exhibits
upon the payment of $.25 per page. Any request should be sent to The Beard
Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma City,
Oklahoma 73112.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) THE BEARD COMPANY
/s/ Herb Mee, Jr.
(Date) June 2, 2006 ____________________________
Herb Mee, Jr., President and
Chief Financial Officer
/s/ Jack A. Martine
(Date) June 2, 2006 ____________________________
Jack A. Martine, Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit
No. Description Method of Filing
- -------- ----------- ----------------
3.1 Certificate of Incorporation of The New Incorporated herein by reference
Beard Company as filed with the Secretary
of State of Oklahoma on September 20,
2000.
3.2 Registrant's By-Laws as currently in Incorporated herein by reference
effect.
4.1 Certificate of Designations, Powers, Incorporated herein by reference
Preferences and Relative, Participating,
Option and Other Special Rights, and the
Qualifications, Limitations or
Restrictions Thereof of the Series A
Convertible Voting Preferred Stock of the
Registrant.
4.2 Settlement Agreement, with Certificate of Incorporated herein by reference
Amendment attached thereto, by and among
Registrant, Beard Oil, New York Life
Insurance Company, New York Life
Insurance and Annuity Company, John
Hancock Mutual Life Insurance Company,
Memorial Drive Trust and Sensor Oil &
Gas, Inc., dated as of April 13, 1995.
10.1 Restated and Amended Letter Loan Incorporated herein by reference
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 Incorporated herein by reference
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 Incorporated herein by reference
adopted on June 9, 2005*.
10.4 Call Option Agreement by and between Filed herewith electronically
Registrant and Richard R. Dunning, Larry
D. Hartzog and Michael C. Black, dated
April 10, 1996.
10.5 Form of 12% Convertible Subordinated Filed herewith electronically
Promissory Note due August 31, 2009.
10.6 Cibola Corporation financial statements Incorporated herein by reference
for the three years ended December
31, 2004.
31.1 Chief Executive Officer Certification Filed herewith electronically
required by Rule 13a-14(a) or Rule
15d-14(a).
31.2 Chief Financial Officer Certification Filed herewith electronically
required by Rule 13a-14(a) or Rule
15d-14(a).
32.1 Chief Executive Officer Certification Filed herewith electronically
required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63
of Title 18 of the United States Code
32.2 Chief Financial Officer Certification Filed herewith electronically
required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63
of Title 18 of the United States Code.