UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the period ended June 30, 2002
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 the number of shares outstanding of each of the registrant's
classes of common stock as of July 31, 2002.
Common Stock $.001333 par value - 1,828,845
THE BEARD COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements................................................3
Balance Sheets - June 30, 2002 (Unaudited) and
December 31, 2001......................................................3
Statements of Operations - Three Months and Six Months
ended June 30, 2002 and 2001 (Unaudited)...............................4
Statements of Shareholders' Equity (Deficiency) -
Year ended December 31, 2001
and Six Months ended June 30, 2002 (Unaudited).........................5
Statements of Cash Flows - Six Months ended
June 30, 2002 and 2001 (Unaudited).....................................6
Notes to Financial Statements (Unaudited).................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................................25
PART II. OTHER INFORMATION
Item 2. Changes in Securities..............................................26
Item 4. Submission of Matters to a Vote of Security Holders................26
Item 6. Exhibits and Reports on Form 8-K...................................27
Signatures...................................................................28
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE BEARD COMPANY AND SUBSIDIARIES
Balance Sheets
June 30, December 31,
Assets 2002 2001
------ ---- ----
Current assets:
Cash and cash equivalents $ 73,000 $ 55,000
Accounts receivable, less allowance for doubtful
receivables of $107,000 in 2002 and 2001 221,000 175,000
Inventory 7,000 76,000
Prepaid expenses and other assets 46,000 56,000
Current portion of notes receivable 171,000 180,000
-------------- --------------
Total current assets 518,000 542,000
-------------- --------------
Notes receivable 72,000 108,000
Investments and other assets 849,000 652,000
Property, plant and equipment, at cost 4,839,000 4,894,000
Less accumulated depreciation, depletion and amortization 2,165,000 2,184,000
-------------- --------------
Net property, plant and equipment 2,674,000 2,710,000
-------------- --------------
Intangible and other assets, at cost 151,000 48,000
Less accumulated amortization 15,000 2,000
-------------- --------------
Net intangible assets 136,000 46,000
-------------- --------------
$ 4,249,000 $ 4,058,000
============== ==============
Liabilities and Shareholders' Equity (Deficiency)
-------------------------------------------------
Current liabilities:
Trade accounts payable $ 178,000 $ 156,000
Accrued expenses 312,000 429,000
Current maturities of long-term debt 133,000 307,000
-------------- --------------
Total current liabilities 623,000 892,000
-------------- --------------
Long-term debt less current maturities 1,052,000 19,000
Long-term debt - related entities 2,898,000 2,494,000
Other long-term liabilities 108,000 108,000
Redeemable preferred stock of $100 stated value;
5,000,0000 shares authorized; 27,838 shares issued
and outstanding in 2002 and 2001 (note 4) 889,000 889,000
Common shareholders' equity (deficiency):
Common stock of $.001333 par value per share; 7,500,000
shares authorized; 2,123,898 shares issued
and outstanding in 2002 and 2001 3,000 3,000
Capital in excess of par value 38,126,000 38,081,000
Accumulated deficit (37,589,000) (36,568,000)
Accumulated other comprehensive loss (15,000) (14,000)
Treasury stock, 295,053 shares, at cost, in 2002 and 2001 (1,846,000) (1,846,000)
-------------- --------------
Total common shareholders' equity (deficiency) (1,321,000) (344,000)
-------------- --------------
Commitments and contingencies (note 7)
$ 4,249,000 $ 4,058,000
============== ==============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Operations
(Unaudited)
For Three Months Ended For Six Months Ended
---------------------- --------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Coal reclamation $ 11,000 $ 45,000 $ 12,000 $ 97,000
Carbon dioxide 109,000 116,000 195,000 242,000
China - - - -
e-Commerce - - - -
Other 7,000 7,000 10,000 12,000
---------- ---------- ----------- -----------
127,000 168,000 217,000 351,000
---------- ---------- ----------- -----------
Expenses:
Coal reclamation 114,000 131,000 233,000 260,000
Carbon dioxide 19,000 21,000 50,000 45,000
China - - - -
e-Commerce - - - -
Selling, general and administrative 307,000 326,000 560,000 616,000
Depreciation, depletion & amortization 36,000 21,000 59,000 44,000
Other 4,000 4,000 19,000 17,000
---------- ---------- ----------- -----------
480,000 503,000 921,000 982,000
---------- ---------- ----------- -----------
Operating profit (loss):
Coal reclamation (139,000) (124,000) (286,000) (242,000)
Carbon dioxide 81,000 86,000 128,000 180,000
China - - - -
e-Commerce (39,000) (52,000) (75,000) (103,000)
Other, primarily corporate (256,000) (245,000) (471,000) (466,000)
---------- ---------- ----------- -----------
(353,000) (335,000) (704,000) (631,000)
Other income (expense):
Interest income 32,000 35,000 59,000 76,000
Interest expense (95,000) (48,000) (162,000) (87,000)
Equity in operations of unconsolidated affiliates (89,000) (49,000) (120,000) (106,000)
Gain on sale of assets 1,000 51,000 10,000 68,000
Other (1,000) 4,000 (1,000) 4,000
---------- ---------- ----------- -----------
Loss from continuing operations before income taxes (505,000) (342,000) (918,000) (676,000)
Income taxes (note 6) - - - 60,000
---------- ---------- ----------- -----------
Loss from continuing operations (505,000) (342,000) (918,000) (616,000)
Loss from discontinued operations (55,000) (147,000) (103,000) (457,000)
---------- ---------- ----------- -----------
Net loss $ (560,000) $ (489,000) $(1,021,000) $(1,073,000)
========== ========== =========== ===========
Net loss per average common share outstanding:
Basic and diluted:
Loss from continuing operations $ (0.28) $ (0.19) $ (0.50) $ (0.34)
Loss from discontinued operations (0.03) (0.08) (0.06) (0.25)
---------- ---------- ----------- -----------
Net loss $ (0.31) $ (0.27) $ (0.56) $ (0.59)
========== ========== =========== ===========
Weighted average common shares outstanding -
basic and diluted 1,829,000 1,829,000 1,829,000 1,829,000
========== ========== =========== ===========
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Shareholders' Equity (Deficiency)
Total
Accumulated Common
Capital in Other Shareholders'
Common Excess of Accumulated Comprehensive Treasury Equity
Stock Par Value Deficit Income Stock (Deficiency)
--------- ------------- -------------- ------------- -------------- ---------------
Balance, December 31, 2000 $ 3,000 $ 37,986,000 $( 34,247,000) $( 13,000) $( 1,846,000) $ 1,883,000
Net loss - - (2,321,000) - - (2,321,000)
Comprehensive income:
Foreign currency translation
adjustment - - - (1,000) - (1,000)
---------------
Comprehensive loss - - - - - (2,322,000)
---------------
Reservation of shares pursuant to
deferred compensation plan - 95,000 - - - 95,000
--------- ------------- -------------- ------------- -------------- ---------------
Balance, December 31, 2001 3,000 38,081,000 (36,568,000) (14,000) (1,846,000) (344,000)
Net loss, six months ended June 30, - - (1,021,000) - - (1,021,000)
2002 (unaudited)
Comprehensive income:
Foreign currency translation
adjustment (unaudited) - - - (1,000) - (1,000)
---------------
Comprehensive loss (unaudited) - - - - - (1,022,000)
---------------
Reservation of shares pursuant to
deferred compensation plan (unaudited) - 45,000 - - - 45,000
--------- ------------- -------------- ------------- -------------- ---------------
Balance, June 30, 2002 (unaudited) $ 3,000 $ 38,126,000 $( 37,589,000) $( 15,000) $( 1,846,000) $( 1,321,000)
========= ============= ============== ============= ============== ===============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Six Months Ended
------------------------
June 30, 2002 June 30, 2001
------------- -------------
Operating activities:
Cash received from customers $ 293,000 $ 293,000
Cash paid to suppliers and employees (1,097,000) (1,299,000)
Interest received 57,000 69,000
Interest paid (155,000) (120,000)
Taxes (paid) refunded - 62,000
------------ ------------
Net cash used in operating activities (902,000) (995,000)
------------ ------------
Investing activities:
Acquisition of property, plant and equipment (12,000) (20,000)
Acquisition of intangibles (1,000) -
Proceeds from sale of assets 77,000 68,000
Investment in and advances to fifty percent-owned
subsidiary in Mexico (10,000) (347,000)
Investment in and advances to fifty percent-owned
subsidiary in China (403,000) -
Advances for notes receivable (7,000) (302,000)
Payments on notes receivable 73,000 896,000
Other 63,000 41,000
------------ ------------
Net cash provided by (used in) investing activities (220,000) 336,000
------------ ------------
Financing activities:
Proceeds from term notes 1,682,000 1,043,000
Payments on line of credit and term notes (454,000) (331,000)
Capitalized costs associated with issuance of subordinated debt (88,000) -
------------ ------------
Net cash provided by financing activities 1,140,000 712,000
------------ ------------
Net increase in cash and cash equivalents 18,000 53,000
Cash and cash equivalents at beginning of period 55,000 31,000
------------ ------------
Cash and cash equivalents at end of period $ 73,000 $ 84,000
============ ============
Continued
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
Reconciliation of Net loss to Net Cash Used in Operating Activities
For the Six Months Ended
------------------------
June 30, 2002 June 30, 2001
------------- -------------
Net loss $ (1,021,000) $ (1,073,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 59,000 71,000
Gain on sale of assets (58,000) (68,000)
Equity in operations of unconsolidated affiliates 124,000 394,000
Net cash used by discontinued operations offsetting
accrued impairment loss (6,000) (37,000)
Increase in accounts receivable, prepaid expenses and
other current assets (27,000) (194,000)
Decrease in inventories 69,000 105,000
Decrease in accounts payable, accrued
expenses and other liabilities (42,000) (193,000)
------------ ------------
Net cash used in operating activities $ (902,000) $ (995,000)
============ ============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2002 and 2001
(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 2001
annual report on Form 10-K.
The accompanying financial statements include the accounts of The Beard
Company and its wholly and majority-owned subsidiaries in which The Beard
Company has a controlling financial interest ("Beard or the Company").
Subsidiaries and investees in which Beard does not exercise control are
accounted for using the equity method. All significant intercompany
transactions have been eliminated in the accompanying financial statements.
The financial information included herein is unaudited; however, such
information reflects solely normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim periods presented.
The results of operations for the three and six-month periods ended June
30, 2002, 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 installation
and construction of facilities which utilize the patented AirLance Compost
Systems (trademark) composting technology. The e-Commerce Segment consists
of a 71%-owned subsidiary which is pursuing the development of a virtually
secure payment system to be used exclusively for Internet transactions. Its
current focus is to develop licensing arrangements and other fee based
arrangements with companies implementing technology in conflict with its
intellectual property.
As discussed in note 3: (1) In 1999, the Company's Board of Directors
adopted a formal plan to discontinue its interstate travel facilities
business (the "ITF" Segment); (2) in 1999 the Management Committee of North
American Brine Resources ("NABR") adopted a plan to discontinue its brine
extraction/iodine manufacturing business which comprised the Company's
("BE/IM") Segment; (3) in May 2001 the fixed assets of the 50%-owned
company (accounted for as an equity investment) involved in the Natural Gas
Well Servicing ("WS") Segment were sold and in August 2001, the Company
ceased pursuing opportunities in Mexico and the segment was discontinued;
and (4) in March 2001 the Company ceased providing financial support to its
environmental remediation ("ER") subsidiary, its exclusive marketing
license was subsequently cancelled, and the ER Segment was discontinued.
Investments
The Company owns a 50% interest in ABT-Beard, L.L.C. ("ABT-Beard"), a
company involved in pursuing environmental opportunities in China.
ABT-Beard had no revenues for either the first six months of 2002 or 2001.
ABT-Beard incurred losses of $243,000 and $179,000 for the second quarter
of 2002 and 2001, respectively. ABT-Beard incurred losses of $390,000 and
$355,000 for the first six months of 2002 and 2001, respectively.
Impact of Recently Issued Accounting Standards Not Yet Adopted
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets". Statement No.
142 applies to intangible assets acquired individually or with a group of
other assets at acquisition and subsequent to acquisition. According to
Statement No. 142, intangible assets are to be recorded at fair value and
goodwill will not be amortized, but assessed annually for impairment.
In September 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 applies to the initial
measurement and subsequent accounting for obligations associated with the
sale, abandonment, or other type of disposal of long-lived tangible assets.
The statement requires that asset retirement obligations be recognized at
fair value when the obligation is incurred.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The assets covered by the
statement include those to be held and used or to be disposed of, such as
assets under capital leases of lessees, assets subject to operating leases
of lessors, and prepaid assets. This statement provides guidance for the
recognition and measurement of an impairment loss for certain types of
long-lived assets and expands the scope of discontinued operations.
The Company has adopted FASB Statements No. 142 and 144 effective January
1, 2002 for the fiscal year ended December 31, 2002 and the impact is not
material. The Company will be required to adopt FASB Statement 143
effective January 1, 2003 for the fiscal year ended December 31, 2003. The
Company has not evaluated the effects of Statement No. 143, but does not
believe that adoption of this accounting standard will have a significant
effect on the financial position or results of operations of the Company.
Reclassifications
Certain 2001 balances have been reclassified to conform to the 2002
presentation. As described in note 3, the Company discontinued two of its
segments. As a result the 2001 statement of operations has been
reclassified to reflect the two segments' operations as discontinued.
(2) Liquidity and Ability to Fund Operations
The Company's cash and cash equivalents increased $18,000 at June 30, 2002
compared to December 31, 2001. To mitigate potential liquidity problems,
the Company obtained financing of $1.8 million in 2000, including $1.5
million from an affiliate of the Company's chairman. This credit line was
increased to a total of $2,250,000 in September of 2001, and was
subsequently increased to $2,625,000 in February of 2002. The line is
secured by a pledge of approximately 89% of the Company's working and
overriding royalty interests in the McElmo Dome Unit. As a result of these
actions and the private placement of $1,200,000 of 10% subordinated notes
discussed below, working capital improved $245,000 during the first half of
2002.
The Company is focusing on replacing its Coal Segment's revenues and
currently has three major projects in various stages of development, all of
which, subject to arranging necessary financing, are ultimately expected to
mature into operating projects. In each case core holes have been drilled
and sample analyses have been completed with favorable results. The
projects are in three different states and involve three different parties.
Negotiations are in progress with the pond owner of one of the projects
concerning the installation of a preparation plant to recover clean coal.
The installation of this project requires the arrangement of necessary
financing. Negotiations are in progress with a third party to form a joint
venture or limited liability company (llc) that would provide the initial
working capital and guarantee the necessary equipment financing on this
project, and give the llc the right of first refusal to participate in
future recovery projects that require financing. A second project involves
the transfer of a large amount of non-recoverable slurry to a new disposal
area, and may ultimately result in the installation of a preparation plant.
The initial phase of this project would require no financing. We have a
high level of confidence that we will be able to start at least one of
these two projects this year. Although the exact timing of the three
projects is uncertain, they are all considered to have a high probability
of activity. However, no definitive contracts have as yet been signed, and
there is no assurance that the required financing will be obtained or that
any or all of the projects will materialize.
Development activity in the China Segment, meanwhile, has been plagued by
delays. Although we had reached agreements and/or formed Cooperative Joint
Ventures ("CJV's") with various Chinese partners which called for the
construction of three compost manufacturing facilities in which the Company
would own an interest and receive an operating fee, two of these (Baoding
and Qihe City) are now on indefinite hold pending resolution of some of the
financing terms. It appears that the third CJV, which calls for the
construction of a plant in the City of Handan and which had been on
indefinite hold, is now poised to move forward. Terms of a financing
arrangement have now been verbally agreed to with third parties in the
U.S., and definitive agreements are in the process of being prepared. In
the event these projects materialize they would result in contracts in
which the segment would receive front-end fees, but might or might not have
an equity interest. The segment is continuing to pursue a number of other
projects, several of which are believed to have a high probability of
occurrence. It now appears that only Handan may materialize in 2002, with
the other projects falling into 2003 and beyond.
Key to the Company's liquidity is the anticipated settlement of a lawsuit,
in which the Company is a Plaintiff, which has been in progress since 1996.
A Settlement Agreement was signed by the parties in September of 2001. On
May 6, 2002, the federal judge issued the Final Judgment approving the
Settlement and ordered that a settlement fund of $50.4 million in cash be
established to settle the class action lawsuit. In companion rulings on the
same date the Judge also approved the allocation of settlement funds among
the class members in the lawsuit. In late May, 2002, objectors entitled to
receive approximately $107,000 of the total settlement filed an appeal to
the final approval of the settlement. Distribution of the proceeds will be
delayed until all appeal periods have run. The Company anticipates its
share of the proceeds will be in excess of $3.5 million. Distribution of
the contemplated proceeds will have a significant impact upon the Company's
liquidity. Although there is the possibility that the appeals process could
delay the Settlement into late 2003 or possibly early 2004 or that the
objecting parties could ultimately cause the Settlement to be overturned,
the Company believes it is unlikely that the Settlement will be overturned.
To further bolster working capital, the Company was successful in the
private placement of $1,200,000 of 10% subordinated notes due September 30,
2003, to "bridge the gap" until the settlement funds are distributed or
until the anticipated Coal and China projects achieve positive cash flow.
In the event the notes have not been redeemed by the maturity date, they
will be automatically extended to March 31, 2005. An investment banking
firm received warrants to purchase 45,000 shares of Company common stock as
part of its sales compensation in connection with the offering. The note
holders have the contingent right to receive up to 240,000 additional
warrants depending upon the length of time their notes are held. Related
parties purchased $320,000 of the offering.
In addition, the Company expects to generate cash from the disposition of
the remaining assets from the discontinued ITF, BE/IM and WS Segments and
from the pay down of notes receivable, and can sell certain other assets to
generate cash if necessary.
The Company believes that the cash generated from the private debt
placement and the remaining portion of its credit lines, coupled with the
cash generated from the sale of assets, will be adequate to enable the
Company to continue operations until (i) the settlement funds have been
received or (ii) the operations of the projects under development in the
Coal and China Segments have come on stream and the Company is generating
positive cash flow.
(3) Discontinued Operations
ITF Segment
In 1999 the Company's Board of Directors adopted a formal plan to
discontinue its interstate travel facilities ("ITF") Segment and recorded a
$1,603,000 estimated loss for the discontinuance in 1998. ITF disposed of a
majority of its assets in 1999, retaining two convenience stores
("C-stores"), including their equipment and inventory, and Beard became
100% owner of ITF.
Beard recorded an additional $420,000 loss in 2000; $60,000 represented
operating losses expected to be incurred by the discontinued ITF Segment
prior to the anticipated disposal date of the remaining assets; $360,000
represented an additional reduction in the estimated realizable value of
the remaining C-stores and related assets as of December 31, 2000. The
discontinued ITF Segment had no revenues for the three months ended June
30, 2001 while recording revenues of $7,000 for the six-month period ended
June 30, 2001. ITF's actual operating losses for the three and six-month
periods ended June 30, 2001 were $6,000 and $37,000, respectively. Such
losses were charged against the loss accrual recorded in the fourth quarter
of 2000.
In December 2001, Beard recorded an additional $100,000 impairment in the
carrying value of the facilities and $14,000 for anticipated operating
losses for the period from December 31, 2001 through the expected disposal
date of the remaining assets. ITF recorded no revenues for the first half
of 2002 and incurred $2,000 and $6,000 of losses for the three and
six-months ending June 30, 2002 which were charged against the loss accrual
recorded in 2001. Included in the losses was a $2,000 gain on the sale of
equipment.
As of June 30, 2002, the significant assets related to the ITF Segment
consisted primarily of the two remaining C-stores and other assets with a
total recorded value of $406,000. The significant liabilities of the
segment consisted of trade accounts payable and accrued expenses totaling
$11,000. Beard is actively seeking opportunities to sell the remaining
C-stores and expects them to be sold by December 31, 2002.
BE/IM Segment
In 1999 the Management Committee of North American Brine Resources ("NABR")
adopted a formal plan to discontinue the business and dispose of its
assets. Beard had a 40% ownership in NABR, which was accounted for under
the equity method. As a result, Beard's share of NABR's operating results
has been reported as discontinued for all periods presented in the
accompanying statements of operations. The joint venture was dissolved in
September 2000 and the Japanese partners received their final distribution
of cash in December 2000, with the Company taking over the remaining assets
and liabilities.
In 1999 Beard recorded a $540,000 loss, which represented its share of
NABR's $1,350,000 estimated loss from the discontinuation of operations.
NABR's loss included $572,000 of anticipated operating losses through April
2000 (the date operations ceased for the larger of its two plants) and
costs of ceasing operations. Revenues for the smaller of the two plants
were $43,000 and $120,000 for the three and six-month periods ended June
30, 2002, respectively. The net losses for the three and six-months ended
June 30, 2002 were $30,000 and $67,000, respectively, and were not
anticipated in the loss accruals recorded in 1999. The Company charged
$5,000 and $7,000 for the three and six-month periods ended June 30, 2002,
respectively, against the accrual for anticipated expenses related to the
shutdown of the larger of its two plants. Revenues for the three and
six-month periods ending June 30, 2001 were $116,000. The actual operating
results for the three and six-month periods ending June 30, 2001 were
losses of $12,000 and $43,000, respectively, which were charged against the
loss accrual recorded in 1999. In addition, the Company recorded losses of
$1,000 and $26,000 for the three and six-month periods ended June 30, 2001,
respectively, for the operations of the smaller of the two plants
distributed to Beard from NABR. These losses were not anticipated in the
loss accrual of 1999.
As of June 30, 2002, the significant assets related to NABR's operations
consisted primarily of equipment and inventory with estimated net
realizable values of $68,000 and $7,000, respectively. The significant
liabilities related to NABR's operations consisted primarily of accounts
payable of $4,000 and accrued expenses related to the shutdown of
operations totaling $146,000. The smaller of the two plants was sold
effective July 31, 2002, which will eliminate future operating losses after
such date. The Company is actively pursuing opportunities to sell NABR's
remaining assets and expects the disposition to be completed by December
31, 2002.
WS Segment
In May 2001 the fixed assets of the 50%-owned company (accounted for as an
equity investment) involved in natural gas well testing operations for the
Natural Gas Well Servicing ("WS") Segment were sold for $1,550,000, subject
to a holdback of $150,000. The Company received $21,000 and $65,000 of the
holdback in June and November, respectively, of 2001. In May, 2002, the
Company received $35,000, net of attorney's fees of $29,000, representing
the remainder of the holdback. As a result of the sale all debt of the
50%-owned company was retired and the Company was relieved of contingent
liabilities totaling $512,000. 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 the first half of 2002 and $3,000 for
the first half of 2001. Beard's share of operating losses from the
discontinued segment was $25,000 and $36,000 for the three and six-months
ended June 30, 2002, respectively. The loss for the first quarter of 2002
included gains on sales of equipment totaling $36,000. Beard's share of
operating losses from the discontinued segment was $145,000 and $414,000,
respectively, for the three and six-month periods ending June 30, 2001. For
the first half of 2001, Beard's share of operating losses from the
50%-owned company was $312,000, including a $175,000 provision for the
discontinuation of operations. The remaining $102,000 of losses incurred in
the six months ended June 30, 2001 were associated with the operations of
the wholly-owned company and were not anticipated in the loss accrual.
As of June 30, 2002, the significant assets of the WS Segment consisted of
fixed assets with a recorded value of $141,000 and cash and accounts
receivable totaling of $18,000. The significant liabilities of the entity
consisted of trade accounts payable and accrued expenses totaling $58,000.
It is anticipated that all liabilities of the segment will be paid prior to
December 31, 2002.
ER Segment
In March of 2001 the Company determined that it would no longer provide
financial support to ISITOP, Inc., an 80%-owned subsidiary specializing in
the remediation of polycyclic aromatic hydrocarbon ("PAH") contamination.
The operations of ISITOP had previously comprised the Company's
environmental remediation ("ER") Segment. On May 31, 2001, ISITOP was
notified by the Licensor that the segment's exclusive U.S. marketing
license for the chemical used for such PAH remediation had been cancelled.
ISITOP generated no revenues in 2002 or in 2001. ISITOP's operating losses
for the six months ended June 30, 2002 totaled less than $1,000 which was
all incurred in the second quarter of the year. The operating losses
totaled less than $1,000 and $17,000 for the three and six-month periods
ending June 30, 2001, respectively. ISITOP had no significant assets or
liabilities at June 30, 2002.
(4) Redeemable Preferred Stock
The Company's preferred stock is mandatorily redeemable through December
31, 2002, from one-third of Beard's "consolidated net income" as defined.
Accordingly, one-third of future "consolidated net income" will accrete
directly to preferred stockholders and reduce earnings per common share.
The Company's 2002 operations through June 30 were not sufficient to begin
the sharing of the consolidated net income. To the extent that the
preferred stock is not redeemed by December 31, 2002, the shares of
preferred stock can be converted into shares of the Company's common stock.
(5) Loss Per Share
Basic loss per share data is computed by dividing loss attributable to
common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted loss per share in the statements of operations exclude potential
common shares issuable upon conversion of redeemable preferred stock or
exercise of stock options as a result of losses from continuing operations
for all periods presented.
(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 refunds of $41,000 and $19,000 for
federal and state income taxes, respectively, for the six months ended June
30, 2001. There was no provision for income taxes for the three and
six-month periods ended June 30, 2002.
At June 30, 2002, 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 2004-2009 $ 52,300
Tax depletion carryforward Indefinite $ 5,500
(7) Commitments and Contingencies
In the normal course of business various actions and claims have been
brought or asserted against the Company. Management does not consider them
to be material to the Company's financial position, liquidity or results of
operations.
In connection with the sale of the fixed assets of the Mexican well testing
operations the Company and its 50% partner have each, as to 50%,
indemnified the purchaser from and against any claims, demands, actions,
damages, cause of action, cost, liability, penalties and expense (including
reasonable legal fees) that purchaser or its successors or assigns may
suffer arising from the Mexican subsidiary's failure to file any applicable
tax returns or pay any and all of its taxes which had accrued prior to the
sale date. As of June 30, 2002, the accrued tax liabilities were estimated
to be $3,000, with the Company liable for one-half of such amount.
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 the Restructure (collectively, the "Obligations"). Neither
Beard nor Beard Oil is presently aware of any material liabilities existing
as a result of such Obligations.
(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 half of 2002 and
2001: 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 patented AirLance Compost
Systems (trademark) composting technology. The e-Commerce Segment consists
of a 71%-owned subsidiary which is (i) pursuing the development of a
payment system to be used exclusively for Internet transactions and (ii)
focusing on developing licensing agreements and other fee based
arrangements with companies implementing technology in conflict with the
Company's intellectual property.
The following is certain financial information regarding the Company's
reportable segments (presented in thousands of dollars).
General corporate assets and expenses are not allocated to any of the
Company's operating segments; therefore, they are included as a reconciling
item to consolidated total assets and loss from continuing operations
before income taxes reported in the Company's accompanying financial
statements.
Carbon
Coal Dioxide China e-Commerce Totals
---- ------- ----- ---------- ------
Three months ended
------------------
June 30, 2002
-------------
Revenues from
external customers $ 11 $ 109 $ - $ - $ 120
Segment profit (loss) (139) 81 (243) (40) (341)
Three months ended
------------------
June 30, 2001
-------------
Revenues from
external customers $ 45 $ 116 $ - $ - $ 161
Segment profit (loss) (125) 87 (179) (53) (270)
Six months ended
----------------
June 30, 2002
-------------
Revenues from
external customers $ 12 $ 195 $ - $ - $ 207
Segment profit (loss) (277) 128 (390) (76) (615)
Segment assets 1,582 467 429 62 2,540
Six months ended
----------------
June 30, 2001
-------------
Revenues from
external customers $ 97 $ 242 $ - $ - $ 339
Segment profit (loss) (243) 180 (355) (104) (522)
Segment assets 1,642 436 156 61 2,295
Reconciliation of total reportable segment loss to consolidated loss from
continuing operations before income taxes is as follows for the three and
six months ended June 30, 2002 and 2001 (in thousands):
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, June 30 June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Total loss for reportable segments $ (341) $ (270) $ (615) $ (522)
Eliminate loss from China operations accounted
for as an equity investment 243 179 390 355
Equity in loss from China operations accounted
for as an equity investment (122) (89) (195) (177)
Net corporate costs not allocated to segments (285) (162) (498) (332)
---- ---- ---- ----
Total consolidated loss for continuing
operations $ (505) $ (342) $ (918) $ (676)
====== ====== ====== ======
THE BEARD COMPANY AND SUBSIDIARIES
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE
FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.
IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND,"
"PROJECT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE
THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE
DISCLOSED UNDER "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY ASSUMES NO DUTY TO UPDATE OR
REVISE ITS FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR
EXPECTATIONS OR OTHERWISE.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion focuses on material changes in the Company's
financial condition since December 31, 2001 and results of operations for the
quarter ended June 30, 2002, compared to the prior year second quarter and the
six months ended June 30, 2002 compared to the prior year six months. Such
discussion should be read in conjunction with the Company's financial statements
including the related footnotes.
In preparing the discussion and analysis, the Company has presumed readers
have read or have access to the discussion and analysis of the prior year's
results of operations, liquidity and capital resources as contained in the
Company's 2001 Form 10-K.
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 patented AirLance Compost
Systems(TM) composting technology. The e-Commerce Segment consists of a
71%-owned subsidiary which is pursuing the development of a virtually secure
payment system to be used exclusively for Internet transactions. Its current
focus is to develop licensing arrangements and other fee based arrangements with
companies implementing technology in conflict with its intellectual property.
In 1999 the Company adopted a plan to discontinue its ITF Segment, and
those operations were reflected as discontinued operations in 1998. The majority
of the assets of the ITF Segment were disposed of in 1999 and the Company is
pursuing the sale of the remaining assets. In 1999 the Company adopted a plan to
discontinue its BE/IM Segment, and those operations have since been reflected as
discontinued. The Company is now in the process of liquidating those assets. In
March 2001 the Company ceased providing financial support to ISITOP, Inc. and
shortly thereafter its exclusive marketing license was terminated. Accordingly,
the operations of the ER Segment have been reflected as discontinued. In May
2001 the fixed assets of the 50%-owned company (accounted for as an equity
investment) involved in the WS Segment were sold. In August 2001 the Company
ceased pursuing opportunities in Mexico related to the sand separator assets
previously operated in Mexico in the WS Segment, and the Company has since been
pursuing the sale of the segment's remaining assets. As a result, the operations
of the WS Segment have now been reflected as discontinued.
MATERIAL CHANGES IN FINANCIAL CONDITION - JUNE 30, 2002 AS COMPARED WITH
DECEMBER 31, 2001.
The following table reflects changes in the Company's financial condition
during the periods indicated:
June 30, December 31, Increase
2002 2001 (Decrease)
---- ---- ----------
Cash and cash equivalents $ 73,000 $ 55,000 $ 18,000
Working capital $(105,000) $(350,000) $245,000
Current ratio 0.83 to 1 0.61 to 1
During the first six months of 2002, the Company increased its working
capital by $245,000 from $(350,000) as of December 31, 2001. The placement of
the 10% Subordinated Debt infused over $900,000 in working capital in the second
quarter of 2002. Net advances from related entities of the Chairman of the Board
totaled $280,000. Proceeds from the sales of assets totaled $77,000 during the
first half of 2002. The Company received payments on notes receivable totaling
$73,000 during the six months ended June 30, 2002. $286,000 of working capital
were used to help fund the operations of the Coal Segment. There were net
advances of $403,000 to the Company's joint venture involved in the pursuit of
environmental opportunities in China. $75,000 was used to fund the startup
activities of the e-Commerce Segment. The Company made net payments of $175,000
on its line of credit with a bank. The remainder of the working capital was
utilized to fund other operations.
The Company's principal business is coal reclamation, and this is where
management's operating attention is primarily focused. The Coal Segment
currently has three major projects in various stages of development, all of
which, subject to arranging necessary financing, are ultimately expected to
mature into operating projects. In each case core holes have been drilled and
sample analyses have been completed with favorable results. The projects are in
three different states and involve three different parties. Negotiations are in
progress with the pond owner of one of the projects concerning the installation
of a preparation plant to recover clean coal. The installation of this project
requires the arrangement of necessary financing. Negotiations are in progress
with a third party to form a joint venture or limited liability company (llc)
that would provide the initial working capital and guarantee the necessary
equipment financing on this project, and give the llc the right of first refusal
to participate in future recovery projects that require financing. A second
project involves the transfer of a large amount of non-recoverable slurry to a
new disposal area, and may ultimately result in the installation of a
preparation plant. The initial phase of this project would require no financing.
We have a high level of confidence that we will be able to start at least one of
these two projects this year. Although the exact timing of the three projects is
uncertain, they are all considered to have a high probability of activity.
However, no definitive contracts have as yet been signed, and there is no
assurance that the required financing will be obtained or that any or all of the
projects will materialize.
Development activity in the China Segment, meanwhile, has been plagued by
delays. Although we had reached agreements and/or formed Cooperative Joint
Ventures ("CJV's") with various Chinese partners which called for the
construction of three compost manufacturing facilities in which the Company
would own an interest and receive an operating fee, two of these (Baoding and
Qihe City) are now on indefinite hold pending resolution of some of the
financing terms. It appears that the third CJV, which calls for the construction
of a plant in the City of Handan and which had been on indefinite hold, is now
poised to move forward. Terms of a financing arrangement have now been verbally
agreed to with third parties in the U.S., and definitive agreements are in the
process of being prepared. In the event these projects materialize they would
result in contracts in which the segment would receive front-end fees, but might
or might not have an equity interest. The segment is continuing to pursue a
number of other projects, several of which are believed to have a high
probability of occurrence. It now appears that only Handan may materialize in
2002, with the other projects falling into 2003 and beyond.
Key to the Company's liquidity is the anticipated settlement of a lawsuit,
in which the Company is a Plaintiff, which has been in progress since 1996. A
Settlement Agreement was signed by the parties in September of 2001. On May 6,
2002, the federal judge issued the Final Judgment approving the Settlement and
ordered that a settlement fund of $50.4 million in cash be established to settle
the class action lawsuit. In companion rulings on the same date the Judge also
approved the allocation of settlement funds among the class members in the
lawsuit. Distribution of the proceeds will be delayed until all appeal periods
have run. The Company anticipates its share of the proceeds will be in excess of
$3.5 million. Distribution of the contemplated proceeds will have a significant
impact upon the Company's liquidity. In late May, 2002, objectors entitled to
receive approximately $107,000 of the total settlement filed an appeal to the
final approval of the settlement. Although there is the possibility that the
appeals process could delay the Settlement into late 2003 or possibly early 2004
or that objecting parties could ultimately cause the Settlement to be
overturned, the Company believes it is unlikely that the Settlement will be
overturned.
In addition, the Company expects to generate cash from the disposition of
the remaining assets from the discontinued ITF, BE/IM and WS Segments and from
the pay down of notes receivable, and can sell certain other assets to generate
cash if necessary.
The Company believes that the cash generated from the private debt
placement, coupled with remaining credit lines and the cash generated from the
sale of assets, will be adequate to enable the Company to continue operations
until (i) the settlement funds have been received or (ii) the operations of the
projects under development in the Coal and China Segments have come on stream
and the Company is generating positive cash flow.
Through the period ending December 31, 2002, the Company's liquidity will
be reduced to the extent it is required to redeem any of the Beard preferred
stock pursuant to the mandatory redemption provisions. See Note 4 to the
accompanying financial statements.
MATERIAL CHANGES IN RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2002 AS
COMPARED WITH THE QUARTER ENDED JUNE 30, 2001.
The net loss for the second quarter of 2002 was $560,000 compared to
$489,000 for the 2001 second quarter. Continuing operations posted a net loss of
$505,000 compared to a loss from continuing operations of $342,000 for the same
period in 2001. In addition, the Company had losses from discontinued operations
of $55,000 for the second quarter of 2002 compared to a loss of $147,000 for the
comparable quarter of 2001.
The operating loss in the Coal Segment increased by $15,000. The operating
profit in the CO2 Segment decreased $5,000. The e-Commerce Segment incurred
operating losses of $39,000 for the second quarter of 2002 compared to $52,000
in the second quarter of 2001. The operating loss in Other activities for the
second quarter of 2002 increased $11,000 compared to the same period in 2001. As
a result, the operating loss for the current quarter increased $18,000 to
$353,000 versus $335,000 in the corresponding quarter of the prior year.
Operating results of the Company's primary operating Segments are reflected
below:
2002 2001
---- ----
Operating profit (loss):
Coal reclamation $(139,000) $(124,000)
Carbon dioxide 81,000 86,000
China - -
e-Commerce (39,000) (52,000)
------- -------
Subtotal (97,000) (90,000)
Other (256,000) (245,000)
-------- --------
$(353,000) $(335,000)
========= =========
The "Other" in the above table reflects primarily general and corporate
activities, as well as other activities of the Company.
Coal reclamation
The segment's revenues decreased $34,000 to $11,000 for the second quarter
of 2002 compared to $45,000 for the same period in 2001 as a result of
performing fewer small consulting and coring jobs in the year 2002. Operating
costs decreased $17,000 to $114,000 for the second quarter of 2002 compared to
$131,000 for the same period in 2001. The decrease was primarily attributable to
significantly lower labor costs related to the drilling work performed in 2002
versus 2001 as a result of a reduction in staffing and the reduction in the
number of jobs. SG&A costs decreased $3,000 for the second quarter of 2002
compared to the same period in 2001. As a result, the operating loss for the
second quarter of 2002 increased $15,000 to $139,000 compared to $124,000 in the
second quarter of 2001.
Carbon dioxide
Second quarter 2002 operations reflected an operating profit of $81,000
compared to $86,000 for the 2001 second quarter. The sole component of revenues
for this segment is the sale of CO2 gas from the working and overriding royalty
interests of the Company's two carbon dioxide producing units in Colorado and
New Mexico. Operating revenues in this segment decreased $7,000 to $109,000 for
the second quarter of 2002 compared to $116,000 for the same period in 2001. The
decrease in revenue for the current quarter was primarily due to lower pricing,
with the Company receiving an average of $0.30 per mcf sold in the 2002 quarter
versus $0.41 per mcf in the year earlier quarter. Paid volumes were actually up
82,000 mcf in the current quarter versus a year ago due to underproduction in
the prior year quarter.
China
Effective January 1, 2001, the operations of this segment are being
conducted through an affiliate. The results of operations for the second quarter
of 2002 and 2001 were losses of $122,000 and $89,000, respectively, and are
included in equity in operations of unconsolidated affiliates discussed below.
The segment had no revenues in either the second quarter of 2002 or 2001.
e-Commerce
The Company's startup company involved in the development of a secure
Internet purchasing system incurred an operating loss of $39,000 for the second
quarter of 2002 versus an operating loss of $52,000 in the prior year quarter.
The segment has cut back its pursuit of strategic alliances pending the issuance
of pending patent claims. The segment had no revenues in either the second
quarter of 2002 or 2001 while pursuing the development of its technology.
Other corporate activities
Other corporate activities include general and corporate operations, as
well as assets unrelated to the Company's operating segments or held for
investment. These activities generated operating losses of $256,000 for the
second quarter of 2002 as compared to $245,000 for the same period of 2001. This
increase in operating losses was due primarily to increased amortization expense
associated with the capitalized cost of issuing the 10% subordinated debt.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") in the
current quarter decreased to $307,000 from $326,000 in the 2001 second quarter.
The primary reason for this was a $12,000 decrease in SG&A expenses incurred by
the e-Commerce Segment as it shifted focus from the development of its
technology to concentrate on developing licensing arrangements and other fee
based arrangements with companies implementing technology in conflict with
starpay's intellectual property. Other operations incurred $4,000 less in SG&A
as the Company continued its efforts to reduce costs.
Depreciation, depletion and amortization expenses
DD&A expense increased $15,000 from $21,000 in the second quarter of 2001
to $36,000 in the same period of 2002. The increase was due primarily to
increased amortization expense associated with the capitalized costs of issuing
the 10% subordinated debt.
Other income and expenses
The other income and expenses for the second quarter of 2002 netted to a
loss of $152,000 compared to a loss of $7,000 for the same period in 2001.
Interest income was down $3,000 for the second quarter of 2003 compared to the
same period in 2001. Interest expense was $47,000 higher as a result of the
increase in debt, primarily to related parties and the issuance of the
subordinated debt. The Company realized a gain on sale of assets for the three
months ended June 30, 2002 of $1,000 versus $51,000 in the prior year second
quarter.
The Company's equity in the operations of unconsolidated affiliates was a
loss of $89,000 for the second quarter of 2002 compared to a loss of $49,000 for
the same period in 2001. The Company's equity in the earnings of Cibola
decreased $7,000 from $40,000 for the second quarter of 2001 to $33,000 for the
same period in 2002 reflecting Cibola's decline in operating results. Through a
wholly-owned subsidiary, the Company is pursuing contracts and formed
Cooperative Joint Ventures ("CJV's") or similar arrangements with various
Chinese partners for the construction of facilities and the marketing and sale
of organic-chemical compound fertilizer ("OCCF") utilizing two types of organic
waste materials: sewage sludge and crop-residual agri-waste. The personnel
employed by the subsidiary devote all their time and energies to the development
of the business related to the technology utilized by the CJV's. The Company's
share of the losses from these operations were $122,000 and $89,000 for the
three months ended June 30, 2002 and 2001, respectively.
Income taxes
The Company made no provision for income taxes in the second quarter of
2002 or 2001. The Company has not recorded any financial benefit attributable to
its various tax carryforwards due to uncertainty regarding their utilization and
realization.
Discontinued operations
ITF Segment
In 1999 the Company's Board of Directors adopted a formal plan to
discontinue its interstate travel facilities ("ITF") Segment and recorded a
$1,603,000 estimated loss for the discontinuance in 1998. ITF disposed of a
majority of its assets in 1999, retaining two convenience stores ("C-stores"),
including their equipment and inventory, and Beard became 100% owner of ITF.
Beard recorded an additional $420,000 loss in 2000; $60,000 represented
operating losses expected to be incurred by the discontinued ITF Segment prior
to the anticipated disposal date of the remaining assets; $360,000 represented
an additional reduction in the estimated realizable value of the remaining
C-stores and related assets as of December 31, 2000. The discontinued ITF
Segment had no revenues for the three months ended June 30, 2001. ITF's actual
operating loss for the three months June 30, 2001 was $6,000 which was charged
against the loss accrual recorded in the fourth quarter of 2000.
In December 2001, Beard recorded an additional $100,000 impairment in the
carrying value of the facilities and $14,000 for anticipated operating losses
for the period from December 31, 2001 through the expected disposal date of the
remaining assets. ITF recorded no revenues for the second quarter of 2002 and
incurred $2,000 in losses for the three months ended June 30, 2002 which were
charged against the loss accrual recorded in 2001. Included in this loss was a
$2,000 gain on the sale of equipment.
As of June 30, 2002, the significant assets related to the ITF Segment
consisted primarily of the two remaining C-stores with a total recorded value of
$406,000. The significant liabilities of the segment consisted of trade accounts
payable and accrued expenses totaling $11,000. Beard is actively seeking
opportunities to sell the remaining C-stores and expects them to be sold by
December 31, 2002.
BE/IM Segment
In 1999 the Management Committee of North American Brine Resources ("NABR")
adopted a formal plan to discontinue the business and dispose of its assets.
Beard had a 40% ownership in NABR, which was accounted for under the equity
method. As a result, Beard's share of NABR's operating results has been reported
as discontinued for all periods presented in the accompanying statements of
operations. The joint venture was dissolved in September 2000 and the Japanese
partners received their final distribution of cash in December 2000, with the
Company taking over the remaining assets and liabilities.
In 1999 Beard recorded a $540,000 loss, which represented its share of
NABR's $1,350,000 estimated loss from the discontinuation of operations. NABR's
loss included $572,000 of anticipated operating losses through April 2000 (the
date operations ceased for the larger of its two plants) and costs of ceasing
operations. NABR's revenues for the smaller of the two plants were $43,000 and
$116,000 for the three months ended June 30, 2002 and 2001, respectively. NABR's
operating losses for the three months ended June 30, 2002 were $30,000 and were
not anticipated in the loss accruals recorded in 1999. NABR charged $5,000 for
the three months ended June 30, 2002, against the accrual for anticipated
expenses related to the shutdown of the larger of its two plants. NABR's actual
operating losses for the three months ended June 30, 2001, were $12,000 which
were charged against the loss accrual recorded in 1999. In addition, NABR
recorded a loss of $1,000 for the three month period ending June 30, 2001 for
the operation of the smaller of the two plants distributed to Beard from NABR.
This loss was not anticipated in the loss accrual of 1999.
As of June 30, 2002, the significant assets related to NABR's operations
consisted primarily of equipment and inventory with estimated net realizable
values of $68,000 and $7,000 respectively. The significant liabilities related
to NABR's operations consisted primarily of accounts payable of $4,000 and
accrued expenses related to the shutdown of operations totaling $146,000. The
Company is actively pursuing opportunities to sell NABR's assets and expects the
disposition to be completed by December 31, 2002.
WS Segment
In May 2001 the fixed assets of the 50%-owned company (accounted for as an
equity investment) involved in natural gas well testing operations for the
Natural Gas Well Servicing ("WS") Segment were sold for $1,550,000, subject to a
holdback of $150,000. The Company received $21,000 and $65,000 of the holdback
in June and November, respectively, of 2001. In May 2002 the Company received
$35,000, net of attorney's fees of $29,000, representing the remainder of the
holdback. As a result of the sale all debt of the 50%-owned company was retired
and the Company was relieved of contingent liabilities totaling $512,000. 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 the second quarter of 2002 and $3,000
of revenues for the first quarter of 2001. Beard's share of operating losses
from the discontinued segment were $25,000 and $145,000 for the three months
ended June 30, 2002 and 2001 respectively. For the second quarter of 2001,
Beard's share of operating losses from the 50%-owned company were $75,000,
comprised of a provision for estimated losses from the discontinuation of
operations. The remaining $72,000 of losses incurred in the three months ended
June 30, 2001 were associated with the operations of the wholly-owned company
and were not anticipated in the loss accrual.
As of June 30, 2002, the significant assets of the WS Segment consisted of
fixed assets with a recorded value of $141,000 and cash and accounts receivable
totaling of $18,000. The significant liabilities of the segment consisted of
trade accounts payable and accrued expenses totaling $58,000. It is anticipated
that all liabilities of the segment will be paid prior to December 31, 2002.
ER Segment
In March of 2001 the Company determined that it would no longer provide
financial support to ISITOP, Inc., an 80%-owned subsidiary whose operations had
previously comprised the Company's environmental remediation ("ER") Segment. In
May 2001 ISITOP was notified that the segment's exclusive U.S. marketing license
for the chemical used for PAH remediation had been cancelled, and the segment
was discontinued. ISITOP generated no revenues in 2002 or in 2001. ISITOP's
operating losses for the three months ended June 30, 2002 and 2001, totaled less
than $1,000 for either quarter. ISITOP had no significant assets or liabilities
at June 30, 2002.
MATERIAL CHANGES IN RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2002 AS
COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001.
The net loss for the six months ended June 30, 2002 was $1,021,000,
compared to a net loss of $1,073,000 for the first six months of the prior year.
Continuing operations posted a net loss of $918,000 compared to a net loss of
$616,000 after tax credits of $60,000 for the same period in 2001. In addition,
the Company had losses from discontinued operations of $103,000 and $457,000 for
the first half of 2002 and 2001, respectively.
Operating results of the Company's primary operating segments are reflected
below:
2002 2001
---- ----
Operating profit (loss):
Coal reclamation $(286,000) $(242,000)
Carbon dioxide 128,000 180,000
China - -
e-Commerce (75,000) (103,000)
------- --------
Subtotal (233,000) (165,000)
Other (471,000) (466,000)
-------- --------
Total $(704,000) $(631,000)
========= =========
The "Other" in the above table reflects primarily general and corporate
activities, as well as other activities and investments of the Company.
Coal reclamation
The Company's coal reclamation revenues decreased to $12,000 for the first
six months of 2002 compared to $97,000 for the same period in 2001 as the result
of obtaining fewer small consulting and coring jobs in the year 2002. Operating
costs decreased $27,000 to $233,000 for the first six months of 2002 compared to
$260,000 for the same period in 2001. SG&A costs also decreased, dropping to
$55,000 for the first six months of 2002 compared to $69,000 for the same period
in 2001. As a result, the operating loss for the first six months of 2002
increased $44,000 to $286,000 for the first six months of 2002 compared to
$242,000 in the first six months of 2001.
Carbon dioxide
Operations for the first six months of 2002 resulted in an operating profit
of $128,000 compared to a $180,000 operating profit for the 2001 first half. The
sole component of revenues for this segment is the sale of CO2 gas from the
working and overriding royalty interests of the Company's two carbon dioxide
producing units in Colorado and New Mexico. Operating revenues in this segment
decreased $47,000 or 19% to $195,000 for the first six months of 2002 compared
to $242,000 for the same period in 2001. The Company recorded $5,000 more in
operating costs associated with the properties in the first half of 2002
compared to the same period in 2001. Production volumes for the McElmo Dome
field increased for the first six months of 2002 compared to the same period in
2001. The decrease in revenue for the current six months was entirely due to
lower pricing, with the Company receiving an average of $0.26 per mcf sold in
the first six months of 2002 versus $0.42 per mcf in the year earlier period.
Paid volumes were actually up 174,000 mcf in the current six months versus a
year ago due to underproduction in the prior year.
China
Effective January 1, 2001, the operations of this segment are being
conducted through an affiliate. The results of operations for the first six
months of 2002 and 2001 were losses of $195,000 and $177,000, respectively, and
are included in equity in operations of unconsolidated affiliates discussed
below. The segment had no revenues in either the first half of 2002 or 2001.
e-Commerce
The Company's startup company involved in the development of a secure
Internet purchasing system incurred an operating loss of $75,000 for the first
half of 2002 versus an operating loss of $103,000 in the prior year period. The
segment has cut back its pursuit of strategic alliances pending the issuance of
pending patent claims. The segment had no revenues in either the first half of
2002 or 2001 while pursuing the development of its technology.
Other corporate activities
Other corporate activities include general and corporate operations, as
well as assets unrelated to the Company's operating segments or held for
investment. These activities generated operating losses of $471,000 for the
first half of 2002 as compared to $466,000 in the same period of 2001.
Reductions of $6,000 in benefit administration costs and reductions in
professional fees of $24,000 were more than offset by increases in DD&A and
other types of SG&A costs, including higher insurance costs.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") in the
first half of 2002 decreased to $560,000 from $616,000 for the 2001 six months.
The Coal Segment had a decrease in SG&A expenses of $14,000 due primarily to
reductions in staff and associated expenses. The e-Commerce Segment incurred
$28,000 less in SG&A costs as the segment scaled back its pursuit of strategic
alliances. Other operations incurred approximately $11,000 less in SG&A for the
six months of 2002 compared to the same period in 2001 primarily as a result of
the decreased legal costs and by the reduction in other expenses discussed
above.
Depreciation, depletion and amortization expenses
DD&A expense increased $15,000 from $44,000 for the six months ended June
30, 2001 to $59,000 for the same period in 2002. The increase was due primarily
to increased amortization expense associated with the capitalized costs of
issuing the 10% subordinated debt.
Other income and expense
The other income and expenses for the first six months of 2002 netted to a
loss of $214,000 compared to a loss of $45,000 for the same period in 2001.
Interest income was down $17,000 for the first half of 2002 compared to the same
period in 2001. Interest expense was up $75,000 as a result of the increase in
debt, primarily to related parties and as a result of the issuance of the 10%
subordinated debt. The Company realized gains on sale of assets for the first
six months of 2001 totaling $68,000 versus $10,000 in the current year period.
The Company's equity in the operations of unconsolidated affiliates was a
loss of $120,000 for the first six months of 2002 compared to a loss of $106,000
for the same period in 2001. The Company's equity in the earnings of Cibola
increased $3,000 from $71,000 for the first six months of 2001 to $74,000 for
the same period in 2002. Through a wholly-owned subsidiary, the Company has
signed contracts and formed Cooperative Joint Ventures ("CJV's") or similar
arrangements with various Chinese partners for the construction of four
facilities and the marketing and sale of organic-chemical compound fertilizer
("OCCF") utilizing two types of organic waste materials: sewage sludge and
crop-residual agri-waste. The personnel employed by the subsidiary devote all
their time and energies to the development of the business related to the
technology utilized by the CJV's. The Company's share of the losses from these
operations was $195,000 for the first half of 2002 compared to $177,000 for the
first six months of 2001.
Income taxes
The Company recorded no provision for taxes in the first half of 2002
compared to refunds of $41,000 and $19,000 for federal and state income taxes,
respectively, in the first half of 2001. The Company has not recorded any
financial benefit attributable to its various tax carryforwards due to
uncertainty regarding their utilization and realization.
Discontinued operations
ITF Segment
Complete details concerning the discontinuance of the interstate travel
facilities ("ITF") Segment are contained in "Material changes in results of
operations - Quarter ended June 30, 2002 as compared with the Quarter ended June
30, 2001" under the "Discontinued Operations - ITF Segment" heading.
ITF's revenues and actual operating losses were none and $6,000,
respectively, for the six months ended June 30, 2002. The actual losses for the
six months ended June 30, 2002 were charged against the loss accrual recorded in
the fourth quarter of 2001.
ITF's revenues and actual operating losses were $7,000 and $37,000,
respectively, for the six months ended June 30, 2001. The actual losses for the
six months ended June 30, 2001 were charged against the loss accrual recorded in
the fourth quarter of 2000.
BE/IM Segment
Complete details concerning the discontinuance of NABR are contained in
"Material changes in results of operations - Quarter ended June 30, 2002 as
compared with the Quarter ended June 30, 2001" under the "Discontinued
Operations - BE/IM Segment" heading.
The revenues and actual loss for the six months ended June 30, 2002 were
$120,000 and $67,000, respectively. These losses were not anticipated in the
loss accrual recorded in 1999. The Company charged $7,000 in losses against the
accrual for anticipated expenses related to the shutdown of the larger of its
two plants. NABR's actual operating losses for the six months ended June 30,
2001, were $43,000 which were charged against the loss accrual recorded in 1999.
In addition, Beard recorded a loss of $26,000 for the six months ended June 30,
2001 for net operating expenses of the smaller of the two plants distributed to
the Company in 2000. This loss was not anticipated in the loss accrual of 1999.
WS Segment
Complete details concerning the discontinuance of the Company's natural gas
well testing operations in Mexico are contained in "Material changes in results
of operations - Quarter ended June 30, 2002 as compared with the Quarter ended
June 30, 2001" under the "Discontinued Operations - WS Segment" heading.
The Segment recorded no revenues for the first six months of 2002 and
$3,000 of revenues for the first half of 2001. Beard recorded operating losses
of $36,000 and $414,000 for the six-month periods ended June 30, 2002 and 2001,
respectively.
ER Segment
Complete details concerning the discontinuance of the Company's
environmental remediation ("ER") Segment are contained in "Material changes in
results of operations - Quarter ended June 30, 2002 as compared with the Quarter
ended June 30, 2001" under the "Discontinued Operations - ER Segment." heading.
ISITOP had no revenues for either of the six-month periods ended June 30,
2002 or 2001, respectively. The segment's operating losses were less than $1,000
and $17,000 for the six-month periods ended June 30, 2002 and 2001,
respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At June 30, 2002, the Company had notes receivable of $243,000 and
long-term debt of $4,083,000. The notes receivable and $3,958,000 of the
long-term debt have fixed interest rates and therefore, the Company's interest
income and expense and operating results would not be affected by an increase in
market interest rates for these items. At June 30, 2002, a 10% increase in
market interest rates would have reduced the fair value of the Company's notes
receivable by $3,000 and reduced the fair value of its long-term debt by less
than $53,000. The remaining $125,000 of debt bears interest at a variable rate
which is one-half percent above Chase Manhattan prime rate. The Company's
interest expense would be increased by less than $1,000 as a result of a 10%
increase in interest rates on this variable rate debt.
The Company has no other market risk sensitive instruments.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
The Company's preferred stock is mandatorily redeemable through December
31, 2002 from one-third of Beard's "consolidated net income" as defined in the
Stock Purchase Agreement. Accordingly, one-third of future "consolidated net
income" will accrete directly to preferred stockholders and reduce earnings per
common share. As a result of these redemption requirements, the payment of any
dividends to the common stockholders in the near future is very unlikely. See
Note 4 to the accompanying financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
Commencing on May 17, 2002, proxies were solicited on behalf of the Board
of Directors of the Company in connection with the Annual Meeting of
Stockholders.
(a) The annual meeting was held on June 20, 2002.
(b) The business of the meeting included the election of W. M. Beard to
serve as director for a three-year term or until his successor has been elected
and qualified.
In addition, the following persons continue to serve as directors for terms
expiring on the dates indicated or until their successors have been elected and
qualified:
Allan R. Hallock (2003) Ford C. Price (2003)
Harlon E. Martin, Jr. (2004) Herb Mee, Jr. (2004)
To date the preferred stockholder has not elected to fill the vacancy
created by the resignation of Michael E. Carr who resigned effective February 1,
2002.
The table below sets forth the voting for election of directors:
Votes Votes Votes Broker
Name of Nominee For Against Withheld Abstentions Non-Votes
--------------- --- ------- -------- ----------- ---------
W. M. Beard 1,785,899 -0- 2,029 -0- 154,054
(c) At the meeting the stockholders also voted to approve the appointment
of Cole & Reed, P.C. as independent certified public accountants for fiscal year
2002. The table below sets forth the voting for such proposal:
Votes Votes Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
1,786,324 1,343 261 154,054
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this Form 10-Q and are identified
by the numbers indicated:
2 Plan of acquisition, reorganization, arrangement, liquidation or
succession:
2(a) Agreement and Plan of Reorganization by and among Registrant, Beard
Oil Company ("Beard Oil") and New Beard, Inc., dated as of July 12,
1993 (see Addendum A to Part I, which is incorporated herein by
reference; schedules to the Agreement have been omitted). (This
Exhibit has been previously filed as Exhibit 3(b), filed on July 27,
1993 to Registrant's Registration Statement on Form S-4, File No.
33-66598, and same is incorporated herein by reference).
2(b) Agreement and Plan of Merger by and between The Beard Company and The
New Beard Company, dated as of September 16, 1997. (This Exhibit has
been previously filed as Exhibit B to Registrant's Proxy Statement
filed on September 12, 1997, and same is incorporated herein by
reference).
2(c) Certificate of Merger merging The Beard Company into The New Beard
Company as filed with the Secretary of State of Oklahoma on November
26, 1997. (This Exhibit has been previously filed as Exhibit 2.1 to
Registrant's Form 8-K, filed on December 8, 1997, and same is
incorporated herein by reference).
3(i) Certificate of Incorporation of The New Beard Company as filed with
the Secretary of State of Oklahoma on September 11, 1997. (This
Exhibit has been previously filed as Exhibit C to Registrant's Proxy
Statement filed on September 12, 1997, and same is incorporated herein
by reference).
3(ii) 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(a) 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(b) 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, dated as of April
13, 1995. (This Exhibit has been previously filed as Exhibit 4(g) to
Registrant's Form 10-K for the period ended December 31, 1994 and same
is incorporated herein by reference).
10 Material contracts:
10(a) Extension Promissory Note from Registrant to Bank of Oklahoma, N.A.
("BOK") dated April 15, 2002.
10(b) Extension Promissory Note from Registrant to BOK dated May 15, 2002.
10(c) Form of 10% Subordinated Note due September 30, 2003.
10(d) Form of Warrant.
THE BEARD COMPANY AND SUBSIDIARIES
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.
(b) A report on Form 8-K was filed by the Company on June 3, 2002. The
matter reported was the completion of the sale of $1,200,000 of 10% subordinated
notes to accredited investors in a private placement. An investment banking firm
received 45,000 warrants as part of its sales compensation. In addition, the
purchasers of the notes have the contingent right to receive up to 240,000
warrants depending upon the length of time their notes are held.
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
(Date) August 14, 2002 HERB MEE, JR.
Herb Mee, Jr., President and
Chief Financial Officer
(Date) August 14, 2002 JACK A. MARTINE
Jack A. Martine, Controller and
Chief Accounting Officer
INDEX TO EXHIBITS
2(a) Agreement and Plan of Reorganization incorporated herein by reference
by and among Registrant, Beard Oil
Company ("Beard Oil") and New Beard,
Inc., dated as of July 12, 1993 (see
Addendum A to Part I).
2(b) Agreement and Plan of Merger by and incorporated herein by reference
between The Beard Company and The New
Beard Company, dated as of September
16, 1997.
2(c) Certificate of Merger merging The incorporated herein by reference
Beard Company into The New Beard
Company as filed with the Secretary of
State of Oklahoma on November 26,
1997.
3(i) Certificate of Incorporation of The incorporated herein by reference
New Beard Company as filed with the
Secretary of State of Oklahoma on
September 11, 1997.
3(ii) Registrant's By-Laws as currently in incorporated herein by reference
effect.
4(a) 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(b) Settlement Agreement, with Certificate incorporated herein by reference
of Amendment attached thereto, by and
among Registrant, Beard Oil, New York
Life Insurance Company, New York Life
Insurance and Annuity Company, John
Hancock Mutual Life Insurance Company,
Memorial Drive Trust and Sensor, dated
as of April 13, 1995.
10(a) Extension Promissory Note from filed herewith electronically
Registrant to Bank of Oklahoma, N.A.
("BOK") dated April 15, 2002.
10(b) Extension Promissory Note from filed herewith electronically
Registrant to BOK dated May 15, 2002.
10(c) Form of 10% Subordinated Note due filed herewith electronically
September 30, 2003.
10(d) Form of Warrant. filed herewith electronically