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 September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 001-12396
THE BEARD COMPANY
(Exact name of registrant as specified in its charter)
Oklahoma 73-0970298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Enterprise Plaza, Suite 320
5600 North May Avenue
Oklahoma City, Oklahoma 73112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 842-2333
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of October 31, 2004.
Common Stock $.0006665 par value - 4,839,565
THE BEARD COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements...........................................3
Balance Sheets - September 30, 2004 (Unaudited) and
December 31, 2003...................................................3
Statements of Operations - Three Months and Nine Months
ended September 30, 2004 and 2003 (Unaudited).......................4
Statements of Shareholders' Equity (Deficiency) - Year ended
December 31, 2003 and Nine Months ended September 30, 2004
(Unaudited).........................................................5
Statements of Cash Flows - Nine Months ended
September 30, 2004 and 2003 (Unaudited).............................6
Notes to Financial Statements (Unaudited)...............................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....23
Item 4. Controls and Procedures.......................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...25
Item 3. Defaults Upon Senior Securities...............................25
Item 4. Submission of Matters to a Vote of Security Holders...........25
Item 5. Other Information.............................................25
Item 6. Exhibits......................................................25
Signatures..................................................................26
THE BEARD COMPANY AND SUBSIDIARIES
Balance Sheets
September 30, 2004 (Unaudited) and December 31, 2003
September 30, December 31,
Assets 2004 2003
-------------------- ---------------------
Current assets:
Cash and cash equivalents $ 291,000 $ 216,000
Accounts receivable, less allowance for doubtful
receivables of $97,000 in 2004 and 2003 125,000 89,000
Prepaid expenses and other assets 101,000 34,000
Assets of discontinued operations held for sale 40,000 55,000
-------------------- ---------------------
Total current assets 557,000 394,000
-------------------- ---------------------
Investments and other assets 102,000 81,000
Property, plant and equipment, at cost 2,048,000 1,843,000
Less accumulated depreciation, depletion and amortization 1,433,000 1,392,000
-------------------- ---------------------
Net property, plant and equipment 615,000 451,000
-------------------- ---------------------
Intangible assets, at cost 134,000 183,000
Less accumulated amortization 97,000 168,000
-------------------- ---------------------
Net intangible assets 37,000 15,000
-------------------- ---------------------
$ 1,311,000 $ 941,000
==================== =====================
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Trade accounts payable $ 192,000 $ 133,000
Accrued expenses 405,000 325,000
Short-term debt - 32,000
Short-term debt - related entities - 661,000
Current maturities of long-term debt 181,000 5,000
Current maturities of long-term debt - related entities 246,000 -
Liabilities of discontinued operations held for sale 96,000 92,000
-------------------- ---------------------
Total current liabilities 1,120,000 1,248,000
-------------------- ---------------------
Long-term debt less current maturities 324,000 1,215,000
Long-term debt - related entities 3,319,000 3,668,000
Other long-term liabilities 195,000 143,000
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 and $.001333 par value per share;
15,000,000 and 7,500,000 authorized; 4,657,690 and 2,328,845
shares issued and outstanding in 2004 and 2003, respectively 3,000 3,000
Capital in excess of par value 38,139,000 37,941,000
Accumulated deficit (42,663,000) (44,151,000)
Accumulated other comprehensive loss (15,000) (15,000)
-------------------- ---------------------
Total shareholders' equity (deficiency) (3,647,000) (5,333,000)
-------------------- ---------------------
Commitments and contingencies (note 7)
$ 1,311,000 $ 941,000
==================== =====================
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,
2004 2003 2004 2003
-------------- --------------- -------------- --------------
Revenues:
Coal reclamation $ 52,000 $ 17,000 $ 70,000 $ 59,000
Carbon dioxide 197,000 120,000 523,000 363,000
China - - - -
e-Commerce - - 29,000 25,000
Other - - - 1,000
-------------- --------------- -------------- --------------
249,000 137,000 622,000 448,000
-------------- --------------- -------------- --------------
Expenses:
Coal reclamation 230,000 139,000 504,000 409,000
Carbon dioxide 27,000 26,000 103,000 90,000
China 134,000 189,000 411,000 526,000
e-Commerce 31,000 28,000 89,000 87,000
Other 6,000 4,000 18,000 22,000
Selling, general and administrative 205,000 220,000 635,000 668,000
Depreciation, depletion & amortization 25,000 50,000 63,000 148,000
Impairment of long-lived assets - 64,000 - 64,000
-------------- --------------- -------------- --------------
658,000 720,000 1,823,000 2,014,000
-------------- --------------- -------------- --------------
Operating profit (loss):
Coal reclamation (185,000) (122,000) (441,000) (350,000)
Carbon dioxide 160,000 85,000 390,000 245,000
China (133,000) (188,000) (411,000) (526,000)
e-Commerce (33,000) (30,000) (65,000) (67,000)
Other, primarily corporate (218,000) (328,000) (674,000) (868,000)
-------------- --------------- -------------- --------------
(409,000) (583,000) (1,201,000) (1,566,000)
Other income (expense):
Interest income 1,000 1,000 2,000 2,000
Interest expense (156,000) (136,000) (415,000) (399,000)
Equity in operations of unconsolidated affiliates 73,000 61,000 211,000 170,000
Gain on settlement - 1,151,000 2,943,000 1,151,000
Gain on sale of assets 11,000 - 87,000 1,000
Other (2,000) (220,000) (7,000) (225,000)
-------------- --------------- -------------- --------------
Earnings (loss) from continuing operations
before income taxes (482,000) 274,000 1,620,000 (866,000)
Income taxes (27,000) - (136,000) -
-------------- --------------- -------------- --------------
Earnings (loss) from continuing operations (509,000) 274,000 1,484,000 (866,000)
Loss from discontinued operations (3,000) (18,000) 4,000 (13,000)
-------------- --------------- -------------- --------------
Net earnings (loss) $ (512,000) $ 256,000 $ 1,488,000 $ (879,000)
============== =============== ============== ==============
Net earnings (loss) per average common share outstanding:
Basic:
Earnings (loss) from continuing operations $ (0.09) $ 0.06 $ 0.27 $ (0.20)
Loss from discontinued operations (0.00) (0.00) 0.00 (0.00)
-------------- --------------- -------------- --------------
Net earnings (loss) $ (0.09) $ 0.06 $ 0.27 $ (0.20)
============== =============== ============== ==============
Net earnings (loss) per average common share outstanding:
Diluted:
Earnings (loss) from continuing operations $ (0.09) $ 0.06 $ 0.22 $ (0.20)
Loss from discontinued operations (0.00) (0.00) 0.00 (0.00)
-------------- --------------- -------------- --------------
Net earnings (loss) $ (0.09) $ 0.06 $ 0.22 $ (0.20)
============== =============== ============== ==============
Weighted average common shares outstanding -
Basic 5,471,000 4,362,000 5,471,000 4,283,000
============== =============== ============== ==============
Diluted 5,471,000 4,618,000 6,736,000 4,283,000
============== =============== ============== ==============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Shareholders' Equity (Deficiency)
Total
Accumulated Common
Capital in Other Shareholders'
Preferred Common Excess of Accumulated Comprehensive Treasury Equity
Stock Stock Par Value Deficit Income Stock (Deficiency)
---------- ---------- ------------ ------------- ------------ ------------ ------------
Balance, December 31, 2002 $ - $ 3,000 $38,207,000 $(41,182,000) $(15,000) $(1,846,000) $(4,833,000)
Net loss - - - (1,611,000) - - (1,611,000)
Comprehensive income:
Foreign currency translation
adjustment - - - - - - -
------------
Comprehensive loss - - - - - - (1,611,000)
------------
Expiration of mandatory redemption
option for preferred stock 889,000 - - - - - 889,000
Issuance of stock warrants - - 24,000 - - - 24,000
Reservation of shares pursuant to deferred
compensation plan - - 198,000 - - - 198,000
Issuance of shares pursuant to termination
of deferred stock compensation plan - - (488,000) (1,358,000) - 1,846,000 -
---------- ---------- ------------ ------------- ----------- ------------ ------------
Balance, December 31, 2003 889,000 3,000 37,941,000 (44,151,000) (15,000) - (5,333,000)
Net earnings, nine months ended
September 30, 2004 (unaudited) - - - 1,488,000 - - 1,488,000
Comprehensive income:
Foreign currency translation
adjustment (unaudited) - - - - - - -
------------
Comprehensive loss (unaudited) - - - - - - 1,488,000
------------
Issuance of stock warrants (unaudited) - - 50,000 - - - 50,000
Reservation of shares pursuant to deferred
compensation plan (unaudited) - - 148,000 - - - 148,000
---------- ---------- ------------ ------------- ----------- ------------ ------------
Balance, September 30, 2004 (unaudited) $ 889,000 $ 3,000 $38,139,000 $(42,663,000) $(15,000) $ - $(3,647,000)
========== ========== ============ ============= =========== ============ ============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
---------------------------------------------
September 30, 2004 September 30, 2003
---------------------------------------------
Operating activities:
Cash received from customers $ 586,000 $ 352,000
Gain on settlement 2,943,000 1,162,000
Cash paid to suppliers and employees (1,967,000) (1,589,000)
Interest received 2,000 1,000
Interest paid (622,000) (129,000)
Operating cash flows of discontinued operations 9,000 (59,000)
--------------------- ---------------------
Net cash provided by (used in) operating activities 951,000 (262,000)
--------------------- ---------------------
Investing activities:
Acquisition of property, plant and equipment (105,000) (20,000)
Acquisition of intangibles (3,000) -
Proceeds from sale of assets 136,000 1,000
Proceeds from sale of assets of discontinued operations 49,000 231,000
Proceeds from redemption of bond 201,000 -
Investment in and advances to fifty percent-owned
subsidiary in Mexico - (2,000)
Investment in and advances to fifty percent-owned
investment in China - (83,000)
Advances for notes receivable - (2,000)
Payments on notes receivable - 2,000
Other (62,000) 126,000
--------------------- ---------------------
Net cash provided by investing activities 216,000 253,000
--------------------- ---------------------
Financing activities:
Proceeds from term notes 650,000 879,000
Payments on line of credit and term notes (1,396,000) (826,000)
Proceeds from related party debt 715,000 406,000
Payments on related party debt (1,070,000) (302,000)
Capitalized costs associated with issuance of subordinated debt (36,000) (66,000)
Proceeds from sale of stock warrants 45,000 -
--------------------- ---------------------
Net cash provided by (used in) financing activities (1,092,000) 91,000
--------------------- ---------------------
Net increase in cash and cash equivalents 75,000 82,000
Cash and cash equivalents at beginning of period 216,000 79,000
--------------------- ---------------------
Cash and cash equivalents at end of period $ 291,000 $ 161,000
===================== =====================
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, 2004 September 30, 2003
---------------------------------------------
Net earnings (loss) $ 1,488,000 $ (879,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 63,000 148,000
(Gain) loss on sale of assets (87,000) 1,000
Gain on sale of assets of discontinued operations (33,000) (50,000)
Equity in net (earnings ) loss of unconsolidated affiliates (211,000) (83,000)
Impairment of long-lived assets - 64,000
Net cash used by discontinued operations offsetting
accrued impairment loss (6,000) (9,000)
Noncash compensation expense 152,000 168,000
Other 12,000 -
Increase in accounts receivable, prepaid expenses
and other current assets (102,000) (4,000)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (325,000) 382,000
--------------------- ---------------------
Net cash provided by (used in) operating activities $ 951,000 $ (262,000)
===================== =====================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes Financial Statements
September 30, 2004 and 2003
(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 2003
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 nine-month periods ended
September 30, 2004, 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
continuing to pursue 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.
All share, per share and exercise price figures referred to have been
adjusted to reflect the 2-for-1 stock split effective August 6, 2004.
Impairment of Long-Lived Assets
-------------------------------
In the third quarter of 2003, the Company recorded a $64,000 impairment of
long-lived assets in other operations. There were no such impairments in
the current year through the third quarter.
Reclassifications
-----------------
Certain 2003 balances have been reclassified to conform to the 2004
presentation.
(2) Ability to Fund Operations and Continue as a Going Concern
- --- ----------------------------------------------------------
Overview
--------
The accompanying financial statements have been prepared based upon the
Company's belief that it will continue as a going concern. The Company's
revenues from continuing operations had declined in each of the four
preceding years; however, they increased in 2004. The Company has incurred
operating losses and negative cash flows from operations during each of the
last six years. Meanwhile, the Coal Segment is currently pursuing a number
of different projects, which are in various stages of negotiation. Market
conditions in the coal industry have significantly improved in recent
months. In August, 2004 the Company commenced a coal reclamation project
and anticipates commencing its second project in the first quarter of 2005
if it can arrange the necessary financing. Assuming the second project
moves forward as expected, the Company believes it will enable the segment
to achieve profitability for the first time since 1998. The exact timing of
the second project is uncertain and is dependent upon the Company's ability
to obtain the necessary financing. (See "Additional Details" below).
The Company has now received substantially all of the long-awaited
Settlement in the McElmo Dome litigation. A total of $1,162,000 was
received on July 31, 2003, $2,826,000 was received on March 26, 2004, and
$117,000 was received on May 12, 2004. Receipt of the Settlement has
virtually assured that 2004 will be a profitable year.
The Company is continuing to pursue financing for fertilizer projects in
China. Such efforts have not been successful to date; accordingly, the
Company is also pursuing funding for a mini-plant to serve as a
demonstration plant for our licensed technology. In addition, the Company
finalized its first licensing arrangement in its e-Commerce Segment in
March of 2003. Although the e-Commerce licensing arrangement will not make
the segment profitable in 2004, the Company believes the arrangement has
the potential to make the segment profitable in 2005 and subsequent years.
Beginning in January 2002 and continuing through September 30, 2004, the
Company took a number of steps to reduce its negative cash flow. The
Company's Chairman and President each deferred a major portion of their
base salary into the Company's deferred stock compensation plans (the "DSC
Plans"), and the Company's outside directors deferred all of their
directors' fees into such plans. The Chairman of Beard Technologies has
deferred a portion of his salary until the first coal project is generating
positive cash flow. The Company has suspended its 100% matching
contribution (up to a cap of 5% of gross salary) under its 401(k) Plan. In
addition, four private debt placements raised gross proceeds of $3,029,000
during such period. The fourth debt placement totaling $1,200,000, was
completed in June of 2004. The offering raised a net of $1,163,000 of
working capital, after reductions for expenses, for the Company. The notes
were accompanied by warrants to purchase a total of 480,000 shares of Beard
Company stock at exercise prices ranging from $0.135 to $0.23 per share.
The notes bear interest at an annual rate equal to the Wall Street Journal
Prime Rate plus 4%, with a floor of 10% and will mature on November 30,
2006. The Company will pay interest only until November 30, 2004 and will
then amortize the notes with equal payments of principal and interest over
the ensuing eight quarters. The note holders will also collectively receive
at maturity a bonus/production payment equivalent to approximately $1 per
ton for the coal expected to be recovered during the term of the notes from
the second project described above. The total amount for the
bonus/production payment is expected to equal $568,000. As a result of the
estimated bonus/production payment, these notes have an effective interest
rate of 29%. These borrowings were supplemented in November of 2003 by a
loan of $200,000 from a related party, in December of 2003 by a loan of
$103,000 from an unconsolidated subsidiary, and in February and March of
2004 by a $125,000 loan from a local bank. All three of these loans were
repaid in the 2004 second quarter. These measures enabled the Company to
continue operating until the McElmo Dome Settlement was finalized. As a
result there has been a substantial amount of dilution to the Company's
common equity. Since January 2002, 1,158,000 warrants have been issued in
connection with the private debt placements, 181,875 of which were
exercised during the current quarter. In addition, 1,632,000 Stock Units
have been accrued since inception of the plans in the participants'
accounts as a result of deferrals of salary into the DSC Plans. Additional
dilution also occurred due to an adjustment to the Preferred Stock
conversion ratio resulting from the issuance of the warrants and the salary
deferrals. Termination of two of the DSC Plans resulted in the issuance of
1,000,000 common shares in 2003, leaving 632,000 Stock Units accrued in the
remaining plan at September 30, 2004.
Following receipt of the second installment of the McElmo Dome Settlement
on March 26, 2004, the Company paid down $2,620,000 of its indebtedness
which totaled $5,581,000 at year-end 2003. Cash and cash equivalents
increased from $216,000 at December 31, 2003, to $291,000 at September 30,
2004.
Additional Details
------------------
The Company's principal business is coal slurry pond reclamation, and this
is where management's operating attention is primarily focused. Due to
management's efforts and the significant improvement in market conditions
in the coal industry in recent months, the Coal Segment has signed
definitive agreements on two projects and is currently pursuing a number of
other projects which are in various stages of negotiation. In July, 2004
Beard Technologies ("BTI") signed an agreement with a subsidiary of DTE
Energy Company, a New York Stock Exchange listed company based in Detroit,
Michigan. BTI is providing dredging services for the DTE subsidiary during
the initial two-year agreement term. The term is extendible at the other
party's option for an additional term of up to four years. Work commenced
under this contract in August of this year and the segment is now working
24/5 at the Ohio pond site. In September, 2004 the Company announced that
BTI had signed a definitive agreement with a subsidiary of PinnOak
Resources, LLC, a coal mining and energy Company headquartered near
Pittsburgh, Pennsylvania. Under this agreement BTI will construct and
operate a pond fines facility to recover and process clean coal from a pond
(the "Pinnacle Project") during the initial six year term thereof which is
extendible for an additional four years if sufficient clean coal remains at
the end of the initial term. The Pinnacle Project is targeted to be
commenced during the first quarter of 2005 if the financing therefor is
successfully arranged.
The Company is currently pursuing the financing necessary for the Pinnacle
Project through two separate avenues: (i) It has arranged for an investment
banking firm to sell $1,800,000 of 9% convertible subordinated notes (the
"9% Notes") to accredited investors in a private placement on a best
efforts basis. Such offering was commenced on September 15 and is scheduled
to terminate on December 15, 2004. As of November 19, 2004, a total of
$255,000 had been subscribed and closed under the offering, including
$150,000 from directors of the Company. If the maximum amount of the
offering is raised, most of it may be infused as working capital into a
wholly-owned subsidiary of the Company to provide a portion of the equity
needed to obtain the necessary financing for the Pinnacle Project which the
Company expects to commence in early 2005. In such event, the balance of
the equity would be provided by equipment contributed by the Coal Segment.
(ii) As an alternative, the Company has also retained a separate investment
banking firm to arrange a term loan through a private placement to
institutional lenders on a best efforts basis to totally finance the
Pinnacle Project and up to three other pond recovery projects. It is
contemplated that the term loan would be in an amount up to $25,250,000.
It is not possible at this point to determine which, if either, of the
financing avenues will be successfully achieved. Nor is there any assurance
that the remainder of the 9% Notes will be sold, that the required
financing will be successfully arranged, that the term loan will be
successfully arranged, or that any of the four pond recovery projects will
proceed.
The securities offered in these private debt placements will not be
registered under the Securities Act of 1933 and may not be offered or sold
in the United States absent registration or an applicable exemption from
the registration requirements.
The China Segment has obtained exclusive license agreements for two
composting technologies and has been pursuing financing for fertilizer
projects in several different areas. The Company is of the opinion that
there is an adequate market for a number of such projects in each of the
areas involved. During the last six months the segment has spent
considerable time designing a mini-plant which will (i) cost approximately
$1,600,000, and (ii) serve as the show case for the segment's technology.
The Company will continue to seek financing for this plant. To date no
financing commitments have been received, and there is no assurance that
such financing efforts will be successful.
In addition, in April of 2004, the Company received cash of approximately
$122,000 from the sale of a portion of the property in a real estate
limited partnership. The Company also generated cash of $93,000 from the
sale of assets from two of its discontinued segments during the first nine
months of 2004, and expects to generate at least $26,000 more from the
disposition of the remaining assets by year-end. It also has certain other
assets it can sell to generate cash if necessary.
The Company believes that if the current financing efforts are successful,
they will provide sufficient working capital to sustain the Company's
activities until the operations of the projects under development in the
Coal Segment have been established and the Company is generating positive
cash flow from operations. If such efforts are not successful or are only
partially successful, then a major restructuring of the Company's
operations will become necessary in the near term in order for the Company
to continue as a going concern.
(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. ITF recorded
no revenues or losses for the first nine months of 2004. The segment also
recorded no revenues for the first nine months of 2003 and incurred $5,000
of losses for the three and nine-month periods, respectively. The 2003
losses were charged to operations.
As of September 30, 2004, the ITF Segment had no significant assets or
liabilities.
BE/IM Segment
-------------
In 1999 the Management Committee of a joint venture 40%-owned by the
Company adopted a formal plan to discontinue the business and dispose of
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 either of the three or nine-month
periods ended September 30, 2004 or 2003. The Company recorded $6,000 and
$21,000 in earnings for the three and nine-month periods ending September
30, 2004 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. The net losses for the three and
nine-month periods ended September 30, 2003 were $2,000 and $9,000,
respectively, and were charged against the loss accrual.
As of September 30, 2004, 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 $54,000 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, 2004.
WS Segment
----------
In August 2001 the Company made the decision to cease pursuing
opportunities in Mexico and the Natural Gas Well Servicing ("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 2004
or 2003. The Company's share of operating results from the discontinued
segment were losses of $3,000 and $16,000 for the three and nine-month
periods ended September 30, 2004, respectively. The Company recorded losses
of $18,000 and $8,000 for the three and nine-month periods ended September
30, 2003, respectively. Included in these results was a $45,000 gain on the
sale of equipment recorded in the first quarter of 2003.
As of September 30, 2004, the significant assets of the WS Segment
consisted of fixed assets with a recorded value of $39,000. The significant
liabilities of the entity consisted of trade accounts payable and accrued
expenses totaling $41,000. It is anticipated that all liabilities of the
segment will be paid prior to December 31, 2004.
(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 10.3790651 shares on September 30, 2004 (total of 288,932
shares). The conversion ratio will be adjusted as: (i) additional warrants
are issued, (ii) as 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) as convertible notes are issued by the Company.
Fractional shares will not be issued, and cash will be paid in lieu
thereof.
(5) Loss Per Share
- --- --------------
Basic earnings (loss) per share data is computed by dividing earnings
(loss) attributable to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if the Company's
outstanding stock options and warrants were exercised (calculated using the
treasury stock method) and if the Company's preferred stock were converted
to common stock.
Diluted loss per share from continuing operations in the statements of
operations for the three-month period ended September 30, 2004 and the
nine-month period ended September 30, 2003 exclude potential common shares
issuable upon conversion of convertible preferred stock as the effect would
be anti-dilutive. Diluted earnings (loss) per share for the same periods
exclude potential common shares issuable upon exercise of stock options and
warrants, as applicable, as the effect would be anti-dilutive.
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,
2004 2003 2004 2003
------------------------------------- --------------------------------------
Basic EPS:
Weighted average common
shares outstanding 4,839,565 4,359,716 4,839,565 4,280,430
Shares in deferred stock
compensation plan treated
as common stock equivalents 631,571 2,894 631,571 2,894
------------------------------------- --------------------------------------
5,471,136 4,362,610 5,471,136 4,283,324
===================================== ======================================
Diluted EPS:
Weighted average common
shares outstanding 4,839,565 4,359,716 4,839,565 4,280,430
Shares in deferred stock
compensation plan treated
as common stock equivalents 631,571 2,894 631,571 2,894
Convertible Preferred Shares
considered to be common
stock equivalents - 255,516 288,932 -
Warrants issued in connection
with debt offerings treated
as common stock equivalents - - 975,750 -
------------------------------------- --------------------------------------
5,471,136 4,618,126 6,735,818 4,283,324
===================================== ======================================
(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 $27,000 and
$136,000 for federal alternative minimum taxes for the three and nine-month
periods ended September 30, 2004, respectively. The Company recorded no
provision for taxes for the three or nine-month periods ended September 30,
2003.
At September 30, 2004, 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 2004-2008 $ 53,100
Tax depletion carryforward Indefinite $ 3,400
(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 2004
and 2003: Coal, Carbon Dioxide, China and e-Commerce.
The Coal Segment is in the business of operating coal fines reclamation
facilities in the U.S. and provides slurry pond core drilling services,
fine coal laboratory analytical services and consulting services. The CO2
Segment consists of the production of CO2 gas. The China Segment is
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, 2004
------------------
Revenues from
external customers $ 52 $ 197 $ - $ - $ 249
Segment profit (loss) (185) 160 (133) (33) (191)
Three months ended
------------------
September 30, 2003
------------------
Revenues from
external customers $ 17 $ 120 $ - $ - $ 137
Segment profit (loss) (122) 85 (188) (30) (255)
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
Nine months ended
-----------------
September 30, 2003
------------------
Revenues from
external customers $ 59 $ 363 $ - $ 25 $ 447
Segment profit (loss) (350) 245 (526) (68) (699)
Segment assets 40 491 58 11 600
Reconciliation of total reportable segment loss to consolidated earnings
(loss) from continuing operations before income taxes is as follows for the
three and nine months ended September 30, 2004 and 2003 (in thousands):
For the Three Months For the Nine Months
Ended Ended
----------------------------------------------------------------------
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
----------------- --------------- --------------- ------------------
Total loss for reportable segments $ (191) $ (255) $ (527) $ (699)
Net corporate income (costs)
not allocated to segments (291) 529 2,147 (167)
----------------- --------------- --------------- ------------------
Total consolidated earnings (loss) from
continuing operations before income taxes $ (482) $ 274 $ 1,620 $ (866)
================= =============== =============== ==================
THE BEARD COMPANY AND SUBSIDIARIES
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THE 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, 2003 and results of operations for the
quarter ended September 30, 2004 compared to the prior year third quarter, and
the nine months ended September 30, 2004 compared to the prior year nine 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 2003 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 fertilizer production facilities which utilize the proprietary
composting technology of Real Earth United States Enterprises, Inc. ("REUSE").
The e-Commerce Segment consists of a 71%-owned subsidiary whose activities are
aimed at developing business opportunities to leverage starpay.com, l.l.c.'s
intellectual property portfolio of Internet payment methods and security
technologies.
In 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
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 - September 30, 2004 as compared with
December 31, 2003.
- ------------------------------------------------------------------------------
The following table reflects changes in the Company's financial condition
during the periods indicated:
September 30, December 31, Increase
2004 2003 (Decrease)
------------ ------------ -------------
Cash and cash equivalents $ 291,000 $ 216,000 $ 75,000
Working capital $ (563,000) $ (854,000) $ 291,000
Current ratio 0.50 to 1 0.32 to 1
During the first nine months of 2004, the Company decreased the deficit in
its working capital position by $291,000 from $(854,000) as of December 31, 2003
to $(563,000) as of September 30, 2004. The Company received a total of
$2,943,000 from the second and third installments of the McElmo Dome Settlement.
The Company used $2,620,000 to repay debt and accrued interest, including
$1,348,000 to related parties. The Company placed its 10% Participating Notes,
which infused over $1,163,000 in working capital in the first nine months of
2004. Related entities purchased $700,000 of the 10% Participating Notes.
Proceeds from the sale of assets totaled $186,000 during the first three
quarters of 2004. Net revenue from the Company's interest in its CO2 producing
properties provided $420,000 of working capital for the first nine months of
2004. $441,000 of working capital were used to help fund the operations of the
Coal Segment. The China Segment utilized over $411,000 of working capital.
$65,000 were used to fund the startup activities of the e-Commerce Segment. The
Company received distributions of $139,000 from other investments, including
Cibola, and $45,000 from the exercise of stock warrants to purchase shares of
the Company's common stock. The remainder of the working capital was utilized to
fund other operations.
In 2002 the Company supplemented its $300,000 credit line with a commercial
bank by arranging for an increase in its credit line from an affiliate of the
Company's chairman. The long-term line of credit from the related party was
increased from $2,250,000 in September of 2001 to $3,000,000 in October of 2002
to provide additional working capital, and was supplemented by a $150,000
short-term line of credit from the same party in November of 2002, which was
increased to $375,000 in November of 2003. These lines were supplemented by (i)
four private placements of notes and warrants totaling $3,029,000 which were
completed in 2002, in February and July of 2003 and June of 2004, and (ii) loans
totaling $303,000 from a related party and an unconsolidated subsidiary in
November and December of 2003 and (iii) borrowings on a line of credit from a
bank totaling $125,000 in February and March of 2004. Such funds were needed to
provide additional working capital, improve liquidity and to bridge the gap
until the distribution of the McElmo Dome settlement had been completed. In
addition, the Company has been disposing of the remaining assets from its
discontinued segments as opportunities have become available and is continuing
to pursue the sale of the few remaining assets.
Receipt of the settlement from the McElmo Dome litigation has significantly
improved the Company's balance sheet, income statement, and debt ratios. The
Company received $1,162,000 of the settlement on July 31, 2003, $2,826,000 on
March 26, 2004, and $117,000 on May 12, 2004. Upon receipt of the second
installment of the settlement, the Company was able to eliminate $2,620,000 of
its total indebtedness and accrued interest.
The Company's principal business is coal slurry pond reclamation, and this
is where management's operating attention is primarily focused. Due to
management's efforts and the significant improvement in market conditions in the
coal industry in recent months, the Coal Segment has signed definitive
agreements on two projects and is currently pursuing a number of other projects
which are in various stages of negotiation. In July, 2004 Beard Technologies
("BTI") signed an agreement with a subsidiary of DTE Energy Company, a New York
Stock Exchange listed company based in Detroit, Michigan. BTI is providing
dredging services for the DTE subsidiary during the initial two-year agreement
term. The term is extendible at the other party's option for an additional term
of up to four years. Work commenced under this contract in August of this year
and the segment is now working 24/5 at the Ohio pond site. In September, 2004
the Company announced that BTI had signed a definitive agreement with a
subsidiary of PinnOak Resources, LLC, a coal mining and energy Company
headquartered near Pittsburgh, Pennsylvania. Under this agreement BTI will
construct and operate a pond fines facility to recover and process clean coal
from a pond (the "Pinnacle Project") during the initial six year term thereof
which is extendible for an additional four years if sufficient clean coal
remains at the end of the initial term. The Pinnacle Project is targeted to be
commenced during the first quarter of 2005 if the financing therefor is
successfully arranged.
The Company is currently pursuing the financing necessary for the Pinnacle
Project through two separate avenues: (i) It has arranged for an investment
banking firm to sell $1,800,000 of 9% convertible subordinated notes (the "9%
Notes") to accredited investors in a private placement on a best efforts basis.
Such offering was commenced on September 15 and is scheduled to terminate on
December 15, 2004. As of November 19, 2004, a total of $255,000 had been
subscribed and closed under the offering, including $150,000 from directors of
the Company. If the maximum amount of the offering is raised, most of it may be
infused as working capital into a wholly-owned subsidiary of the Company to
provide a portion of the equity needed to obtain the necessary financing for the
Pinnacle Project which the Company expects to commence in early 2005. In such
event, the balance of the equity would be provided by equipment contributed by
the Coal Segment. (ii) As an alternative, the Company has also retained a
separate investment banking firm to arrange a term loan through a private
placement to institutional lenders on a best efforts basis to totally finance
the Pinnacle Project and up to three other pond recovery projects. It is
contemplated that the term loan would be in an amount up to $25,250,000.
It is not possible at this point to determine which, if either, of the
financing avenues will be successfully achieved. Nor is there any assurance that
the remainder of the 9% Notes will be sold, that the required financing will be
successfully arranged, that the term loan will be successfully arranged, or that
any of the four pond recovery projects will proceed.
The securities offered in these private debt placements will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an applicable exemption from the
registration requirements.
The China Segment has obtained exclusive license agreements for two
composting technologies and has been pursuing financing for fertilizer projects
in several different areas. The Company is of the opinion that there is an
adequate market for a number of such projects in each of the areas involved.
During the last 90 days the segment has spent considerable time designing a
mini-plant which will (i) cost approximately $1,600,000, (ii) be expected to
generate a high return on investment and (iii) serve as the show case for the
segment's technology. The Company will continue to seek financing for this
plant. To date no financing commitments have been received, and there is no
assurance that such financing efforts will be successful.
The Company believes that if the current financing efforts are successful,
they will provide sufficient working capital to sustain the Company's activities
until the operations of the projects under development in the Coal Segment have
been established and the Company is generating positive cash flow from
operations. If such efforts are not successful or are only partially successful,
then a major restructuring of the Company's operations will become necessary in
the near term in order for the Company to continue as a going concern.
Material changes in results of operations - Quarter ended September 30, 2004 as
compared with the Quarter ended September 30, 2003.
- -------------------------------------------------------------------------------
The Company realized a net loss for the quarter ended September 30, 2004 of
$512,000, compared to net earnings of $256,000 for the third quarter of the
prior year. Discontinued operations accounted for $3,000 of the loss in the
third quarter of 2004 compared to $18,000 for the same period in 2003. The Coal
Segment reported a $63,000 increase in operating loss for the quarter. The
operating profit in the CO2 Segment increased $75,000. The China Segment's loss
for the third quarter of 2004 totaled $133,000 compared to $188,000 for the same
period in 2003. The e-Commerce Segment had an operating loss of $33,000 in the
third quarter of 2004 versus $30,000 in the 2003 third quarter. Other activities
generated a $110,000 smaller loss in the third quarter of 2004 than in 2003. As
a result, the operating loss in the third quarter of 2004 was $174,000 less than
in the same period of 2003. Operating results of the Company's primary operating
Segments are reflected below:
2004 2003
--------------- ---------------
Operating profit (loss):
Coal reclamation $ (185,000) $ (122,000)
Carbon dioxide 160,000 85,000
China (133,000) (188,000)
e-Commerce (33,000) (30,000)
--------------- ---------------
Subtotal (191,000) (255,000)
Other (218,000) (328,000)
--------------- ---------------
Total $ (409,000) $ (583,000)
=============== ===============
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 segment's revenues increased to $52,000 in the third quarter of 2004
versus $17,000 in the same period of 2003 because of the DTE project and other
smaller drilling and sampling projects. Operating costs increased $91,000 to
$230,000 for the third quarter of 2004 compared to $139,000 for the same period
in 2003 due to increased levels of activity as the Company prepared for the DTE,
Pinnacle and other projects. DD&A costs increased $7,000 for the third quarter
of 2004 compared to the same period in 2003. As a result, the operating loss for
the third quarter of 2004 increased $63,000 to $185,000 compared to $122,000 in
the third quarter of 2003.
Carbon dioxide
The operating profit for the CO2 Segment increased $75,000 for the third
quarter of 2004 to $160,000 compared to $85,000 for the same period in 2003. 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
increased $77,000 or 64% to $197,000 for the third quarter of 2004 compared to
$120,000 for the same period in 2003. The increase in revenue was primarily due
to an increase in price for the paid volumes to the Company's interest for CO2
gas during the quarter. In addition, paid volumes to the Company's interest were
up roughly 23MMCF for the quarter. The increased revenue was partially offset by
a $1,000 increase in lifting costs for the current quarter.
China
The China Segment incurred an operating loss of $133,000 for the third
quarter of 2004 compared to $188,000 for the same period in 2003. The $55,000
smaller loss for the third quarter of 2004 compared to the same period in 2003
is attributable to lower costs in 2004 associated with the termination of the
relationship with a former partner in China partially offset by increased
expenses relating to the development of projects to utilize the proprietary
composting technology of REUSE.
e-Commerce
The e-Commerce Segment incurred an operating loss of $33,000 for the third
quarter of 2004 versus an operating loss of $30,000 in the prior year quarter.
The slightly larger operating loss for the current year quarter compared to the
prior year quarter was due to increased insurance and travel costs partially
offset by lower professional fees incurred while attempting to develop business
opportunities to leverage its intellectual property portfolio of Internet
payment methods and security technologies. The segment had no revenues in either
the third quarter of 2004 or 2003.
Other 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 $218,000 for the
third quarter of 2004 as compared to $328,000 for the same period of 2003. This
decrease in operating losses was due primarily to decreased amortization expense
associated with the capitalized cost of issuing the 10% subordinated debt,
together with a $64,000 impairment in September of 2003 of certain oil and gas
leases held by the Company with no comparable amounts in the third quarter of
2004.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") in the
current quarter decreased $15,000 to $205,000 from $220,000 in the 2003 third
quarter. The Company realized reductions in several SG&A expense accounts,
including $5,000 less in costs related to the issuance of warrants associated
with the subordinated debt issued in 2002 and 2003 and $8,000 less in legal and
other professional expenses.
Depreciation, depletion and amortization expenses
The third quarter of 2004 reported a decrease in DD&A expense of $25,000,
reflecting a $28,000 decrease in amortization of capitalized costs associated
with the issuance of the subordinated debt in the first quarter of 2003. These
costs were partially offset by a $3,000 increase in depreciation costs
associated with property, plant and equipment.
Impairment of long-lived assets
The Company recorded a $64,000 impairment of its oil and gas leases in the
third quarter of 2003. There was no such expense recorded in the same period of
the current year. The leases are being held for future development or sale.
Other income and expense
Other income and expense for the third quarter of 2004 netted to a loss of
$73,000 compared to earnings of $857,000 for the same period in 2003. Interest
income was unchanged at $1,000 for the third quarter of 2004 compared to the
same period in 2003. Interest expense was $20,000 higher as a result of the
increase in debt, primarily resulting from the issuance of the subordinated
debt.
The Company's equity in operations of unconsolidated affiliates reflected
income of $73,000 for the third quarter of 2004 compared to $61,000 for the same
period in 2003. This reflected the Company's share of the earnings of Cibola
Corporation ("Cibola").
In July of 2003, the Company received $1,151,000 as the first payment in
the McElmo Dome litigation, representing its share as a member of the LLC
Coalition which participated in the suit against the operator. The Company
received the remainder of the settlement in March and May of 2004. The Company
recorded no income related to the litigation in the third quarter of 2004.
Income taxes
The Company provided $37,000 in alternative minimum taxes during the third
quarter of 2004 with no comparable provision for the same period of 2003. 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. ITF recorded no
revenues or losses for either the third quarter of 2004 or 2003.
The ITF Segment had no significant assets or liabilities as of September
30, 2004.
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 either of the three-month periods
ended September 30, 2004 or 2003. The Company recorded $3,000 in losses for the
third quarter of 2004, which were charged against an accrual for anticipated
expenses related to the shutdown of its remaining plant. The net losses for the
three-month period ended September 30, 2003 were $2,000, and were charged
against the loss accrual.
As of September 30, 2004, the significant assets related to the segment's
operations consisted primarily of equipment with no estimated net realizable
value. The significant liabilities related to the segment's operations consisted
primarily of accrued expenses related to the shutdown of operations totaling
$54,000. The Company is actively pursuing opportunities to sell the segment's
assets and expects the disposition to be completed by December 31, 2004.
WS Segment
- ----------
In August 2001 the Company made the decision to cease pursuing
opportunities in Mexico and the Natural Gas Well Servicing ("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 third quarter of 2004 or
2003. The Company's share of operating results from the discontinued segment
were losses of $3,000 and $18,000 for the three-month periods ended September
30, 2004 and 2003, respectively.
As of September 30, 2004, the significant assets of the WS Segment
consisted of fixed assets with a recorded value of $39,000. The significant
liabilities of the segment consisted of trade accounts payable and accrued
expenses totaling $57,000. It is anticipated that all liabilities of the segment
will be paid prior to December 31, 2004.
Material changes in results of operations - Nine months ended September 30, 2004
as compared with the Nine months ended September 30, 2003.
- -------------------------------------------------------------------------------
The Company realized net earnings for the nine months ended September 30,
2004 of $1,488,000 compared to a net loss of $879,000 for the first nine months
of the prior year. Continuing operations posted net earnings of $1,484,000 for
the first nine months of 2004 compared to a loss of $866,000 for the same period
in 2003. Discontinued operations accounted for $13,000 of the net loss for the
2003 period versus $4,000 in earnings for the 2004 period.
Operating results of the Company's primary operating segments are reflected
below:
2004 2003
---------------- ----------------
Operating profit (loss):
Coal reclamation $ (441,000) $ (350,000)
Carbon dioxide 390,000 245,000
China (411,000) (526,000)
e-Commerce (65,000) (67,000)
---------------- ----------------
Subtotal (527,000) (698,000)
Other (674,000) (868,000)
---------------- ----------------
Total $ (1,201,000) $ (1,566,000)
================ ================
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 increased $11,000 to $70,000 for
the first nine months of 2004 compared to $59,000 for the same period in 2003.
This increase was primarily attributable to the start-up on the DTE project in
2004 and more small consulting and coring jobs in the 2004 period than in the
2003 period. Operating costs increased $95,000 to $504,000 for the first nine
months of 2004 compared to $409,000 for the same period in 2003. The increase
was primarily attributable to increases in labor and other overhead costs as the
Segment geared up for the DTE, Pinnacle and other new projects. DD&A costs
increased $7,000 for the first nine months of 2004 compared to the same period
in 2003 because of purchases of additional equipment for the new projects. As a
result, the operating loss for the first nine months of 2004 increased $91,000
to $441,000 compared to $350,000 in the first nine months of 2003.
Carbon dioxide
Operations for the first nine months of 2004 resulted in an operating
profit of $390,000 compared to $245,000 in operating profit for the first nine
months of 2003. 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 increased $160,000 to $523,000 for the first nine months of 2004
compared to $363,000 for the same period in 2003. The Company recorded $13,000
more in operating costs associated with the properties in the first nine months
of 2004 compared to the same period in 2003. Both paid and production volumes
for the McElmo Dome field increased for the first nine months of 2004 compared
to the same period in 2003, accounting for roughly $71,000 of the increase in
revenue. The remainder of the increase in revenue was due primarily to higher
pricing paid to the Company's interest, with the Company receiving an average of
$0.40 per mcf sold in the first nine months of 2004 versus $0.34 per mcf in the
year earlier period.
China
The China Segment incurred an operating loss of $411,000 for the first nine
months of 2004 compared to $526,000 for the same period in 2003 - a $115,000
reduction. For the first nine months of 2003, the Company recorded $88,000 in
losses from its interest in the operations of an unconsolidated affiliate with
no comparable charge in 2004. Additionally, the segment incurred $15,000 less in
legal fees and $14,000 less in rent expense for the nine months in 2004 compared
to the same period in 2003.
e-Commerce
The e-Commerce Segment incurred an operating loss of $65,000 for the first
nine months of 2004 versus an operating loss of $67,000 in the prior year
period. A $4,000 increase in revenue for the first nine months of 2004 compared
to the same period in 2003 accounted for the majority of the difference; a
$2,000 increase in operating expenses accounted for the balance.
Other activities
Other operations, consisting principally of general and corporate
activities, generated a $194,000 smaller operating loss for the first nine
months of 2004 than in the same period last year. The primary reasons for the
decreased loss are: (i) a $76,000 decrease in amortization expense associated
with the issuance of the subordinated debt in 2002; these capitalized costs had
been almost fully amortized by September 30, 2003, and (ii) a $64,000 impairment
of oil and gas leases in 2003 with no comparable impairment in 2004. The Company
experienced minor cost increases in numerous other expense classifications.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") in the
first nine months of 2004 decreased to $635,000 from $668,000 for the 2003 nine
months. Other operations incurred approximately $32,000 less in SG&A for the
nine months of 2004 compared to the same period in 2003, primarily reflecting a
$21,000 decrease in financing costs.
Depreciation, depletion and amortization expenses
DD&A expense decreased $85,000 to $63,000 from $148,000 for the nine months
of 2004 compared to the same period in 2003, primarily as a result of lower
amortization expense relating to the capitalized costs associated with the
issuance of the subordinated debt in the second quarter of 2002 and the second
issue in the first quarter of 2003. These capitalized costs had been almost
fully amortized by the end of the third quarter of 2003.
Impairment of long-lived assets
The Company recorded a $64,000 impairment of its oil and gas leases in the
third quarter of 2003. There was no such expense recorded during the first nine
months of the current year. The leases are being held for future development or
sale.
Other income and expenses
The other income and expenses for the first nine months of 2004 netted to
earnings of $2,821,000 compared to $700,000 for the same period in 2003.
Interest income was unchanged at $2,000 for the first nine months of 2004
compared to the same period in 2003. Interest expense was up $16,000 as a result
of the increase in debt, primarily as a result of the issuance of the 10%
subordinated debt and the debt to related parties. Gains on sale of assets for
the first nine months of 2004 increased $86,000 to $87,000 compared to $1,000 in
the prior year period.
The Company's equity in the earnings of Cibola, an unconsolidated
affiliate, increased $41,000 from $170,000 for the first nine months of 2003 to
$211,000 for the same period in 2004 reflecting Cibola's improved operating
results.
In July of 2003, the Company received $1,151,000 as the first payment in
the McElmo Dome litigation, representing its share as a member of the LLC
Coalition which participated in the suit against the operator. The Company
received the second installment of $2,826,000 in March of 2004 and the third
installment of $117,000 in May of 2004.
Income taxes
The Company recorded $136,000 as a provision for alternative minimum taxes
in the first nine months of 2004 with no similar provision for taxes for the
nine months ended September 30, 2003. 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 September 30, 2004 as compared with the Quarter ended
September 30, 2003" under the "Discontinued Operations - ITF Segment" heading.
ITF recorded no revenues and losses of less than $1,000 for the nine months
ended September 30, 2004. ITF's revenues and actual operating losses were none
and $5,000, respectively, for the nine months ended September 30, 2003. The
actual losses for the nine months ended September 30, 2003 were charged to
operations.
BE/IM Segment
- -------------
Complete details concerning the discontinuance of the segment's operations
are contained in "Material changes in results of operations - Quarter ended
September 30, 2004 as compared with the Quarter ended September 30, 2003" under
the "Discontinued Operations - BE/IM Segment" heading.
The revenues and earnings for the nine months ended September 30, 2004 were
none and $21,000 respectively. Included in the $21,000 in earnings were gains on
the sales of equipment totaling $33,000. In addition, the Company charged $6,000
of expenses against the accrual for loss on shutdown of the operations of the
operation established in 1999. The revenues and actual loss for the nine months
ended September 30, 2003 were none and $9,000, respectively. These losses were
charged against the loss accrual recorded in 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 September 30, 2004 as compared with the
Quarter ended September 30, 2003" under the "Discontinued Operations - WS
Segment" heading.
The segment recorded no revenues for the first nine months of 2004 or 2003.
Beard recorded losses of $16,000 and $8,000 for the first nine months of 2004
and 2003, respectively. The loss for 2003 included a $43,000 gain from the sale
of assets.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At September 30, 2004, the Company had long-term debt of $4,070,000,
including accrued interest to related entities of $81,000. Debt in the amount of
$2,785,000 has fixed interest rates; therefore, the Company's interest expense
and operating results would not be affected by an increase in market interest
rates for this amount. The Company's $1,200,000 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 will require payment of interest only until
November 30, 2004 and the Company will then amortize the notes with equal
payments of principal and interest over the remaining eight quarters. A 10%
increase in market interest rates would have increased the Company's interest
expense by approximately $4,000. At September 30, 2004, a 10% increase in market
interest rates would have reduced the fair value of the Company's long-term debt
by $48,000.
The Company has no other market risk sensitive instruments.
Item 4. Controls and Procedures.
Our principal executive officer and principal financial officer have
participated in and supervised the evaluation of The Beard Company's disclosure
controls and procedures that are designed to ensure that information required to
be disclosed by the issuer in the reports it files is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that the information required
to be disclosed in the reports that it files is accumulated and communicated to
our management, including our principal executive officer or officers and
principal financial officer to allow timely decisions regarding required
disclosure. Based on their evaluation of those controls and procedures as of a
date within 90 days of the date of this filing, our CEO and CFO determined that
the controls and procedures are adequate and effective. The evaluation resulted
in no significant changes in those controls or in other factors that could
significantly affect the controls, and no corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
McElmo Dome Litigation
- ----------------------
The McElmo Dome Settlement became final in July of 2003. The Company
received its $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. The Company has expensed its entire
share, totaling $450,000, of the costs of the litigation. The Settlement
proceeds have resulted in net income of $3,997,000, after alternative minimum
taxes presently estimated at $97,000.
In a separate suit, in which the Company is not a defendant, the parties
who objected to the Settlement have sued the managers of the Coalition alleging
various claims which defendants have denied. The Coalition has held back
approximately $800,000 as a litigation reserve until this matter is resolved to
pay for defense of the case and winding up costs of the Coalition. 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
holdback in addition to the three installments described above.
Visa Litigation
- ---------------
In May of 2003 the Company's 71%-owned subsidiary, starpay.com, l.l.c.,
joined with VIMachine, Inc. in filing 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 a U.S. Patent (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, with
the express written consent of the Defendants, an Amended Complaint. The suit as
amended 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.
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, starpay.com et al. filed Plaintiffs' Patent
Infringement Contentions and Plaintiffs' Supplemental Patent Infringement
Contentions, respectively, detailing Visa's alleged infringement of the majority
of the patent claims depicted in VIMachine's U.S. Patent 5,903,878.
Subsequently, in May 2004, Defendants filed Preliminary Invalidity Contentions
requesting the 878' Patent be found invalid.
From May through October 2004, the Plaintiffs and Defendants submitted
numerous filings related to interpretation of the terms and phrases set out in
the 878' patent claims. A Markman Hearing was held on October 29, 2004, allowing
both parties to present oral arguments before the Court regarding the claim
construction issues. It is anticipated the Court will rule on these issues by
the first quarter of 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Default upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(a) The following exhibits are filed with this Form 10-Q and are
identified by the numbers indicated:
3.1 Certificate of Incorporation of The New Beard Company as filed with the
Secretary of State of Oklahoma on September 20, 2000. (This Exhibit has
been previously filed as Exhibit 3(ii) to Registrant's Form 10-Q for the
period ended September 30, 2000, filed on November 20, 2000, and same is
incorporated herein by reference).
3.2 Registrant's By-Laws as currently in effect. (This Exhibit has been
previously filed as Exhibit 3(ii) to Registrant's Form 10-K for the period
ended December 31, 1997, filed on March 31, 1998, and same is incorporated
herein by reference).
4 Instruments defining the rights of security holders:
4.1 Certificate of Designations, Powers, Preferences and Relative,
Participating, Option and Other Special Rights, and the Qualifications,
Limitations or Restrictions Thereof of the Series A Convertible Voting
Preferred Stock of the Registrant. (This Exhibit has been previously filed
as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to
Registrant's Registration Statement on Form S-4, File No. 33-66598, and
same is incorporated herein by reference).
4.2 Settlement Agreement, with Certificate of Amendment attached thereto, by
and among Registrant, Beard Oil, New York Life Insurance Company, New York
Life Insurance and Annuity Company, John Hancock Mutual Life Insurance
Company, Memorial Drive Trust and Sensor Oil & Gas, Inc., dated as of April
13, 1995. (This Exhibit has been previously filed as Exhibit 4(g) to
Registrant's Form 10-K for the period ended December 31, 1994 and same is
incorporated herein by reference).
10 Material Contracts
10.1 Form of 10% Participating Note due November 30, 2006. (This Exhibit has
been previously filed as Exhibit 10.1 to the Registrant's Form 10-Q for the
period ended June 30, 2004 and same is incorporated herein by reference).
10.2 Form of 2004 Warrant. (This Exhibit has been previously filed as Exhibit
10.2 to the Registrant's Form 10-Q for the period ended June 30, 2004 and
same is incorporated herein by reference).
10.3 Form of 2004 Production Payment. (This Exhibit has been previously filed as
Exhibit 10.3 to the Registrant's Form 10-Q for the period ended June 30,
2004 and same is incorporated herein by reference).
10.4 Dredging Services Agreement by and between DTE Dickerson LLC and Beard
Technologies, Inc., dated July 14, 2004.
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).
32.1 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.
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) November 19, 2004 ___________________________________
Herb Mee, Jr., President and
Chief Financial Officer
/s/ JACK A. MARTINE
(Date) November 19, 2004 ___________________________________
Jack A. Martine, Controller and
Chief Accounting Officer
INDEX TO EXHIBITS
3.1 Certificate of Incorporation of The New Incorporated herein by reference
Beard Company as filed with the Secretary
of State of Oklahoma on September 20,
2000.
3.2 Registrant's By-Laws as currently in Incorporated herein by reference
effect.
4.1 Certificate of Designations, Powers, Incorporated herein by reference
Preferences and Relative, Participating,
Option and Other Special Rights, and the
Qualifications, Limitations or
Restrictions Thereof of the Series A
Convertible Voting Preferred Stock of the
Registrant.
4.2 Settlement Agreement, with Certificate of Incorporated herein by reference
Amendment attached thereto, by and among
Registrant, Beard Oil, New York Life
Insurance Company, New York Life Insurance
and Annuity Company, John Hancock Mutual
Life Insurance Company, Memorial Drive
Trust and Sensor Oil & Gas, Inc., dated as
of April 13, 1995.
10.1 Form of 10% Participating Note due Incorporated herein by reference
November 30, 2006.
10.2 Form of 2004 Warrant. Incorporated herein by reference
10.3 Form of 2004 Production Payment. Incorporated herein by reference
10.4 Dredging Services Agreement by and between Filed herewith electronically
DTE Dickerson LLC and Beard Technologies,
Inc., dated July 14, 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.