SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
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
Securities registered pursuant to Section 12(b) of the Act:
(Name of each exchange on
(Title of each class) which registered)
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0006665 par value
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
requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates of
the registrant, computed by using the last sale price of registrant's common
stock on the OTC Bulletin Board as of the close of business on June 30, 2004,
was $1,773,000. The number of shares outstanding of the registrant's common
stock as of March 28, 2005 was Common Stock $.0006665 par value - 5,245,940
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its 2005 Annual Meeting of
Stockholders are incorporated by reference as to Part III, Items 10, 11, 12, 13
and 14.
THE BEARD COMPANY
FORM 10-K
For the Fiscal Year Ended December 31, 2004
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................3
Item 2. Properties........................................................18
Item 3. Legal Proceedings.................................................18
Item 4. Submission of Matters to a Vote of Security Holders...............20
Item 4a. Executive Officers and Significant Employees of the Registrant....21
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.....23
Item 6. Selected Financial Data...........................................25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation................................26
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk..............................................................37
Item 8. Financial Statements and Supplementary Data.......................39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................64
Item 9A. Controls and Procedures...........................................64
Item 9B Other Information.................................................64
PART III
Item 10. Directors and Executive Officers of the Registrant................64
Item 11. Executive Compensation............................................64
Item 12. Security Ownership of Certain Beneficial Owners and Management....64
Item 13. Certain Relationships and Related Transactions....................65
Item 14. Principal Accountant Fees and Services............................65
PART IV
Item 15. Exhibits, Financial Statement Schedules...........................65
SIGNATURES..................................................................70
THE BEARD COMPANY
FORM 10-K
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 1. BUSINESS (c) NARRATIVE DESCRIPTION OF OPERATING
SEGMENTS - RISK FACTORS," "ITEM 7. 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.
PART I
Item 1. Business.
--------
(a) General development of business.
--- --------------------------------
General. Prior to October, 1993, The Beard Company ("Beard" or the
"Company"), then known as Beard Oil Company ("BOC"), was primarily an oil and
gas exploration company. During the late 1960's we made the decision to
diversify. In 1968 we started a hazardous waste management company, USPCI, Inc.
("USPCI"), which was partially spun off to shareholders in January 1984.
Following two public offerings and several acquisitions USPCI became so
successful that it subsequently listed on the New York Stock Exchange in 1986.
It was acquired by Union Pacific Corporation in 1987-1988 for $396 million ($111
million to BOC stockholders for their residual 28% interest, of which $60
million was distributed to shareholders).
In 1989 BOC founded Beard Investment Company (now The Beard Company) for
the purpose of building new businesses which Beard management believed to have
either high growth potential or better-than-average profit potential. Our goal
has been to nurture each investment to the point where it could sustain its
growth through internal cash flow while cultivating its own outside funding
sources to supplement financing requirements.
In pursuit of this endeavor we have been involved in numerous businesses
during the last 25 years, many of them unsuccessful. We have now reduced our
operating activities down to four segments:
o The coal reclamation ("Coal") Segment, which is in the business of
operating coal fines reclamation facilities in the U.S.;
o The carbon dioxide ("CO2") Segment, which has profitably produced CO2
gas since the early 1980's;
o The China ("China") Segment, which is pursuing environmental
opportunities in China, focusing on the financing, construction and
operation of organic chemical compound fertilizer plants; and
o The e-Commerce ("e-Commerce") Segment, whose current strategy is to
develop business opportunities to leverage starpay's(TM) intellectual
property portfolio of Internet payment methods and security
technologies.
Net Operating Loss Carryforwards. We have approximately $46.8 million of
unused net operating losses ("NOL's") available for carryforward, which expire
between 2006 and 2022. Approximately $44.8 million of such NOL's expire between
2006 and 2008. The loss of the NOL's would have a negative impact on our future
value. If we were to experience an "ownership change" as defined in Section 382
of the Internal Revenue Code, we would be severely limited in our ability to use
our NOL's in the future. Our Certificate of Incorporation contains provisions to
prevent the triggering of such a change by restricting transfers of shares
without the Board of Directors' consent to any person if that person was, or
would thereby become, a holder of 5% or more of the fair market value of our
outstanding capital stock.
Effect of Recent Operations on Liquidity. Sustaining the operating
activities of our unprofitable Coal, China and e-Commerce segments, plus our
overhead, has resulted in a serious outflow of cash during the past several
years. We have managed this cash shortfall through a series of financings and
the sale of various assets, principally those left over from our discontinued
operations. We obtained bank loans totaling $125,000 in February and March of
2004 which were needed to "bridge the gap" until we received the second
installment of the McElmo Dome litigation (the "Settlement". See "Item 3. Legal
Proceedings--McElmo Dome Litigation" for complete details). These loans were
supplemented by private placements of (i) notes and warrants totaling $1,200,000
completed in June of 2004 and (ii) $2,100,000 of convertible notes completed in
October of 2004 and January of 2005. These borrowings were needed to provide
working capital until we obtain the funds necessary to proceed with the Pinnacle
Project (defined below). Any remaining proceeds will be used to finance the
project (See "Coal Reclamation Activities---Projects Under Development").
Upon receipt of the second installment of the Settlement, we paid off all
of our then outstanding $1,529,000 of subordinated notes, plus accrued interest
totaling $63,000, and paid off an additional $564,000 of notes to a related
party, plus accrued interest totaling $464,000.
We have several projects in various stages of development in the Coal
Segment which, subject to arranging necessary financing, we ultimately expect to
mature into operating projects. We have finalized a definitive agreement with
Pinnacle Mining Company, LLC, a coal mining and energy resources company, to
construct and operate a pond fines recovery project in West Virginia (the
"Pinnacle Project") on which we are currently pursuing financing. In addition,
we have arranged for the financing of our initial fertilizer manufacturing plant
in China. Now that the Settlement has been received it is essential that these
projects move forward quickly. If that does not occur, we must pursue additional
outside financing, which would likely involve further dilution to our
shareholders.
Unless the context otherwise requires, references to us herein include our
consolidated subsidiaries, including BOC.
Recent Developments
- -------------------
Oil and Gas Business. On January 19, 2005, we announced that we were back
in the oil and gas business. We reported that in recent years our wholly-owned
subsidiary, BOC, has filed on a number of federal and state oil and gas leases
in the Rocky Mountain area. One of the leases which BOC acquired was a 640-acre
tract covering all of Section 36, Township 3 North, Range 48 West, in Yuma
County, Colorado.
In January of 2004 BOC entered into a Seismic Option - Farmout Agreement
with Vista Resources ("Vista") of Pittsburgh, Pennsylvania. Vista has now
drilled six wells in the Niobrara Formation on the farmout lands. Under the
farmout arrangement BOC was carried for a 22.5% working interest in the #43-36
well and will pay its 22.5% share of the cost of the additional wells. The first
two wells were completed in January of 2005. The Yuma-5 State #43-36 located in
the NE SE of Section 36 had an indicated wellhead open flow of 516 mcfd
(thousand cubic feet per day) and the Yuma-5 State #44-36 located in the SE SE
of Section 36 had an indicated wellhead open flow of 678 mcfd. Pipe was set on
four additional wells in February and March of 2005 which are awaiting
completion and test results.
Preliminary indications are that the wells are expected to have reserves of
approximately 350 to 400 mmcf (million cubic feet) each, with BOC's 22.5% share
of the six wells costing a total of approximately $200,000. Following completion
of the four new wells, we anticipate that they will be placed on production in
the second quarter of 2005, with expected initial production of 150-200 MCF per
day from each well. We believe the wells will be a source of meaningful income
to BOC for a number of years.
Placement of Convertible Subordinated Notes. On January 25, 2005, we
reported that we had completed the sale of $2,100,000 of our 12% Convertible
Subordinated Notes due February 15, 2010 (the "Notes") to a group of private
investors. $255,000 of the Notes were exchanged for notes we had previously
issued. The Notes are convertible into shares of the Company's common stock at
$1.00 per share. The sale of the Notes, net of the exchange and legal and other
costs associated with the offering, provided approximately $1,700,000 of net
proceeds to us in 2005. A portion of the net proceeds will be used to provide us
with the necessary working capital to bridge the gap until we obtain the funds
necessary to proceed with the Pinnacle Project, which we expect to commence
during the second quarter of 2005. The remainder of the net proceeds will be
used to finance the project, if necessary.
Financing of Initial Fertilizer Manufacturing Plant in China. On February
14, 2005, we announced that a private investor has agreed to finance the cost of
our initial fertilizer manufacturing facility in the People's Republic of China
(the "PRC"). Beard Environmental Engineering, L.L.C. ("BEE") and the investor
have formed a limited liability company (the "LLC") that will own the Chinese
operating company that will control and manage the day-to-day operations of the
facility. The investor and BEE have each made a $50,000 cash contribution to and
have a 50% ownership and equity in the LLC. The investor has agreed to loan
funds to the LLC between February 14 and July 1, 2005, that we believe will be
sufficient to fund the capital costs and pre-operating costs of the facility.
The lender can look only to available funds of the LLC for repayment, and we
will not be liable for repayment of the loan.
The initial plant will be located in close proximity to Beijing and will
produce a new, environmentally friendly, Organic Chemical Compound Fertilizer
("OCCF"). The new fertilizer will use up to 62% less chemicals and yet provide
superior performance as compared to chemical fertilizers presently used in the
PRC. The plant is initially targeted to produce about 32,000 metric tons per
year of OCCF with estimated revenues of more than US$5,000,000 annually. The
facility will be sized to permit doubling of production capacity to meet market
demand. We anticipate that production will commence in time for the fall
planting.
CONTINUING OPERATIONS
Coal Reclamation Activities. Our coal reclamation activities, which are
conducted by Beard Technologies, Inc. ("BTI"), comprise the Coal Segment. BTI 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.
Carbon Dioxide Operations. Our carbon dioxide activities comprise the CO2
Segment, consisting of the production of CO2 gas which is conducted through
Beard. We own non-operated working and overriding royalty interests in two
producing CO2 gas units in Colorado and New Mexico.
Operations in China. Our activities in China, which are conducted by Beard
Environmental Engineering, LLC ("BEE") through its consolidated subsidiaries,
comprise the China Segment. BEE and its subsidiaries are pursuing environmental
opportunities in the PRC, focusing on the installation and construction of
plants that manufacture OCCF.
e-Commerce. Our e-Commerce activities, which are conducted by
starpay.com(TM), l.l.c. ("starpay") and its parent, Advanced Internet
Technologies, L.L.C. ("AIT"), comprise the e-Commerce Segment. starpay's current
focus is on developing licensing agreements and other fee based arrangements
with companies implementing technology in conflict with its intellectual
property.
(b) Financial information about industry segments.
--- ----------------------------------------------
Financial information about industry segments is contained in the
Statements of Operations and Note 15 of Notes to the Company's Financial
Statements. See Part II, Item 8---Financial Statements and Supplementary Data.
(c) Narrative description of operating segments.
--- --------------------------------------------
We currently have four operating segments: Coal, CO2, China, and
e-Commerce. All of such activities, with the exception of our CO2 gas production
activities, are conducted through subsidiaries. We, through our corporate staff,
perform management, financial, consultative, administrative and other services
for our subsidiaries.
COAL RECLAMATION ACTIVITIES
Background of Beard Technologies, Inc. In early 1990 we acquired more than
80% of Energy International Corporation ("EI"), a research and development firm
specializing in coal-related technologies. We sold EI in 1994, retaining certain
assets which were contributed to a wholly-owned subsidiary, BTI.
Impact of Section 29. In the late 1990's significant activity in the coal
industry was focused upon the development of fine coal waste impoundment
recovery projects which qualified for Federal tax credits of $20 to $25 per ton
under Section 29 of the Internal Revenue Code. In order to qualify for the tax
credit, the projects had to produce a synthetic fuel (i) from a facility placed
in service before July 1, 1998; (ii) pursuant to a binding contract entered into
before January 1, 1997; and (iii) before January 1, 2008.
The MCN Projects. Beginning in April of 1998, BTI operated six pond
recovery/Section 29 briquetting projects for a subsidiary of MCN Energy Group,
Inc. ("MCN"). At the time this made BTI, to the best of our knowledge, the
largest operator of coal recovery plants in the world. Unfortunately MCN became
concerned that the plants might not qualify for the tax credit and took a
special charge of $133,782,000 at year-end 1998 to completely write off the
projects. In January of 1999 MCN terminated the contracts, which later qualified
for the tax credits. This was a major setback to BTI and had a severe negative
impact on its subsequent income and cash flow.
DTE Dickerson Services Agreement. In July of 2004 BTI entered into an
agreement to provide dredging services and equipment for DTE Dickerson, LLC, a
subsidiary of DTE Energy Company. At the time the agreement was entered into it
was expected to have a material effect upon the Coal Segment's financial results
during the initial two year agreement term. However, BTI was unable to meet the
performance design objectives specified in the agreement which contained some
unusually restrictive requirements. BTI spent approximately $184,000 gearing up
for the project, which generated only $133,000 of revenues. Due to the early
termination of the project on November 30, 2004, BTI incurred a loss of
approximately $158,000 on the project.
Sharp Increase in Natural Gas Prices; Effect on Coal Demand. The recent
sharp increase in natural gas prices has had a major impact upon the electric
power generating industry. It now appears that natural gas will be in
increasingly short supply in future years. As a result, the price of coal when
compared to the price of gas on a Btu basis has become increasingly attractive.
It now appears that coal, which accounts for over 50% of the nation's power
generating capacity, will remain the principal fuel source for electric power
production for a number of years.
The rising price of natural gas has driven the spot price of coal to record
levels that have not been seen in the coal industry since the oil crisis of 1974
and 1975. Many energy economists believe that natural gas prices will remain
high for many years to come. The strong coal market, plus added pressure from
regulatory agencies to more quickly reclaim or re-mine abandoned slurry
impoundments, has sparked renewed interest among pond owners and coal operators
to quickly move forward with pond recovery projects. Many of these recovery
projects have been sitting on the back burner for a number of years because of
marginal coal prices and stagnant demand.
We believe this is an ideal set of circumstances for BTI, which in recent
years has been totally focused on pond recovery. Since the termination of the
MCN agreements BTI has called on numerous coal producers and utilities,
particularly those having ponds which it believes have large reserves of
recoverable coal fines. We have a great deal of expertise in the complicated
business of coal pond recovery. We believe that we are the industry leader and
that most coal operators contact us first when they are interested in having a
pond recovered.
Projects Under Development. This convergence of high coal prices with added
regulatory agency pressure has resulted in BTI having more potential projects on
the drawing board than at any other time in its existence. In September we
announced the signing of an agreement to perform the Pinnacle Project. The
contract has an initial term of six years and is extendible for an additional
four years if sufficient coal reserves remain at the end of the initial term. We
expect to commence the Pinnacle Project during the second quarter of 2005 if we
can successfully arrange the financing therefor.
Currently, we are actively pursuing seven other projects, all but three of
which are located in the Central Appalachian Coal Basin. We also have a number
of other projects in the pipeline for follow up once these projects have come to
a resolution. We have had more coal producers and utilities calling us to
discuss projects in the last year than we have had during the previous 13 years
of BTI's existence.
Status of Financing. We are pursuing the financing necessary to fund the
Pinnacle Project through three separate avenues:
Note Offering. We arranged for an investment banking firm to sell
$1,800,000 of our 9% convertible subordinated notes (the "9% Notes") to
accredited investors in a private placement which was commenced on September 15,
2004 on a best efforts basis. We raised a total of $255,000 under this offering,
which we terminated when we determined that we needed to offer more favorable
terms in order to raise the needed funds. On December 29, 2004, we commenced a
private placement of $2,100,000 of 12% convertible subordinated notes (the "12%
Notes") which had a higher coupon, a lower conversion price, and gave the
purchasers a security position in certain equipment owned by BTI in the event
that we do not obtain sufficient financing to perform the Pinnacle Project. We
also allowed the purchasers of our 9% Notes to exchange such notes for the 12%
Notes if they agreed to forego any interest accrued prior to the date of
exchange. All of the 9% Notes were subsequently exchanged, and the offering was
fully subscribed and closed on January 25, 2005.
The net proceeds of more than $1,700,000 from the offering of the 12% Notes
substantially improved our liquidity and working capital position. However,
because the 12% Notes are currently convertible at $1.00 per share into our
common stock, their conversion will create a substantial amount of dilution on
our future earnings per share.
USDA-Guaranteed Financing. We have also been pursuing USDA-guaranteed
financing of up to $5,000,000 for the Pinnacle Project. We have been advised
that such financing may also be available for up to four additional projects. In
order to qualify for the USDA guaranty of our financing, we must have a minimum
equity amount of 20% of the loan proceeds. We intend to use the net proceeds
from the 12% Note offering (to the extent not used for working capital), the
proceeds from any additional debt or equity placements and BTI's equipment to
provide the equity necessary to qualify for the USDA guaranty.
Additional Debt and Equity Placements. We have retained a New York
City-based firm (the "Financing Agent") which specializes in the private
placement of debt and equity securities for energy companies, to raise the
financing necessary for us to perform three to four pond recovery projects,
including the Pinnacle Project. They are seeking financing from both debt and
equity lenders, based on the premise that USDA-guaranteed financing may or may
not be available.
At this point, we cannot determine which, if any, of the financing avenues
described above will be successfully achieved. Additionally, we cannot assure
you that the new subsidiary debt or project equity being offered will be sold,
that the USDA-guaranteed financing will become available, that the Financing
Agent will arrange the desired financing, or that any of the eight pond recovery
projects will proceed.
To date no financing commitments have been received, and there is no
assurance that our financing efforts will be successful.
Improved Drilling and Lab Capabilities. In 2000 BTI made substantial
investments to improve its slurry pond core drilling equipment and its fine coal
laboratory analytical services capabilities. In addition to supporting its own
pond recovery project evaluations, BTI is now able to offer state of the art
drilling and analytical services to commercial clients who are independently
investigating their own projects.
Principal Products and Services. The principal products and services
supplied by our Coal Segment are (i) the capability to undertake large
reclamation projects and the cleanup of slurry pond recovery sites; (ii) core
drilling of slurry ponds and evaluation of recoverable coal reserves; (iii)
consulting reclamation technology; (iv) technical services; and (v) proprietary
coal reclamation technology.
Sources and Availability of Raw Materials. There are numerous coal
impoundments scattered throughout the eastern third of the U.S. which contain
sizeable reserves of coal fines which we believe can be recovered on an economic
basis while at the same time solving an environmental problem. With the recent
dramatic increase in coal prices, slurry pond owners are recognizing that
recovery can be done on a profitable basis, making it a win-win proposition for
both the pond owner and the company undertaking the project.
Dependence of the Segment on a Single Customer. The Coal Segment accounted
for the following percentages of our consolidated revenues from continuing
operations for each of the last three years.
Percent of
Consolidated
Revenues from
Fiscal Year Continuing
Ended Operations
----- ----------
12/31/04 19.4%
12/31/03 9.9%
12/31/02 2.6%
The segment is not dependent on a single customer. Loss of all of the
segment's present customers would not have a material adverse effect on the
segment nor on us. Although revenues from the DTE Servicing Agreement accounted
for 70.4% of segment revenues and 13.7% of consolidated revenues, early
termination of this contract is not expected to have a material adverse effect
on the segment or the Company as it appears the contract would have been
marginally profitable at best if it had run to its conclusion.
Our revenues and profitability will continue to be negatively impacted
until contracts for new reclamation projects currently in development have been
negotiated and finalized.
Facilities. BTI leases an office and laboratory facilities from the Applied
Research Center at the University of Pittsburgh ("UPARC"). BTI's facilities at
UPARC give the Coal Segment access to a wide range of coal and mineral testing
capabilities.
Market Demand and Competition. To our best knowledge, our only competition
of equivalent or greater size and scope of operations is DTE Energy Company, a
full service energy and energy technology company based in Detroit, Michigan
("DTE"). Although DTE has significantly greater financial capability, we believe
that BTI has better facilities and a wider range of technical expertise. There
are also several small independent concerns in the business. Competition is
largely on the basis of technological expertise and customer service.
Seasonality. The coal reclamation business is somewhat seasonal due to the
tendency for field activity to be reduced in cold and/or bad weather.
Environmental Matters. Compliance with Federal, state and local laws
regarding discharge of materials into the environment or otherwise relating to
protection of the environment are of primary concern to the segment, and the
cost of addressing such concerns are factored into the cost of each project. The
cost of compliance varies by project and cannot be estimated until all of the
contract provisions have been finalized. See " Regulation---Environmental and
Worker Safety Matters."
Financial Information. Financial information about the Coal Segment is set
forth in the Financial Statements. See Part II, Item 8---Financial Statements
and Supplementary Data.
CARBON DIOXIDE OPERATIONS
General. Our carbon dioxide (CO2) gas operations are conducted by the
parent company which owns working and overriding royalty interests in two CO2
gas producing units.
Carbon Dioxide (CO2) Properties
- -------------------------------
McElmo Dome. The McElmo Dome field in western Colorado is a 240,000-acre
unit from which CO2 gas is produced. We own a 0.53814206% working interest
(0.4708743% net revenue interest) and an overriding royalty interest equivalent
to a 0.0920289% net revenue interest in the Unit, giving us a total 0.5629032%
net revenue interest.
Deliveries of CO2 gas are transported through a 502-mile pipeline to the
Permian Basin oilfields in West Texas where such gas is utilized primarily for
tertiary oil recovery. Kinder Morgan CO2 Company, L.P. serves as operator of the
unit. There are 46 producing wells, ranging from 7,634 feet to 8,026 feet in
depth. McElmo Dome is believed to be the largest producing CO2 field in the
world. The gas is approximately 98% CO2.
In 2004, we sold 1,787,000 Mcf (thousand cubic feet) attributable to our
working and overriding royalty interests at an average price of $.42 per Mcf. In
2003 we sold 1,529,000 Mcf attributable to our working and overriding royalty
interests at an average price of $.33 per Mcf. In 2002 we sold 1,514,000 Mcf
attributable to our working and overriding royalty interests at an average price
of $.29 per Mcf. We were underproduced by 48,000 Mcf on the sale of our share of
McElmo Dome gas at year-end 2004.
As the result of the recent increase in oil prices, CO2 demand for tertiary
recovery and McElmo Dome production has increased accordingly. CO2 production,
which averaged 732 million cubic feet per day in 2002, increased to 784 million
cubic feet per day in 2003, and increased further to 887 million cubic feet per
day in 2004. We have been advised by the operator that the field is now capable
of producing 1.2 billion cubic feet per day.
We consider our ownership interest in the McElmo Dome Field to be one of
our most valuable assets. As a result of the settlement of the McElmo Dome
litigation, the recent improvement in oil prices and the increased demand and
improved pricing for CO2, we now believe that our interest in the field has a
fair market value in excess of $4.8 million versus a book value of $338,000 at
year-end 2004.
Anticipated Improvement in Pricing as a Result of the McElmo Dome
Settlement. In addition to establishing a cash settlement fund to settle the
litigation the McElmo Dome Settlement Agreement also provided for the monitoring
of pipeline tariffs, minimum prices and funding for a CO2 Claims Committee to
enforce these provisions. We anticipate additional improvement in pricing from
the above. Moreover, we will investigate marketing our share of the CO2 through
other parties at a higher price.
Bravo Dome. We also own a 0.05863% working interest in the 1,000,000-acre
Bravo Dome CO2 gas unit in northeastern New Mexico. Bravo Dome is believed to be
the second largest producing CO2 field in the world. At December 31, 2004, we
had produced 606,000 Mcf of CO2 gas which is presently in storage. We sold no
CO2 gas from Bravo Dome in 2004, 2003 and 2002. Our solid CO2 segment, which was
sold in 1997, had previously provided the market for such gas. We are continuing
our efforts to market our share of the gas at a reasonable price, but such
efforts have to date been unsuccessful.
Occidental Petroleum Corporation operates the Bravo Dome field. The 350
producing wells are approximately 2,500 feet deep. The gas is approximately 99%
CO2.
Net CO2 Production. The following table sets forth our net CO2 production
from McElmo Dome for each of the last three fiscal years:
Net CO2
Fiscal Year Production
Ended (Mcf)
----- -----
12/31/04 1,787,000
12/31/03 1,529,000
12/31/02 1,514,000
Average Sales Price and Production Cost. The following table sets forth our
average sales price per unit of CO2 produced and the average lifting cost (lease
operating expenses and production taxes) per unit of production for the last
three fiscal years:
Average Sales Average Lifting
Fiscal Year Price Per Mcf Cost Per Mcf
Ended of CO2 of CO2
----- ------ ------
12/31/04 $0.42 $0.06
12/31/03 $0.33 $0.06
12/31/02 $0.29 $0.07
Dependence of the Segment on a Single Customer. The CO2 Segment accounted
for the following percentages of our consolidated revenues from continuing
operations for each of the last three years. Our CO2 revenues are received from
two operators who market the CO2 gas to numerous end users on behalf of the
interest owners who elect to participate in such sales. In 2004, approximately
95% of our revenues from the sale of CO2 gas was derived from Kinder Morgan,
L.P. and approximately 5% was derived from Exxon Mobil.
Percent of
Consolidated
Revenues from
Fiscal Year Continuing
Ended Operations
----- ----------
12/31/04 77.6%
12/31/03 85.7%
12/31/02 94.9%
Under the existing operating agreements, so long as any CO2 gas is being
produced and sold from the field, we have the right to sell our undivided share
of the production to either Kinder Morgan or Exxon Mobil and also have the right
to sell such production to other users. During 2004 Kinder Morgan was offering a
slightly higher price than Exxon Mobil, so more of the segment's production was
sold to Kinder Morgan. We believe that the loss of either Kinder Morgan or Exxon
Mobil as a customer would have a material adverse effect on the segment and on
us.
Productive Wells. Our principal CO2 properties are held through our
ownership of working interests in oil and gas leases which produce CO2 gas. As
of December 31, 2004, we held a working interest in a total of 396 gross (0.45
net) CO2 wells located in the continental United States. The table below is a
summary of such developed properties by state:
Number of Wells
---------------
State Gross Net
----- ----- ---
Colorado ..................... 46 0.248
New Mexico ................... 350 0.205
--- -----
Total.................... 396 0.453
=== =====
Financial Information. Financial information about our CO2 gas operations
is contained in our Financial Statements. See Part II, Item 8---Financial
Statements and Supplementary Data.
OPERATIONS IN CHINA
Background Information. In 1998 we opened an office in the PRC. In 1999 we
established a Representative Office in Beijing. In 2001 Beijing Beard Bio-Tech
Engineering Co., Ltd. ("BTEC"), a Chinese corporation, was organized as a
wholly-owned subsidiary to serve as the operating entity for all of the China
Segment's activities in the PRC. In 2002 we formed BEE, a wholly-owned Oklahoma
limited liability company, to serve as the parent company of BTEC and all of the
segment's subsidiaries in China. In February of 2005 BEE and a private investor
formed BEE/7HBF, LLC which is owned 50% each by BEE and the private investor.
This new entity will form a wholly foreign-owned enterprise ("WFOE") in China
that will control and manage the segment's initial fertilizer manufacturing
plant in the PRC.
Environmental Opportunities. China is a large country with serious
environmental problems which include atmospheric pollution, ground water
pollution and land pollution. To solve these problems the government has made
the decision to permit the use of foreign equipment and technology. The amount
of arable land in China is limited considering its dense population. China is
the largest user of chemical fertilizers in the world. Unfortunately, the
carryover of fertilizers from one planting to the next and the considerable
runoff into lakes and rivers has polluted much of China's arable land and fresh
water resources.
Organic-Chemical Compound Fertilizer Initiatives. China, which is the
world's fourth largest country in area, is also the world's most heavily
populated country, with a population of almost 1.3 billion. China categorizes
about 800 million of their population as "farmers." The average sized farm is
less than two acres. In order to earn a subsistence living, China's farmers
must, if possible, multi-crop the same plot of soil, frequently using hybrid
crop varieties with greater yields that stress the soil much more so than
non-hybrid crops. To ensure production, fertilizers are used with each planting,
which increases soil stress. This abusive farming practice has, over time,
resulted in damaged, less productive soil. Working with the top agronomists and
academicians in the Chinese agricultural community, we have developed a concept
to mitigate this problem by manufacturing organic chemical compound fertilizers
("OCCF"). The end result will be a line of environmentally friendly fertilizers
utilizing organics derived from waste materials that, due to their abundance,
are a serious environmental nuisance in China.
Formulation of Product. The formulation of our product will be based on the
target crops and determined by leading soil scientists at China Agricultural
University in Beijing and agronomists in each province. Our production will
amount to less than about 5% of total fertilizer demand in each of the provinces
in which we are planning to construct a facility. We believe that the sales
price for our product will be commensurate with and that the quality will be
superior to other similar products presently available. We expect to receive
strong support for our product from these senior scientists and from the
provincial authorities. Based on these and other factors, we are confident that
our product will be well received by the agricultural community.
REUSE License Agreement. In February of 2003 BEE entered into a License
Agreement with Real Earth United States Enterprises, Inc. ("REUSE") whereby BEE
obtained the exclusive right and license to use the REUSE proprietary composting
technology in the PRC. BEE also has the exclusive right to license or sublicense
the technology in the PRC. The exclusive right is for a term of five years and
will be automatically extended for additional five year periods if BEE or its
affiliates have entered into written agreements for either (i) the sublicense of
five plants or (ii) the sale to Cooperative Joint Ventures ("CJV's") of five
plants during the respective periods involved.
BEE will pay a license fee prior to the start up date of each plant which
utilizes the REUSE technology. For biosolid plants, such fee will be determined
by the design biocell capacity of each plant. The fee for a biosolid plant will
range from $125,000 to $250,000 depending upon the size of the plant. The
license fee for an MSW plant will be higher due to the complexity of the plant
and equipment involved. If either type of plant is later expanded, BEE will pay
a supplemental license fee equal to 10% of the construction cost of the plant
enhancement. BEE will also pay a quarterly royalty payment to REUSE for each
metric ton of compost sold.
BEE has placed the marketing of the REUSE technology on hold pending
completion of the new "mini-plant" described below, which will be used to
showcase our OCCF technology.
Financing of Initial Fertilizer Manufacturing Plant. In February of 2005 we
announced that a private investor has agreed to finance the cost of BEE's
initial fertilizer manufacturing facility in the PRC. The initial plant will be
located in close proximity to Beijing and will produce a new, environmentally
friendly, OCCF. The plant is initially targeted to produce about 32,000 metric
tons per year of OCCF with estimated revenues of more than US$5,000,000
annually. The facility is sized to permit doubling of production capacity to
meet market demand. It is anticipated that production will commence in time for
the fall planting. (See "General development of business---Recent Developments"
for additional details).
Principal Products and Services. The principal products and services
supplied by our China Segment are the installation, construction and operation
of facilities which utilize proprietary technology licensed from others.
The China Segment generated no revenues in 2004, 2003 and 2002.
Facilities. BEE leases a small office located in Beijing Landmark Tower,
Building No. 1, in Beijing, China. It intends to move its office to the site of
the new manufacturing facility during the second quarter of 2005.
Market Demand and Competition. The environmental industry is highly
competitive, and the China Segment must compete against significantly larger
companies, as well as a number of small independent concerns. Competition is
largely on the basis of technological expertise, product quality and customer
service.
Financial Information. Financial information about the China Segment is set
forth in the Financial Statements. See Part II, Item 8---Financial Statements
and Supplementary Data.
e-COMMERCE
Formation of starpay.com(TM), inc. (now starpay.com, l.l.c.). In 1999 four
patent applications were filed embodying the features of a new secure payment
system for Internet transactions and we formed starpay.com, inc. ("starpay") to
pursue the development of the payment system. In 2000, starpay filed two
additional patent applications which considerably broadened the scope and the
potential of its patent claims. In 2001 starpay became starpay.com, l.l.c.
In May of 2003 we formed Advanced Internet Technologies, L.L.C. ("AIT").
The members of starpay.com, l.l.c. contributed their entire membership interests
in starpay to AIT for equivalent membership interests in AIT. starpay became a
wholly-owned subsidiary of AIT with Marc Messner, Beard's VP-Corporate
Development and the inventor of starpay's technology, serving as its Sole
Manager. Current ownership in AIT is as follows: Beard (71%); Messner (15%);
patent attorney (7%); Web site company (7%).
The starpay Technology. Our secure payment methods and technologies address
payer and transaction authentication in many forms. These include, but are not
limited to, performing a payer query for authentication and transaction consent
verification, as well as, chaining split transactions into an integrated
verifiable unique transaction authenticating the user and the transaction
attributes in the process.
Other features of starpay's technology include a patent-pending system that
incorporates the innovative use of the ubiquitous compact disc or smart card as
a security and transaction-enabling device. The enabling device, user's
identifier and/or PIN must all be present to enable a payment transaction on the
Internet. This technology is an additional layer of security that may or may not
be applied to starpay's proprietary process flow models.
License Agreement. In November of 2001 VIMachine, Inc. ("VIMachine"), the
owner of U.S. Patent 5,903,878, "Method and Apparatus for Electronic Commerce"
(the "VIMachine Patent") granted to starpay the exclusive marketing rights, with
respect to certain clients (the "Clients") which starpay has identified to
VIMachine, for security software and related products and applications. starpay
believes the VIMachine Patent will provide numerous opportunities to generate
related licensing agreements in the electronic authentication and payment
transaction fields.
In March 2002 starpay's marketing rights with respect to its Clients were
broadened to include the right to litigate on behalf of VIMachine all patent
claims in relation to the VIMachine Patent and related foreign applications or
patents. Any settlement and/or judgment resulting from starpay's prosecution of
the VIMachine Patent claims will be shared 50/50 or 25/75 between starpay and
VIMachine (depending upon who the infringing party may be) following
reimbursement to starpay (from the settlement and/or judgment monies) for
litigation related expenses incurred, including defense of any counterclaims.
Visa Litigation. In May of 2003 starpay along with VIMachine filed a suit
in the U. S. District Court for the Northern District of Texas, Dallas Division
against Visa International Service Association and Visa USA, Inc., both d/b/a
Visa (Case No. CIV:3-03-CV0976-L). In July of 2003 the Plaintiffs filed, with
the express written consent of the Defendants, an Amended Complaint. The ongoing
suit seeks damages and injunctive relief (i) related to Visa's infringement of
the VIMachine Patent; and (ii) 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 court costs related to the foregoing claims. If willfulness
can be shown, Plaintiffs will seek treble damages.
On January 4, 2005, following a Markman hearing held in late October of
2004, the Magistrate Judge filed a Report and Recommendation of the United
States Magistrate Judge addressing his findings and recommendations with respect
to the claim constructions to be applied to the VIMachine Patent. The Magistrate
Judge found that 24 of the 28 claims asserted by the Plaintiffs were valid. Both
parties have pursued modifications of the Magistrate's recommendations in the
form of an appeal to the District Court and are awaiting the Court's final
ruling on claim construction issues.
See "Item 3. Legal Proceedings---Visa Litigation" for additional details.
Issuance of Initial Patent; Exclusive License Agreement. On April 9, 2002,
the U.S. Patent and Trademark Office issued U.S. Patent No. 6,370,514 (the
"Voucher Patent") to starpay on its patent application titled "Method for
Marketing and Redeeming Vouchers for use in Online Purchases." All claims
submitted in this application were allowed.
On March 28, 2003, starpay finalized a Patent License Agreement with
Universal Certificate Group LLC ("UCG"), a private company based in New York
City. UCG has developed a universal online gift certificate that is accepted as
payment at hundreds of online stores through its subsidiary, GiveAnything.com,
LLC. The Agreement, which remains in effect for the term of the patent, grants
to UCG the exclusive, worldwide license to use, improve, enhance or sublicense
the Voucher Patent. Under the Agreement, starpay receives a license fee payable
annually for three years plus a royalty payable semi-annually during the patent
term. starpay also shares in any license fees or royalties paid to UCG for any
sublicenses. UCG has the exclusive right to institute any suit for infringement
under the Agreement. starpay has the right to jointly participate in any suit,
in which case any damages obtained will be shared according to the fees and
expenses borne by each party. UCG has the option to terminate the Agreement at
any time without liability.
starpay's Strategy and Current Opportunities. starpay's plan is to develop
licensing agreements and other fee based arrangements with companies
implementing technology in conflict with our intellectual property. We have
identified and investigated many opportunities for our intellectual property
portfolio which include various e-commerce payment systems, security access
applications and secure document transmission. Although there are many
applications for our technology, our focus is on Internet security,
authentication and electronic payments. starpay is continuously assessing these
situations looking toward the possibility of generating additional licensing
opportunities.
starpay believes that its intellectual property portfolio provides the
technology and methods for enabling the most secure payment system and
authentication protocols available for use on the Internet. If starpay is
successful in its strategic licensing and litigation efforts, the e-Commerce
Segment is expected to become a major contributor to our future success.
However, no assurance can be given that starpay will successfully capitalize on
its Internet security methods and technologies.
Facilities. starpay occupies a small portion of the office space occupied
by us at our corporate headquarters located in Oklahoma City, Oklahoma.
Market Demand and Competition. The e-commerce industry is rapidly changing
and highly competitive, and the e-Commerce Segment must compete against
significantly larger companies, as well as a number of small independent
concerns. Competition is largely on the basis of technological expertise,
customer service, capital available for product branding and the ability to
react quickly to a constantly changing environment.
Dependence of the Segment on a Single Customer. The e-Commerce Segment
accounted for the following percentages of the Company's consolidated revenues
from continuing operations for each of the last three years.
Percent of
Consolidated
Revenues from
Fiscal Year Continuing
Ended Operations
----- ----------
12/31/04 3.0%
12/31/03 4.2%
12/31/02 0%
The segment presently has only one customer, a licensee. However, the
licensee has already generated one sublicense and is pursuing others. We believe
that the loss of the segment's present customer would not have a material
adverse effect on the segment since the segment would then be in a position to
pursue licenses directly with other parties. The loss of the present customer
would not have a material adverse effect on us.
Financial Information. Financial information about the e-Commerce Segment
is set forth in the Financial Statements. See Part II, Item 8---Financial
Statements and Supplementary Data.
REGULATION
General. We are subject to extensive regulation by federal, state, local,
and foreign governmental authorities. Our operations in the United States and
China are subject to political developments that we cannot accurately predict.
Adverse political developments and changes in current laws and regulations
affecting us could dramatically impact the profitability of our current and
intended operations. More stringent regulations affecting our coal reclamation
activities could adversely impact the profitability of our future coal
reclamation operations and the availability of those projects.
Environmental and Worker Safety Matters. Federal, state, and local laws
concerning the protection of the environment, human health, worker safety,
natural resources, and wildlife affect virtually all of our operations,
especially our coal reclamation and environmental remediation activities. These
laws affect our profitability and increase the Company's exposure to third party
claims.
It is not possible to reliably estimate the amount or timing of our future
expenditures relating to environmental matters because of continually changing
laws and regulations, and the nature of our businesses. We cannot accurately
predict the scope of environmental or worker safety legislation or regulations
that will be enacted. Our cost to comply with newly enacted legislation or
regulations affecting our business operations may require us to make material
expenditures to comply with these laws. Since we are not currently involved in
any projects, it does not include environmental exposures in its insurance
coverage. Should we become involved with projects having environmental exposure,
we believe we will have no difficulty in obtaining environmental coverage
adequate to satisfy its probable environmental liabilities. As of this date, we
are not aware of any environmental liability or claim that could reasonably be
expected to have a material adverse effect upon our present financial condition.
RISK FACTORS
Net Losses, Limited Liquidity and Capital Resources
Although we were profitable in 2004 as a result of the Settlement, we have
suffered net operating losses during each of the last seven years. Our net worth
became negative as of December 31, 2001, and the deficiency increased to
($5,333,000) at year-end 2003. Receipt of the second installment of the
Settlement reduced the deficiency to ($4,144,000) at year-end 2004; however,
such deficiency will continue to increase until we are able to achieve
profitability in our Coal and China Segments. This deficiency will impede our
ability to borrow funds and may impact our ability to achieve profitability in
the future.
Our business will continue to require substantial expenditures. There is no
certainty that we will be able to achieve or sustain profitability or positive
cash flows from operating activities in the future.
History of Delays in Finalizing New Coal Projects
We have experienced delays in the past in finalizing its new coal projects.
We may experience additional delays in the future. Although we have signed a
definitive agreement on the Pinnacle Project, we have not yet been successful in
arranging the financing for the project. No definitive contracts have been
signed in connection with the other projects currently under development in the
Coal Segment, nor has any financing been arranged to date for these projects.
Continued delays in finalizing our new coal projects may have a material adverse
effect on us.
History of Delays in Finalizing Projects in China
We have experienced delays in the past in finalizing projects in China and
may experience additional delays in the future. We have just arranged the
financing for our initial project. It is critical that this project be completed
on budget and in a timely manner. Continued delays in finalizing our new
projects in China may have a material adverse effect on us.
starpay Intellectual Property Rights; Copying by Competitors
We have identified at least three competitors that offer services that
potentially conflict with starpay's intellectual property rights. If we are
unable to protect our intellectual property rights from infringement, we may not
be able to realize the anticipated profit potential from the e-Commerce Segment.
Failure to Achieve a Settlement or Win a Judgment in the Lawsuit Against Visa
In connection with the lawsuit against Visa, we have agreed to bear
one-half of the out-of-pocket expenses (excluding legal fees) borne by the law
firm handling the case. At this point it is difficult to estimate the maximum
exposure for such expenses, or the length of time before the matter might be
resolved. However, if our operating results do not improve going forward and we
are unable to pay our share of the expenses, then we would be faced with
reducing our potential recovery from any settlement or judgment.
Political and economic uncertainty in China could worsen at any time and our
operations could be delayed or discontinued.
Our business is subject to political and economic risks, including:
o Loss of revenue, property and equipment as a result of unforeseen
events like expropriation, nationalization, war and insurrection;
o Risks of increases in import, export and transportation regulations
and tariffs, taxes and governmental royalties;
o Renegotiation of contracts with governmental entities;
o Changes in laws and policies governing operations of foreign-based
companies in China;
o Exchange controls, currency fluctuations and other uncertainties
arising out of foreign government sovereignty over international
operations;
o Laws and policies of the United States affecting foreign trade,
taxation and investment; and
o The possibility of being subject to the exclusive jurisdiction of
foreign courts in connection with legal disputes and the possible
inability to subject foreign persons to the jurisdiction of courts in
the United States.
OTHER CORPORATE ACTIVITIES
Other Assets. During the last six years we have disposed of most of the
assets related to our discontinued operations. However, we still have a few
remaining assets and investments which we are in the process of liquidating as
opportunities materialize. At year-end 2004 such assets consisted primarily of
the residue of an iodine extraction plant and related equipment, brine
collection wells, drilling rig components and related equipment, land and
improvements, wastewater storage tanks, oil and gas leases and a real estate
limited partnership in which we are a limited partner. All of such assets are
reflected on our books for less than their anticipated realizable value. As
excess funds become available from such liquidations they will be utilized for
working capital, reinvested in our ongoing business activities or redeployed
into newly targeted opportunities.
Office and Other Leases. We lease office space in Oklahoma City, Oklahoma,
aggregating 5,817 square feet under a lease expiring September 30, 2005, at a
current annual rental of $75,000. In addition, our subsidiaries lease space at
other locations as required to serve their respective needs.
Employees. As of December 31, 2004, we employed 21 full time and seven part
time employees in all of our operations, including five full time employees and
two part time employees on the corporate staff.
(d) Financial information about foreign and domestic operations and export
sales.
---------------------------------------------------------------------
See Item 1(c) for a description of foreign and domestic operations and
export sales.
Item 2. Properties.
-----------
See Item 1(c) for a description of properties.
Item 3. Legal Proceedings.
------------------
Neither we nor any of our subsidiaries are engaged in any litigation or
governmental proceedings which we believe will have a material adverse effect
upon the results of operations or financial condition of any of such companies.
However, we were a plaintiff in a lawsuit where our share of the claims,
exclusive of interest and costs, exceeded 10% of consolidated current assets at
year-end 2004. This suit has now been settled. See "McElmo Dome Litigation"
below.
McElmo Dome Litigation. In October of 1996 we joined with other Plaintiffs
in filing in U.S. District Court for the District of Colorado a suit against
Shell Oil Company, Shell Western E & P, Inc., Mobil Producing Texas and New
Mexico, Inc. and Cortez Pipeline Company, a partnership (collectively, the
"Defendants"). Plaintiffs' complaint alleged damages caused by Defendants'
wrongful determination of the value of CO2 produced from the McElmo Dome Field
(the "Field"---see "Carbon Dioxide Operations" at pages 10-12) and the
corresponding wrongful underpayment to Plaintiffs.
A Settlement Agreement was signed in September of 2001. Following a lengthy
appeal by certain objecting class members the Settlement became final in July of
2003 and we received our $1,151,000 share of the first installment of the
Settlement. We received the second installment of $2,826,000 on March 26, 2004.
Distribution of the proceeds significantly improved our balance sheet and
enabled us to pay off $2,620,000 of our then outstanding debt and associated
accrued interest.
We expensed all of our share, totaling $450,000 from 1996 through year-end
2003, of the costs of the litigation. Accordingly, the Settlement proceeds
flowing to us resulted in net income, except for alternative minimum tax in the
amount of $118,000 in 2004. Our share of the Settlement was not subject to
Federal or Colorado income tax due to our NOL's. (See Note 11 to the Company's
Financial Statements).
Coalition Managers Litigation. In April of 2002 a suit was filed in the
U.S. District Court of Colorado (Harry Ptasynski v. John M. Cogswell, et
al---Case No. 02-WM-0830 (OES) against the attorneys and managers (including our
Chairman) of the CO2 Claims Coalition, LLC (the "Coalition"---one of the
Plaintiffs in the preceding lawsuit which has now been settled). We are not a
defendant in the suit, which was initially brought by Ptasynski and another
party which later dismissed itself from the action. In this action Ptasynski is
seeking to recover a share of the proceeds of the Coalition's settlement against
the Defendants in the McElmo Dome lawsuit despite the fact that he opted out of
the lawsuit in order to pursue his own claims in a separate lawsuit against the
Defendants in Texas. Although his case was initially successful in Texas it was
later overturned on appeal.
The Coalition held back $1 million of the Settlement proceeds to defend the
costs of the Ptasynski suit until such time as its outcome has been determined.
Presently approximately $700,000 remains in the defense fund. Once the case has
been resolved, any remaining funds net of costs will be distributed to the
Coalition members, including us. In March of 2004 the Court dismissed the claims
against the attorneys and several of the claims against the managers but gave
the Plaintiff the opportunity to make additional arguments as to why other
claims should not be dismissed. In April of 2004 Plaintiff asked the Court not
to dismiss the remaining claims and moved to file a Second Amended Complaint
against the managers and, for the first time, against the Coalition. In May of
2004 the Defendants asked the Court to deny Plaintiff's new Complaint and have
been waiting for the Court's Order since then. We consider the Plaintiff's
claims to be without merit. We will receive approximately 20% of the remaining
funds, if any, once the suit has been resolved.
Visa Litigation. In May of 2003 our 71%-owned subsidiary, starpay.com,
l.l.c., along with VIMachine, Inc. filed a suit in the U. S. District Court for
the Northern District of Texas, Dallas Division against Visa International
Service Association and Visa USA, Inc., both d/b/a Visa (Case No.
CIV:3-03-CV0976-L). VIMachine is the holder of U.S. Patent No. 5,903,878 (the
"VIMachine Patent") that covers, among other things, an improved method of
authenticating the cardholder involved in an Internet payment transaction. On
July 25, 2003, the Plaintiffs filed an Amended Complaint. The suit seeks damages
and injunctive relief (i) related to Visa's infringement of the VIMachine
Patent; (ii) related to Visa's breach of certain confidentiality agreements
express or implied; (iii) for alleged fraud on the Patent Office based on Visa's
pending patent application; and (iv) under California's common law and statutory
doctrines of unfair trade practices, misappropriation and/or theft of starpay's
intellectual property and/or trade secrets. In addition, Plaintiffs are seeking
attorney fees and costs related to the foregoing claims. If willfulness can be
shown, Plaintiffs will seek treble damages.
In August of 2003 the Defendants filed a motion to dismiss the second,
third and fourth claims. Despite objections to such motion by the Plaintiffs,
the Judge on February 11, 2004, granted Defendants' motion to dismiss the second
and third causes of action, and denied the motion insofar as it sought to
dismiss the fourth cause of action. Accordingly, Plaintiffs' fourth claim
(misappropriation and/or theft of intellectual property and/or trade secrets)
will continue to move forward.
On February 23, 2004, Defendants filed an Answer to Plaintiffs' Amended
Complaint. In such filing Visa denied each allegation relevant to claim four.
Visa asked that the VIMachine Patent be declared invalid, and, even if it is
found valid, Visa asked that they be found not to infringe the VIMachine Patent.
Visa asked for other related relief based on these two allegations.
In April and May 2004, Plaintiffs filed their Patent Infringement
Contentions and a supplement thereto detailing Visa's alleged infringement of
the majority of the patent claims depicted in the VIMachine Patent.
Subsequently, in May 2004, Defendants filed Preliminary Invalidity Contentions
requesting the VIMachine Patent be found invalid.
From May through October 2004, the Plaintiffs and Defendants submitted
numerous filings related to interpretation of the terms and phrases set out in
the 878' patent claims. A hearing regarding patent claim construction (a
"Markman hearing") was held on October 21 and 29, 2004, allowing both parties to
present oral arguments before the Court regarding the claim construction issues.
On January 4, 2005, Magistrate Judge Sanderson filed a Report and Recommendation
of the United States Magistrate Judge addressing his findings and
recommendations with respect to the claim constructions to be applied to the
VIMachine Patent. Judge Sanderson found that 24 of the 28 claims asserted by the
Plaintiffs were valid. Both parties have pursued modifications of the
Magistrate's recommendations in the form of an appeal to District Judge Lindsey
and are awaiting the Court's final ruling on claim construction issues.
During the first quarter of 2000 starpay's trade secrets were relayed to
Visa verbally in face-to-face conferences and telephone calls, as well as in
correspondence by post and electronic mail. After receiving starpay's technology
and ideas, Visa filed a series of provisional patent applications beginning in
April of 2000 using starpay's trade secrets. At the same time, Visa wrongfully
incorporated starpay's trade secrets in to its Visa Payer Authentication Service
("VPAS"). VPAS infringes the VIMachine Patent. From early 2000 until recently,
starpay tried on several occasions to enter into meaningful negotiations with
Visa to resolve their intellectual property concerns. Visa has continually
denied their infringement of the VIMachine Patent and starpay's assertion that
Visa has appropriated starpay's trade secrets.
In November of 2000 Visa publicly announced that it was testing VPAS. In
September of 2001 Visa stated that, once rolled out globally, it expected VPAS
to reduce Internet payment disputes by at least 50%. In an October 26, 2004,
news release, Visa depicted Verified by Visa as "the leading security standard
for authentication of Internet transactions." Also, in this release Visa
announced that Verified by Visa had "recorded an increase of close to 200% in
the number of transactions for the quarter ending in September 2004." Visa
further announced that "total Verified by Visa card volume for the first nine
months of 2004 was $5.4 billion."
Both sides anticipate filing dispositive motions in the late summer or
fall. Trial is slated to begin in February 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 4a. Executive Officers and Significant Employees of the Company.
------------------------------------------------------------
The table below sets forth the age, positions with us and the year in which
each person first became our executive officer or significant employee. All
positions are held with us unless otherwise indicated, and such persons are part
of the corporate staff serving us and all of our subsidiaries unless otherwise
indicated.
Executive Officer
Or Significant
Employee of
Beard or Beard
Name Principal PositionsOil Since Age
---- -------------------- --------- ---
W. M. Beard Chairman of the Board and
Chief Executive OfficerJune 1969 76
Herb Mee, Jr. President & Chief Financial OfficerNovember 1973 76
Philip R. Jamison Chairman - Beard Technologies, Inc.February 1997 66
C. David Henry President - Beard Technologies, Inc.July 2004 51
Riza E. Murteza President & CEO - Beard Environmental Engineering, L.L.C. and
Chairman - Beijing Beard Sino-American Bio-Tech Engineering Co., Ltd.November 1998 75
Marc A. Messner President - Advanced Internet Technologies, L.L.C., Sole Manager -
starpay.com, l.l.c.
and Vice President Corporate Development of the Company April 1999 43
Jack A. Martine Controller and Chief Accounting Officer October 1996 55
Rebecca G. Voth Secretary and TreasurerJuly 1997 45
_____________________
Director of the Company.
Trustee of certain assets of the Company's 401(k) Trust.
Devotes all of his time to this subsidiary.
Devotes all of his time to these subsidiaries.
Devotes most of his time to these subsidiaries.
Indicated entities are subsidiaries of the Registrant.
Information concerning our executive officers and certain significant
employees is set forth below:
W. M. Beard has served as our Chairman of the Board and Chief Executive
Officer since December 1992. He previously served as our President and Chief
Executive Officer from our incorporation in October 1974 until January 1985. He
has served BOC as its Chairman of the Board and Chief Executive Officer since
its incorporation. He has also served as our director and as a director of BOC
since their incorporation. Mr. Beard has been actively involved since 1952 in
all management phases of us and BOC from their inception, and as a partner of
their predecessor company.
Herb Mee, Jr. has served as our President since October 1989 and as our
Chief Financial Officer since June 1993. He has served as BOC's President since
its incorporation and as its Chief Financial Officer since June 1993. He has
also served as our director and as a director of BOC since their incorporation.
Mr. Mee served as President of Woods Corporation, a New York Stock Exchange
diversified holding company, from 1968 to 1972 and as its Chief Executive
Officer from 1970 to 1972.
Philip R. Jamison has served as Chairman of BTI since July 2004. He
previously served as BTI's President from August 1994 until July 2004. Mr.
Jamison has been associated with the coal industry since 1960, working in
various positions. From 1972 to 1977 he served as Vice President Operations for
International Carbon and Minerals and as President and CEO of all its coal
producing subsidiaries. From 1979 to 1988 he served as CEO of four small
companies which were engaged in the production and sale of coal.
C. David Henry has served as President of BTI since July 2004. He
previously served from 2000 until July 2004 as BTI's Vice President of
Operations where he focused on the development of coal recovery operations
through the utilization of advanced coal processing technologies and the
production of high-grade fine coal products. His area of expertise includes
recovery and reclamation of coal slurry impoundments, testing and analysis of
coal slurry samples, slurry pond reclamation design and coal preparation.
Riza E. Murteza has served as President and Chief Executive Officer of BEE
since December 2002 and of its predecessor since November 1998. He has served as
Chairman of BTEC since December 2001. He was appointed Senior Advisor to the
United Nations Development Project for China, residing in China for one year
(1996-1997) while assisting large Chinese enterprises' move to a market economy.
Prior to that he served as General Manager and Project Manager for two large
projects in Indonesia and a large project in the Soviet Union for periods
totaling nine years.
Marc A. Messner has served as President of AIT and as sole manager of
starpay. com, l.l.c. since May 2003. He served as President and Chief Executive
Officer of starpay (and its predecessor) from April 1999 to May 2003, and as
Sole Manager of starpay since May 2003. He has also served as our Vice President
- - Corporate Development since August 1998. Mr. Messner is the inventor of
starpay's proprietary payment system technology. From 1993 to 1998 he served as
President of Horizontal Drilling Technologies, Inc., a company he founded in
1993 which we acquired in 1996.
Jack A. Martine has served as our Controller, Chief Accounting Officer and
Tax Manager since 1996. Mr. Martine had previously served as tax manager for BOC
from June 1989 until October 1993. Mr. Martine is a certified public accountant.
Rebecca G. Voth has served as Corporate Secretary of us and BOC since
October 1993, and has served as Treasurer of such companies since July 1997.
All executive officers serve at the pleasure of the Board of Directors.
There is no family relationship between any of our executive officers. All
executive officers hold office until the first meeting of the Board of Directors
following the next annual meeting of stockholders or until their prior
resignation or removal.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
-----------------------------------------------------------------------
Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters.
- ---------------------------------------------------------------------------
(a) Market information.
--- -------------------
Our common stock trades on the OTC Bulletin Board ("OTCBB") under the
ticker symbol BRCO. The following table sets forth the range of reported high
and low bid quotations A for such shares on the OTCBB for each full quarterly
period within the two most recent fiscal years:
2004High Low
------------ ---- ---
Fourth quarter $0.83 $0.52
Third quarter 1.25 0.35
Second quarter 1.00 0.115
First quarter 0.275 0.10
2003High Low
------------ ---- ---
Fourth quarter $0.35 $0.125
Third quarter 0.35 0.14
Second quarter 0.80 0.12
First quarter 0.375 0.12
____________________
The reported quotations were obtained from the OTCBB Web Site. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. The
quotations reflect the high best bid and low best bid for each quarter.
There are several market makers who have been quoting a best bid of $0.01
per share for some time, and such bids are not considered to reflect a
realistic bid for the shares.
All of the 2003 quotations and the 2004 quotations prior to August 6, 2004,
have been adjusted to reflect the 2-for-1 stock split effected on that
date.
(b) Holders.
--- --------
As of March 25, 2005, the Company had 431 record holders of common stock.
(c) Dividends.
--- ----------
To date, we have not paid any cash dividends. The payment of cash dividends
in the future will depend upon our financial condition, capital requirements and
earnings. We intend to employ our earnings, if any, primarily in our coal
reclamation activities and do not expect to pay cash dividends for the
foreseeable future. The Certificate of Designations of our Preferred Stock does
not preclude the payment of cash dividends. The Certificate provides that, in
the event we pay a dividend or other distribution of any kind, holders of the
Preferred Stock will be entitled to receive the same dividend or distribution
based upon the shares into which their Preferred Stock would be convertible on
the record date for such dividend or distribution.
(d) Securities authorized for issuance under equity compensation plans.
--- -------------------------------------------------------------------
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, warrants outstanding options, under equity compensation
and rights warrants and rights plans (excluding securities
reflected in column (a))
(a) (b) (c)
------------------------------------- ---------------------- --------------------------------
Equity compensation plans 1993 SO Plan - 26,250$2.08 None
approved by security holders 2003-2 DSC Plan - 712,717$0.36 87,283
Equity compensation plans
not approved by security
holders None None None
------------------------------------- ---------------------- --------------------------------
Total All Plans - 738,967 $0.42 87,283
===================================== ====================== ================================
_____________________
The 1993 Stock Option Plan, as amended and as adjusted for subsequent stock splits, authorized the issuance of 412,500 shares
of common stock. Stockholders approved the initial plan and all subsequent amendments. The Plan terminated on August 26,
2003.
The 2003-2 Deferred Stock Compensation Plan, as amended, which authorizes 800,000 shares to be issued, was approved by the
stockholders at the 2004 Annual Stockholders' Meeting.
As of March 15, 2005, a total of 739,991 Stock Units had been credited to the Participants' Stock Unit Accounts based upon
the Participants' deferral of $292,600 of Fees or Compensation.
The numbers shown in the above table are as of December 31, 2004.
Item 6. Selected Financial Data.
------------------------
The following financial data are an integral part of, and should be read in
conjunction with, the financial statements and notes thereto. Information
concerning significant trends in the financial condition and results of
operations is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 26 through 37 of this report.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of operations data:
Revenues from continuing operations $ 972 $ 593 $ 469 $ 602 $ 717
Interest income 3 1 119 177 136
Interest expense (575) (519) (400) (207) (60)
Earnings (loss) from continuing
operations 937 (1,490) (4,391) (1,453) (1,392)
Loss from discontinued operations - (121) (223) (868)(1,637)
Net earnings (loss) 937 (1,611) (4,614) (2,321) (3,029)
Net earnings (loss) attributable to
common shareholders 937 (1,611) (4,614) (2,321) (3,029)
Net earnings (loss) per share:
Basic:
Earnings (loss) from continuing
operations 0.18 (0.33) (1.05) (0.37) (0.37)
Loss from discontinued operations 0.00 (0.02) (0.05) (0.21) (0.43)
Net earnings (loss) 0.18 (0.35) (1.10) (0.58) (0.80)
Diluted:
Earnings (loss) from continuing
operations 0.14 (0.33) (1.05) (0.37) (0.37)
Loss from discontinued operations 0.00 (0.02) (0.05) (0.21) (0.43)
Net earnings (loss) 0.14 (0.35) (1.10) (0.58) (0.80)
Balance Sheet Data:
Working capital (944) (854) (303) 281 (159)
Total assets 1,273 941 1,264 4,058 5,087
Long-term debt (excluding
current maturities) 3,807 4,883 4,241 2,513 1,428
Convertible preferred stock 889 889 - - -
Redeemable preferred stock - - 889 889 889
Total common shareholders'
equity (deficiency) (4,144) (5,333) (4,833) (344) 1,883
___________________
In March 2001, we determined that we would no longer provide financial support to ISITOP, Inc., an 80%-owned subsidiary
specializing in the remediation of polycyclic aromatic hydrocarbon contamination. In May 2001, we sold the fixed assets of
the 50%-owned subsidiary involved in natural gas well testing operations. In August 2001, we made the decision to cease
pursuing opportunities in Mexico and the WS Segment was discontinued. (See note 3 of notes to financial statements).
All per share numbers have been adjusted to reflect the 2-for-1 stock split effected by us as of August 6, 2004.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
------------------------------------------------------------------------
The following discussion addresses the significant factors affecting our
results of operations, financial condition, liquidity and capital resources.
Such discussion should be read in conjunction with our financial statements
including the related notes and our selected financial information.
Overview
- --------
General. In 2004 we operated within the following operating segments: (1)
the Coal Reclamation Segment, (2) the Carbon Dioxide ("CO2") Segment, (3) the
China Segment, and (4) the 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, construction
and operation of plants that manufacture environmentally friendly organic
chemical compound fertilizer ("OCCF"). The e-Commerce Segment is engaged in a
strategy to develop licensing agreements and other fee based arrangements with
companies implementing technology in conflict with our intellectual property.
In 2004, our continuing operations reflected earnings of $937,000 as
compared with losses of $1,490,000, $4,391,000, $1,453,000, and $1,392,000 in
2003, 2002, 2001, and 2000, respectively.
Beginning in 1999 we started discontinuing the operations of those segments
that were not meeting their targeted profit objectives and which did not appear
to have significant growth potential. This ultimately led to the discontinuance
of four of our unprofitable segments. Such discontinued operations have
reflected losses of $-0-, $121,000, $223,000, $868,000 and $1,637,000 in 2004,
2003, 2002, 2001 and 2000, respectively. See "Discontinued Operations" below.
Now that the McElmo Dome litigation has been settled, we are focusing our
primary attention on the Coal, China and e-Commerce Segments, which we believe
have significant potential for growth and profitability.
We have other assets and investments that we have been liquidating as
opportunities have materialized.
The results of operations for 2004, 2003 and 2002 were severely impacted by
the termination of a major contract in January of 1999. Termination of this
contract (see "Coal Reclamation Activities---The MCN Projects") has resulted in
a severe decline in the segment's revenues---from $8,585,000 in 1998 down to
$189,000 in 2004---with a correspondingly dramatic impact on profitability. The
segment, which had an operating profit of $1,678,000 in 1998, recorded operating
losses of $508,000 in 1999, $625,000 in 2000, $544,000 in 2001, $2,105,000 in
2002, $516,000 in 2003 and $682,000 in 2004. $1,516,000 and $6,000 of the 2002
and 2003 losses, respectively, resulted from impairments of long-lived assets
within the segment.
Operating profit of the CO2 Segment in 2004 increased $222,000, or 61%,
from the prior year, as a result of both increased production and higher
pricing. The operating losses of the China Segment decreased to $549,000 in 2004
from $724,000 for the prior year as the segment incurred fewer administrative
costs associated with the termination of a relationship with a former technology
partner in China. The operating loss of the e-Commerce Segment increased to
$124,000 from $100,000 the previous year as a result of increased expenses
associated with its lawsuit against VISA. The operating loss from corporate
activities at the parent company level decreased $231,000, or 20%, primarily as
a result of lower professional fees and a reduction in amortization of
capitalized costs associated with our debt offerings. We reversed our
fortunes---going from a loss of $1,611,000 in 2003 to earnings of $937,000 in
2004, primarily reflecting (i) the receipt of $2,943,000 as the second and third
installments of the McElmo Dome settlement versus $1,151,000 the prior year,
(ii) a $379,000 increase in total revenues, and (iii) a reduction in operating
costs of $59,000.
Operating profit of the CO2 Segment in 2003 increased $72,000, or 25%, from
the prior year, as a result of both increased production and higher pricing. As
a result of the dissolution of the relationship with its previous technology
partner in China, losses of the China Segment increased to $724,000 in 2003 from
$46,000 the prior year when results of the first 11 months were reported as a
$357,000 loss in earnings of unconsolidated affiliates. The e-Commerce Segment
reported its first revenues in 2003, and reduced its operating loss to $100,000
from $202,000 the previous year when results were burdened by a $45,000
impairment of intangible assets. The operating loss from corporate activities at
the parent company level increased $183,000, or 19%, primarily as a result of
higher insurance costs and professional fees, and costs associated with the debt
offerings. Our total net loss decreased $3,003,000, or 65%, to $1,611,000
primarily reflecting (i) the receipt of $1,162,000 as the first installment of
the McElmo Dome settlement and (ii) the fact that $2,433,000 of the 2002 loss
resulted from impairment of long-lived assets, investments and other assets.
Operating profit of the CO2 Segment in 2002 decreased $22,000 from the
prior year, primarily as a result of higher production costs. As a result of the
deterioration in relations between us and our previous partner in conducting
operations in China, we reported the results of operations for the last month of
2002 as an operating segment and, for the first 11 months of 2002, through the
affiliate which is included in equity in earnings of unconsolidated affiliates.
The segment incurred an operating loss of $63,000 for the last month of 2002 and
reported a loss in earnings of unconsolidated affiliates of $357,000. The
e-Commerce Segment also had no revenues in 2002, but incurred $15,000 less SG&A
expenses than in the prior year as it continued its pursuit of strategic
alliances. The segment's operating loss increased $30,000 to $202,000 in 2002 as
a result of a $45,000 impairment of intangible assets. Our total net loss
increased $2,293,000 to $4,614,000 primarily as a result of the $2,392,000
increase in impairments during 2002.
The recurring net losses and overall declines in financial condition and
liquidity raise substantial doubts about our ability to continue as a going
concern, as expressed in the independent auditors' opinion on page 39.
Liquidity and capital resources
- -------------------------------
Capital investments. The Company's capital investment programs have
required more cash than has been generated from operations during the past three
years. Cash flows provided by (used in) operations during 2004, 2003 and 2002
were $447,000, $(732,000) and $(1,789,000), respectively, while capital
additions from continuing operations were $217,000, $55,000 and $77,000,
respectively, as indicated in the table below:
2004 2003 2002
---- ---- ----
Coal $ 183,000 $ 7,000 $ 7,000
Carbon dioxide 33,000 33,000 62,000
e-Commerce 1,000 - -
Other - 15,000 8,000
---------------- ---------------- -------------------
Total $ 217,000 $ 55,000 $ 77,000
================ ================ ===================
Our 2005 capital expenditure budget has tentatively been set at $951,000.
This does not include the cost of any recovery plants that may be constructed by
the Coal Segment since the timing and dollar amount of such projects are
uncertain and the projects are subject to the availability of financing.
Liquidity. The Coal Segment produced a healthy profit in 1998, but has
since operated unprofitably. Activity commenced in China in late 1998 and in the
e-Commerce Segment in early 1999, but both are still essentially start-up
operations. Sustaining the operating activities of the three unprofitable
segments, plus our overhead, has resulted in a serious outflow of cash during
the past three years. We have managed to survive this cash shortfall to date
through a series of financings and the sale of various assets, principally those
left over from our discontinued operations. Three private placements of notes
and warrants totaling $1,829,000 were completed in May of 2002 and in February
and July of 2003. Three additional private placements were completed in June and
December of 2004 and January of 2005 for gross proceeds of $3,300,000, of which
$1,455,000 was received in 2004. In addition, we borrowed $200,000 from a
related party in November 2003, $103,000 from an unconsolidated subsidiary in
December 2003 and $125,000 from a bank in February and March of 2004. Such funds
were needed to "bridge the gap" until the distribution of the McElmo Dome
settlement had been completed. We borrowed an additional $200,000 from the
unconsolidated subsidiary in November of 2004 to provide needed working capital
until the $2,100,000 private placement was completed in January of 2005.
Several projects are in various stages of development in the Coal Segment
which, subject to arranging necessary financing, are ultimately expected to
mature into operating projects. A definitive agreement has been finalized on the
Pinnacle Project on which we are currently pursuing financing. In addition, we
have arranged for the financing of our initial fertilizer manufacturing plant in
China. (See "Recent Developments---Financing of Initial Fertilizer Manufacturing
Plant in China" for additional details). Now that the Settlement has been
received it is essential that these projects move forward quickly. If that does
not occur, we must pursue additional outside financing, which would likely
involve further dilution to our stockholders.
Our activities in 2003 and 2002 were primarily funded by the proceeds from
three private placements of notes and warrants, by loans from related parties or
an affiliate and by the sale of assets. Our activities in 2004 were primarily
funded from the proceeds of three additional private placements. Future cash
flows and availability of credit are subject to a number of variables, including
demand for our coal reclamation services and technology, continuing demand for
CO2 gas, demand for the installation of fertilizer manufacturing facilities in
China and the e-Commerce Segment's success (i) in developing licensing
agreements and other fee based arrangements with companies implementing
technology in conflict with its intellectual property or (ii) resulting from its
ongoing Visa litigation.
During 2004 we reduced our working capital by $90,000 to $(944,000) in 2004
from $(854,000) at year-end 2003. The Coal Segment used $183,000 to purchase
equipment and $682,000 to fund operating losses. The China Segment required
$549,000 to fund net advances for operations. The four discontinued segments
absorbed $-0-, $121,000 and $223,000, respectively, in 2004, 2003 and 2002 to
fund their operations while we sought buyers for the remaining assets. Another
$124,000 was used to fund the startup activities of the e-Commerce Segment. We
repaid $2,466,000 in debt. Other corporate activities utilized approximately
$1,445,000 of working capital. The bulk of these expenditures were funded by the
second and third installments of the McElmo Dome Settlement totaling $2,943,000,
an additional $1,820,000 in debt, $754,000 from the sale of carbon dioxide, a
$122,000 distribution from an investment in a real estate partnership and
$63,000 from the sale of assets.
As a result, at December 31, 2004, we were in a negative working capital
position with working capital of $(944,000), and a current ratio of 0.31 to 1.
We incurred losses from continuing operations totaling $4,944,000 during
the past three years. Losses from discontinued operations totaled $344,000
during such period. $4,391,000 of the losses from continuing operations and
$223,000 of the losses from discontinued operations occurred in 2002. The
problems from the discontinued segments are now behind us and management expects
to dispose of the few assets remaining from such operations in 2005.
Our principal business is coal reclamation, and this is where management's
operating attention is primarily focused. The Coal Segment has a signed contract
on the Pinnacle Project on which we are currently pursuing financing, and is
actively pursuing seven other projects. We have a number of other projects in
the pipeline once these projects have come to a resolution.
We completed a private placement of $2,100,000 of convertible notes in
January of 2005. A portion of the net proceeds from this offering will be used
to finance the Pinnacle Project, if necessary.
The timing of the projects we are actively pursuing is uncertain but,
subject to obtaining the necessary financing, they are considered to have a high
probability of activity. With the exception of the Pinnacle Project, no
definitive contracts have as yet been signed, and there is no assurance that the
required financing will be obtained or that any of the projects will
materialize. However, we are diligently pursuing both debt and equity financing
through several different sources, and believe that we will be successful in
arranging financing for at least one or two projects during the second quarter
of 2005.
We achieved a major breakthrough in February of 2005 with the announcement
that a private investor had agreed to finance the cost of the China Segment's
initial fertilizer manufacturing facility in China. The investor has agreed to
loan funds to an LLC, owned 50% by BEE and 50% by the investor, that we believe
will be sufficient to fund the capital costs and pre-operating costs of the
facility. The plant is initially targeted to produce estimated revenues of more
than US$5 million annually. Additionally, the LLC will absorb, beginning in
February of 2005, approximately 60% of the overhead burden that the Company has
been carrying for the China Segment.
Receipt of the second and third installments from the McElmo Dome
litigation has improved our balance sheet and income statement. We received
$1,162,000 of the settlement in July of 2003, and $2,826,000 and $117,000 in
March and May of 2004, respectively. Upon receipt of the second installment, we
were able to eliminate $2,620,000 of our total indebtedness. (See "Item 3. Legal
Proceedings---McElmo Dome Litigation").
In March of 2001 we arranged for a $1,750,000 long-term line of credit from
an affiliate of the Chairman. The credit line was increased in stages up to
$3,000,000 in October of 2002 to provide additional working capital. This line
was supplemented by a $150,000 short-term line of credit from the same party in
November of 2002, and subsequently increased in stages up to $375,000 in
November of 2003. In March of 2004, following receipt of the second installment
of the Settlement, the short-term line of credit was terminated, and the
long-term line of credit was paid down to $2,800,000 and ceased to be a
revolving credit. This loan has since been extended and paid down to $2,785,000.
These loans from a related party were supplemented by (i) the three private
placements completed in 2002 and 2003 which raised proceeds of $1,829,000, (ii)
loans totaling $303,000 from a related party and an unconsolidated subsidiary in
late 2003, (iii) the three additional private placements completed in 2004 and
January of 2005 which raised proceeds of $3,300,000, and (iv) the additional
borrowings of $200,000 in November of 2004 from the unconsolidated subsidiary.
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, we have been disposing of the remaining assets from
our discontinued segments as opportunities have become available and we are
continuing to pursue the sale of the few remaining assets.
Our selected liquidity highlights for the past three years are summarized
below:
2004 2003 2002
---- ---- ----
Cash and cash equivalents $ 127,000 $ 216,000 $ 79,000
Accounts and other receivables, net 167,000 89,000 133,000
Asset sales 63,000 234,000 334,000
Assets of discontinued operations held for resale 40,000 55,000 324,000
Liabilities of discontinued operations held for resale 95,000 92,000 125,000
Trade accounts payable 177,000 133,000 138,000
Current maturities of long-term and short-term debt 774,000 698,000 419,000
Long-term debt 3,807,000 4,883,000 4,241,000
Working capital (944,000) (854,000) (303,000)
Current ratio 0.31 to 1 0.32 to 1 0.65 to 1
Net cash provided by (used in) operations 447,000 (732,000) (1,789,000)
In 2004, we had negative cash flow of $89,000. Operations of the Coal,
China, and e-Commerce Segments and the discontinued operations resulted in cash
outflows of $1,330,000. (See "Results of operations---Other corporate
activities" below).
Our investing activities provided cash of $107,000 in 2004. Proceeds from
the sale of assets provided cash of $63,000. Net distributions from our
investment in Cibola and a real estate partnership provided cash of $333,000.
Acquisitions of property, plant and equipment and intangible assets used
$255,000 of the cash outflow.
Our financing activities used cash flows of $643,000 in 2004. We received
$1,865,000 from our borrowings and from the exercise of warrants and utilized
$2,466,000 for payments on lines of credit and term notes.
At December 31, 2004 we had no available lines of credit. However, at March
24, 2005 we had cash and cash equivalents of $914,000, primarily as a result of
the $2,100,000 debt offering closed in January of 2005.
Effect of Recent Developments on Liquidity. Our debt-to-equity ratio, which
stood at 2.20(A) to 1 at year-end 2001, had deteriorated to 11.07(A) at year-end
2002, but improved to 9.59(A) to 1 at year-end 2003, and to 1.64(A) to 1 at
year-end 2004. Consolidated debt, which totaled $2,820,000 at year-end 2001,
$4,660,000 at year-end 2002, and $5,581,000 at year-end 2003, decreased to
$4,581,000 at year-end 2004. Although our balance sheet improved in 2004 as a
result of the receipt of the settlement and the subsequent pay down of debt, it
is essential that some of the projects under development in the Coal and China
Segments achieve positive cash flow quickly. If this does not occur, we must
pursue additional outside financing, which would likely involve further dilution
to our shareholders.
____________________
(A) Computed by using the market value of our common equity in the denominator
of the equation. Using the negative equity for the respective periods would
result in ending up with meaningless numbers.
Material Trends and Uncertainties. 2004 was our first profitable year since
1997. We recorded net earnings of $937,000 in 2004 compared with net losses of
$1,611,000 in 2003 and $4,614,000 in 2002. 2004 results benefited from the
$2,943,000 received from the McElmo Dome settlement. We have generated operating
losses for six consecutive years. The recent trend has been positive. We
recorded an operating loss of $1,700,000 in 2004 versus operating losses of
$2,138,000 and $3,057,000 in 2003 and 2002, respectively. Despite the amount of
debt that we have incurred in recent years, we believe that we have the ability
to finance our Coal and China projects on a project financing basis, as
demonstrated by the financing of our initial fertilizer plant in China. At the
corporate level, future borrowings will likely be dependent upon our ability to
generate positive cash flows from operations. It is unlikely that additional
borrowings will be made available to us from a related party until the Coal
and/or China Segments have demonstrated the ability to generate positive cash
flow. We have retained a firm which specializes in the private placement of debt
and equity securities for energy companies to pursue project financing for our
Coal projects, and we are also pursuing USDA-guaranteed loans for such projects
through various sources, but there is no assurance we will be successful in such
efforts. As discussed above, it is critical that we achieve positive cash flow
on at least one, and preferably two, Coal or China projects in short order.
Our 2004, 2003 and 2002 financial results were burdened by impairments
totaling $-0-, $82,000 and $2,433,000, and by losses from discontinued
operations totaling $-0-, $121,000 and $223,000, respectively. At year-end 2004
our total assets, net of current assets of $416,000, had been written down to
only $857,000. $338,000 of this amount consisted of our McElmo Dome properties
which generated revenues of $754,000 and operating profits of $585,000 in 2004.
We believe it is highly unlikely that there will be any significant impairments
going forward. Nor do we anticipate having any additional losses from the
operations of the discontinued segments going forward. On the other hand, 2003
and 2004 financial results benefited from the McElmo Dome settlement in the
gross amount of $1,162,000 and $2,943,000, respectively. The Settlement is a
non-recurring item, so we will not have this benefit in the future except to the
extent that McElmo Dome operating results may benefit from improved pricing or
reduced pipeline charges as a result of the Settlement.
One uncertainty we are facing is the amount of litigation expense the
e-Commerce Segment will incur in 2005 and 2006 related to the litigation against
Visa. It is difficult to estimate how much the segment's one-half of the
out-of-pocket expenses (excluding legal fees) associated with such litigation
may total. However, we believe that the improved results from the segment's
licensing activities, coupled with the anticipated improved results from the CO2
Segment, will take care of such expenses.
Results of operations
- ---------------------
General. We discontinued four of our segments, all of which were
unprofitable, during the period from 1998 to 2001. Management has since been
focusing its attention on making the remaining operations profitable. We have
now succeeded in arranging financing for our initial fertilizer project in
China. Subject to obtaining the necessary financing, we believe we are now
getting close to bringing one or more of the projects in the Coal Segment to
reality. If not, as mentioned above, we will need to pursue additional outside
financing, which would likely involve further dilution to our shareholders.
Operating profit (loss) for the last three years for our remaining segments
is set forth below:
2004 2003 2002
---- ---- ----
Operating profit (loss):
Coal $ (682,000) $ (516,000) $(2,105,000)
Carbon dioxide 585,000 363,000 291,000
China (549,000) (724,000) (63,000)
e-Commerce (124,000) (100,000) (202,000)
------------------ ------------------ ------------------
Subtotal (770,000) (977,000) (2,079,000)
Other - principally corporate (930,000) (1,161,000) (978,000)
------------------ ------------------ ------------------
Total $(1,700,000) $(2,138,000) $(3,057,000)
================== ================== ==================
Following is a discussion of results of operations for the three-year
period ended December 31, 2004.
Coal reclamation. As a result of the recent change of direction, we have
focused much of our attention on coal reclamation. The following table depicts
segment operating results for the last three years:
2004 2003 2002
---- ---- ----
Revenues $ 189,000 $ 59,000 $ 12,000
Operating costs (719,000) (441,000) (458,000)
SG&A (135,000) (129,000) (123,000)
Other expenses (17,000) (5,000) (1,536,000)
---------------- ----------------- ----------------
Operating profit (loss) $ (682,000) $ (516,000) $ (2,105,000)
================ ================= ================
The 2004 operating loss reflects the negative impact of the early
termination of the DTE Dickerson agreement. The 2003 and 2002 operating losses
included $6,000 and $1,516,000, respectively, of impairments of long-lived
assets. Except for the aforementioned contract, no new projects were undertaken
during the three year period. However, the industry climate has improved
dramatically in recent months due to the increase in coal and natural gas
prices, and the outlook for the segment has correspondingly improved, with eight
projects currently under development, including three new projects since the
beginning of 2005.
Carbon dioxide. The sole component of revenues for this segment is the sale
of CO2 gas from the working and overriding royalty interests of our two carbon
dioxide producing units in Colorado and New Mexico. The following table depicts
operating results for the last three years:
2004 2003 2002
---- ---- ----
Revenues $ 754,000 $ 508,000 $ 445,000
Operating expenses (128,000) (106,000) (117,000)
DD&A (41,000) (39,000) (37,000)
---------------- ----------------- ----------------
Operating profit $ 585,000 $ 363,000 $ 291,000
================ ================= ================
The following table shows the trend in production volume, sales prices and
lifting cost for the three years:
2004 2003 2002
---- ---- ----
Net production (Mcf) 1,787,000 1,529,000 1,514,000
Average sales price per Mcf $0.42 $0.33 $0.29
Average lifting cost per Mcf $0.06 $0.06 $0.07
As evidenced by the above, revenues, production and sales prices are all
trending up, while lifting costs per Mcf are trending down. As a result of the
additional development drilling in the field in 2003-2004, the increase in oil
prices which has increased the demand for CO2, and the anticipated continuing
improvement in CO2 pricing as a result of the McElmo Dome settlement, we look
for continuing improvement in the outlook for the CO2 Segment in 2005.
China. In 2002, 2003 and most of 2004 the China Segment focused its
attention on the financing and construction of fertilizer plants utilizing
composting technology licensed from third parties. These efforts were
unsuccessful; accordingly, in the fall of 2004 the segment shifted its focus to
the concept of a much smaller mini-plant which would not utilize the licensed
technology. During the first 11 months of 2002, the operations of this segment
were conducted through an unconsolidated affiliate. The segment had no revenues
in 2004, 2003 or 2002, and recorded $548,000, $724,000 and $58,000 of SG&A
expenses, respectively, in 2004, 2003 and 2002 while pursuing its various
marketing efforts. The segment recorded operating losses of $549,000 and
$724,000 attributable to its operations in China for the years 2004 and 2003,
respectively. In 2002, we recorded an operating loss of $63,000 attributable to
our operations in China, along with losses of $357,000 in equity in operations
of unconsolidated affiliates for the first 11 months of 2002.
e-Commerce. In early 1999, we began developing our proprietary concept for
an Internet payment system through starpay. starpay recorded its initial
revenues of $25,000 in 2003 and $29,000 in 2004 versus none in 2002, and
recorded $147,000, $119,000, and $151,000 of SG&A expenses, respectively, in
2004, 2003 and 2002. Operating results for 2004 were burdened with additional
expenses associated with the segment's ongoing litigation against VISA. The
segment's 2004 and 2003 results benefited from the improvement in revenues, cost
cutting efforts and no impairment provisions. The segment recorded $45,000 of
impairment of intangibles in 2002, which increased its operating loss for such
year to $202,000.
Other corporate activities. Other corporate activities include general and
corporate operations, as well as assets unrelated to our operating segments or
held for investment. These activities generated operating losses of $930,000 in
2004, $1,161,000 in 2003, and $978,000 in 2002. The increased operating loss in
2003 compared to 2002 was due to a $76,000 impairment of leases, higher
professional fees associated with the search for project financing and increased
amortization of capitalized costs associated with our subordinated debt. The
$231,000 decrease in the operating loss for 2004 compared to 2003 was
attributable to a $58,000 reduction in professional fees and other SG&A costs, a
$91,000 drop in amortization costs associated with our subordinated debt, and
the fact that there was no impairment of leases in 2004.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") decreased to $870,000 in 2004 from $923,000 in
2003 after increasing from $884,000 in 2002. The $53,000 decrease in 2004 was
primarily attributable to lower professional fees associated with the issuance
of our debt. The $39,000 increase in 2003 compared to 2002 was largely
attributable to an increase in professional fees incurred in the search for
project financing.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expenses decreased to $92,000 in 2004 after increasing to $169,000
in 2003 from $144,000 in 2002. The decrease in 2004 was the result of lower
amortization costs associated with the issuance of our subordinated debt. The
lower amortization expense was the result of such costs being amortized over a
longer term than in the prior year. The increase in 2003 was due primarily to
the increase in intangible assets associated with the issuance of the 10%
subordinated debt.
Impairment of long-lived assets. In 2003 and 2002 we recognized $82,000 and
$1,561,000, respectively, of impairment of long-lived assets as required by FASB
No. 144. Assets in the Coal Segment were impaired $6,000 in 2003 while the
remainder of the 2003 impairments related to assets unrelated to the operating
segments. Impairments related to assets in the Coal and e-Commerce Segments
totaled $1,516,000 and $45,000, respectively in 2002. No such impairments were
required in 2004.
Interest income. Interest income increased to $3,000 in 2004 from $1,000 in
2003 after decreasing from $119,000 in 2002. At the end of 2002, we made the
decision to stop charging interest on a loan by us to our affiliate operating in
China shortly after we had initiated litigation to dissolve the affiliate. This
decision was the primary reason for the drop in interest income for 2003
compared to 2002.
Interest expense. Interest expense increased to $575,000 in 2004 from
$519,000 in 2003 and $400,000 in 2002 reflecting the increased level of debt in
each year as we borrowed to meet our working capital and operating needs and to
fund the China ventures.
Equity in earnings of unconsolidated affiliates. Our equity in earnings of
unconsolidated affiliates reflected earnings of $376,000 and $236,000 for 2004
and 2003, respectively, compared to losses of $238,000 for 2002. Our equity in
the operating losses of our affiliate in China reflected a loss of $357,000 for
2002, the second year of conducting the operations in China in this format, and
$-0- for both 2003 and 2004, respectively. The losses for 2002 represent 50% of
the losses recorded by the affiliate in China. The litigation seeking to
dissolve the affiliate, in which we had been involved with our former partner,
was settled in 2003 and the entity was dissolved in December of that year.
Offsetting our share of the losses of the affiliate in China was our share
of the earnings of Cibola Corporation ("Cibola"). Although we own 80% of the
common stock of Cibola, we do not have operating or financial control of this
gas marketing subsidiary. Cibola, formed in 1996, contributed $290,000,
$238,000, and $123,000 of our pre-tax net income for fiscal years 2004, 2003 and
2002, respectively, pursuant to a tax sharing agreement. Such income was down in
2002 due to capital losses incurred on Cibola's investments. In addition, in
2004, we recorded $86,000 in earnings from our investment in JMG-15, a real
estate partnership in Texas that sold a parcel of land during the year, compared
to losses of $2,000 and $4,000 for 2003 and 2002, respectively, from the
partnership.
Gain on sale of assets. Gains on the sale of assets totaled $14,000 in
2004, $1,000 in 2003, and $27,000 in 2002. Such gains reflected proceeds from
the sale of certain assets sold in such years.
Impairment of investments and other assets. In 2002, we recognized $872,000
of impairments to the carrying values of investments and other assets related to
the recoverability of such investments or assets. The 2002 impairment was due
primarily to the $759,000 impairment of our net investment in our then 50%-owned
subsidiary in China. There were no such impairments in 2003 and 2004.
Income taxes. We have approximately $50.1 million of net operating loss
carryforwards and depletion carryforwards to reduce future income taxes. Based
on our historical results of operations, it is not likely that we will be able
to fully realize the benefit of our net operating loss carryforwards which begin
expiring in 2006. At December 31, 2004 and 2003, we have not reflected as a
deferred tax asset any future benefit we may realize as a result of our tax
credits and loss carryforwards. Our future regular taxable income for the next
four years will be effectively sheltered from federal income tax as a result of
our substantial tax credits and loss carryforwards. Continuing operations
reflect foreign and state income and federal alternative minimum taxes (refunds)
of $118,000, $-0-, and ($31,000) for 2004, 2003 and 2002, respectively. It is
anticipated that we will continue to incur minor alternative minimum tax in the
future, despite our carryforwards and credits.
Discontinued operations. As mentioned in the Overview above, our financial
results from the discontinuance of four of our segments have been burdened by
losses of $-0-, $121,000, and $223,000, $868,000 and $1,637,000, respectively,
during the last five years. As of December 31, 2004, assets of discontinued
operations held for resale totaled $40,000 and liabilities of discontinued
operations held for resale totaled $95,000. We believe that all of the assets of
the discontinued segments have been written down to their realizable value. See
Note 4 to the financial statements.
Forward looking statements. The previous discussions include statements
that are not purely historical and are "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including statements regarding our expectations, hopes, beliefs, intentions
and strategies regarding the future. Our actual results could differ materially
from its expectations discussed herein, and particular attention is called to
the discussion under "Liquidity and Capital Resources---Effect of Recent
Developments on Liquidity" and "Material Trends and Uncertainties" contained in
this Item 7.
Impact of Recently Adopted Accounting Standards
- -----------------------------------------------
In November 2004, the FASB issued SFAS 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." This Statement amends the guidance in Accounting
Research Bulletin ("ARB") No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that "...under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges..." This Statement
requires that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this Statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005.
In December 2004, the FASB issued SFAS 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67." This
Statement amends FASB Statement No. 66, "Accounting for Sales of Real Estate,"
to reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in American Institute of Certified
Public Accountants ("AICPA") Statement of Position (SOP) 04-2, "Accounting for
Real Estate Time-Sharing Transactions." This Statement also amends FASB
Statement No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects," to state that the guidance for (a) incidental operations and
(b) costs incurred to sell real estate projects does not apply to real estate
time-sharing transactions. The accounting for those operations and costs is
subject to the guidance in SOP 04-2. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." The guidance in Accounting
Principles Board ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions," is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair market value of the assets exchanged. The
guidance in that Opinion, however, included certain exception to that principle.
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for nonmonetary transactions
occurring in fiscal periods beginning after June 15, 2005.
In addition, in December 2004, the FASB issued a revision of FASB Statement
No. 123, "Accounting for Stock Based Compensation," entitled "Share-Based
Payment." This statement supercedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and its related implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and EITF
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." This Statement will
be effective as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
We have not evaluated the effects of Statement No. 151, 152 or 153, or the
revision of Statement 123, but we do not believe that adoption of these
accounting standards will have a significant effect on the financial position or
results of operations of the Company.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. For example, unexpected changes in market
conditions or a downturn in the economy could adversely affect actual results.
Estimates are used in accounting for, among other things, the allowance for
doubtful accounts, valuation of long-lived assets, legal liability,
depreciation, taxes, and contingencies. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Receivables and Credit Policies
- -------------------------------
Accounts receivable include amounts due from the sale of CO2 from
properties in which we own an interest, a tax refund due, accrued interest
receivable and uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice date. Notes receivable
are stated at principal amount plus accrued interest and are normally not
collateralized. Payments of accounts receivable are allocated to the specific
invoices identified on the customers remittance advice or, if unspecified, are
applied to the earliest unpaid invoices. Payments of notes receivable are
allocated first to accrued but unpaid interest with the remainder to the
outstanding principal balance. Trade accounts and notes receivable are stated at
the amount management expects to collect from outstanding balances. The carrying
amounts of accounts receivable are reduced by a valuation allowance that
reflects management's best estimate of the amounts that will not be collected.
Management individually reviews all notes receivable and accounts receivable
balances that exceed 90 days from invoice date and based on an assessment of
current creditworthiness, estimates the portion, if any, of the balance that
will not be collected. Management provides for probable uncollectible accounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are still
outstanding after management has used reasonable collection efforts are written
off through a charge to the valuation account and a credit to trade accounts
receivable. Changes to the valuation allowance have not been material to the
financial statements.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
- -----------------------------------------------------------------------
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition
- -------------------
We recognize revenue when it is realized or receivable and earned. Revenue
from the CO2 Segment is recognized in the period of production. Revenue from
Coal Segment projects is recognized in the period the projects are performed.
License fees from the e-Commerce segment are recognized over the term of the
agreement.
Off-Balance Sheet Arrangements
- ------------------------------
We do not have any material off-balance sheet arrangements.
Contractual Obligations
- -----------------------
The table below sets forth our contractual cash obligations as of December
31, 2004:
Payments Due By Period
-----------------------------------------------------------------------------------
Contractual 2010 and
Obligations Total 2005 2006-2007 2008-2009 Beyond
- -------------------- -------------- ------------- --------------- ------------- ------------
Long-term debt
obligations $4,581,000 $ 774,000 $3,552,000 $ - $255,000
Capital lease
obligations $ - $ - $ - $ - $ -
Operating lease
obligations $ 282,000 $ 206,000 $ 76,000 $ - $ -
Purchase
obligations $ - $ - $ - $ - $ -
Other long-term
liabilities $ - $ - $ - $ - $ -
-------------- ------------- --------------- ------------- ------------
Total $4,863,000 $ 980,000 $3,628,000 $ - $255,000
============== ============= =============== ============= ============
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
At December 31, 2004, we had no notes receivable and total debt of
$4,581,000, including accrued interest to related parties of $138,000. Debt in
the amount of $3,381,000 has fixed interest rates; therefore, our interest
expense and operating results would not be affected by an increase in market
interest rates for this amount. Our $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 required payment of interest only until November
30, 2004. We will then amortize the notes with equal payments of principal and
interest over the remaining eight quarters. A 10% increase in market interest
rates above the 10% floor would have increased our interest expense by
approximately $3,000. At December 31, 2004, a 10% increase in market rates above
the 10% floor would have reduced the fair value of our long-term debt by
$52,000.
We have no other market risk sensitive instruments.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The Beard Company and Subsidiaries
Index to Financial Statements
Forming a Part of Form 10-K Annual Report
to the Securities and Exchange Commission
Page Number
-----------
Report of Independent Registered Public Accounting Firm ....................39
Financial Statements:
Balance Sheets, December 31, 2004 and 2003...............................40
Statements of Operations, Years ended December 31, 2004, 2003 and 2002...41
Statements of Shareholders' Equity (Deficiency), Years ended
December 31, 2004, 2003 and 2002.......................................42
Statements of Cash Flows, Years ended December 31, 2004, 2003 and 2002...43
Notes to Financial Statements, December 31, 2004, 2003 and 2002..........45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Beard Company
Oklahoma City, Oklahoma
We have audited the accompanying consolidating balance sheets of The Beard
Company and subsidiaries a as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for each of the years in the three-year period ended December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Beard Company and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that The Beard Company and subsidiaries will continue as a going concern. As
discussed in Note 2 to the financial statements, The Beard Company and
subsidiaries' recurring losses and negative cash flows from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
Oklahoma City, Oklahoma
March 28, 2005
THE BEARD COMPANY AND SUBSIDIARIES
Balance Sheets
December 31, December 31,
Assets 2004 2003
------ ----------------- ------------------
Current assets:
Cash and cash equivalents $ 127,000 $ 216,000
Accounts receivable, less allowance for doubtful
receivables of $97,000 in 2004 and 2003 167,000 89,000
Prepaid expenses and other assets 82,000 34,000
Assets of discontinued operations held for resale 40,000 55,000
----------------- ------------------
Total current assets 416,000 394,000
----------------- ------------------
Note receivable, less allowance for doubtful receivable of
$30,000 in 2004 and 2003 (note 6) - -
Investments and other assets (note 5) 121,000 81,000
Property, plant and equipment, at cost (note 7) 2,090,000 1,843,000
Less accumulated depreciation, depletion and amortization 1,457,000 1,392,000
----------------- ------------------
Net property, plant and equipment 633,000 451,000
----------------- ------------------
Intangible assets, at cost (note 8) 292,000 183,000
Less accumulated amortization 189,000 168,000
----------------- ------------------
Net intangible assets 103,000 15,000
----------------- ------------------
$ 1,273,000 $ 941,000
================= ==================
Liabilities and Shareholders' Equity (Deficiency)
-------------------------------------------------
Current liabilities:
Trade accounts payable $ 177,000 $ 133,000
Accrued expenses (note 3) 314,000 325,000
Short-term debt - 32,000
Short-term debt - related entities 200,000 661,000
Current maturities of long-term debt (note 9) 241,000 5,000
Current maturities of long-term debt - related entities (note 9) 333,000 -
Liabilities of discontinued operations held for resale 95,000 92,000
----------------- ------------------
Total current liabilities 1,360,000 1,248,000
----------------- ------------------
Long-term debt less current maturities (note 9) 367,000 1,215,000
Long-term debt - related entities (note 9) 3,440,000 3,668,000
Other long-term liabilities 250,000 143,000
Common shareholders' equity (deficiency):
Convertible preferred stock of $100 stated value;
5,000,000 shares authorized; 27,838 shares issued
and outstanding 889,000 889,000
Common stock of $.0006665 and $.001333 par value per share;
15,000,000 and 7,500,000 authorized; 4,839,565 and 2,328,845
shares issued and outstanding in 2004 and 2003, respectively 3,000 3,000
Capital in excess of par value 38,193,000 37,941,000
Accumulated deficit (43,214,000) (44,151,000)
Accumulated other comprehensive loss (15,000) (15,000)
----------------- ------------------
Total common shareholders' equity (deficiency) (4,144,000) (5,333,000)
----------------- ------------------
Commitments and contingencies (notes 4, 10, and 14)
$ 1,273,000 $ 941,000
================= ==================
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Operations
Year Ended December 31,
----------------------------------------------------
2004 2003 2002
---------------- ---------------- ---------------
Revenues:
Coal reclamation $ 189,000 $ 59,000 $ 12,000
Carbon dioxide 754,000 508,000 445,000
China - - -
e-Commerce 29,000 25,000 -
Other - 1,000 12,000
---------------- ---------------- ---------------
972,000 593,000 469,000
---------------- ---------------- ---------------
Expenses:
Coal reclamation 854,000 570,000 581,000
Carbon dioxide 128,000 106,000 117,000
China 548,000 724,000 46,000
e-Commerce 147,000 119,000 151,000
Selling, general and administrative 870,000 923,000 884,000
Depreciation, depletion and amortization 92,000 169,000 144,000
Impairment of long-lived assets (notes 1, 7, 8 and 16) - 82,000 1,561,000
Other 33,000 38,000 42,000
---------------- ---------------- ---------------
2,672,000 2,731,000 3,526,000
---------------- ---------------- ---------------
Operating profit (loss):
Coal reclamation (682,000) (516,000) (2,105,000)
Carbon dioxide 585,000 363,000 291,000
China (549,000) (724,000) (63,000)
e-Commerce (124,000) (100,000) (202,000)
Other, principally corporate (930,000) (1,161,000) (978,000)
---------------- ---------------- ---------------
(1,700,000) (2,138,000) (3,057,000)
Other income (expense):
Interest income 3,000 1,000 119,000
Interest expense (575,000) (519,000) (400,000)
Equity in net earnings (loss) of unconsolidated affiliates 376,000 236,000 (238,000)
Gain on settlement 2,943,000 1,151,000 -
Gain on sale of assets 14,000 1,000 27,000
Impairment of investments and other assets (notes 1, 7, 8 and 16) - - (872,000)
Other (6,000) (222,000) (1,000)
---------------- ---------------- ---------------
Earnings (loss) from continuing operations before income taxes 1,055,000 (1,490,000) (4,422,000)
Income tax (expense) benefit (note 11) (118,000) - 31,000
---------------- ---------------- ---------------
Earnings (loss) from continuing operations 937,000 (1,490,000) (4,391,000)
Discontinued operations (note 3):
Earnings (loss) from discontinued brine extraction/iodine manufacturing
activities 21,000 - (88,000)
Loss from discontinued interstate travel facilities activities - (9,000) (85,000)
Loss from discontinued natural gas well servicing activities (21,000) (112,000) (50,000)
---------------- ---------------- ---------------
Loss from discontinued operations - (121,000) (223,000)
---------------- ---------------- ---------------
Net earnings (loss) $ 937,000 $ (1,611,000) $(4,614,000)
================ ================ ===============
Net earnings (loss) attributable to common shareholders (note 4) $ 937,000 $ (1,611,000) $(4,614,000)
================ ================ ===============
Net earnings (loss) per average common share outstanding:
Basic (notes 1 and 12):
Earnings (loss) from continuing operations $ 0.18 $ (0.33) $ (1.05)
Loss from discontinued operations - (0.02) (0.05)
---------------- ---------------- ---------------
Net earnings (loss) $ 0.18 $ (0.35) $ (1.10)
================ ================ ===============
Net earnings (loss) per average common share outstanding:
Diluted (notes 1 and 12):
Earnings (loss) from continuing operations $ 0.14 $ (0.33) $ (1.05)
Loss from discontinued operations - (0.02) (0.05)
---------------- ---------------- ---------------
Net earnings (loss) $ 0.14 $ (0.35) $ (1.10)
================ ================ ===============
Weighted average common shares outstanding:
Basic 5,215,000 4,542,000 4,193,000
================ ================ ===============
Diluted 6,478,000 4,542,000 4,193,000
================ ================ ===============
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, 2001 $ - $ 3,000 $38,081,000 $(36,568,000) $(14,000) $(1,846,000) $( 344,000)
Net loss - - - (4,614,000) - - (4,614,000)
Comprehensive income:
Foreign currency translation
adjustment - - - - (1,000) - (1,000)
------------
Comprehensive loss - - - - - - (4,615,000)
------------
Issuance of stock warrants - - 11,000 - - - 11,000
Reservation of shares pursuant to deferred
compensation plan (note 12) - - 115,000 - - - 115,000
-------- -------- ----------- ------------ --------- ----------- ------------
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 (note 12) - - 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 - - - 937,000 - - 937,000
Comprehensive income:
Foreign currency translation
adjustment - - - - - - -
------------
Comprehensive income - - - - - - 937,000
------------
Issuance of stock warrants - - 50,000 - - - 50,000
Reservation of shares pursuant to deferred
compensation plan (note 12) - - 202,000 - - - 202,000
-------- -------- ----------- ------------ --------- ----------- ------------
Balance, December 31, 2004 $889,000 $ 3,000 $38,193,000 $(43,214,000) $(15,000) $ - $(4,144,000)
======== ======== =========== ============ ========= =========== ============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Year Ended December 31,
---------------------------------------------------
2004 2003 2002
---------------- ---------------- ---------------
Operating activities:
Cash received from customers $ 894,000 $ 593,000 $ 499,000
Gain on settlement 2,943,000 1,162,000 -
Cash paid to suppliers and employees (2,670,000) (2,247,000) (1,595,000)
Interest received 3,000 1,000 21,000
Interest paid (711,000) (160,000) (430,000)
Operating cash flows of discontinued operations (12,000) (81,000) (284,000)
---------------- ---------------- ---------------
Net cash provided by (used in) operating activities 447,000 (732,000) (1,789,000)
---------------- ---------------- ---------------
Investing activities:
Acquisition of property, plant and equipment (221,000) (59,000) (68,000)
Acquisition of intangibles (34,000) (3,000) (2,000)
Proceeds from sale of assets 14,000 1,000 49,000
Proceeds from sale of assets of discontinued operations 49,000 233,000 285,000
Payments on notes receivable - - 188,000
Investment in and advances to fifty percent-owned
and wholly-owned subsidiary in Mexico - - (21,000)
Investment in and advances to fifty percent-owned
subsidiary in China - - (585,000)
Other investments 299,000 200,000 199,000
---------------- ---------------- ---------------
Net cash provided by investing activities 107,000 372,000 45,000
---------------- ---------------- ---------------
Financing activities:
Proceeds from line of credit and term notes 755,000 879,000 1,166,000
Proceeds from related party debt 1,065,000 814,000 1,178,000
Payments on line of credit and term notes (1,397,000) (828,000) (373,000)
Payments on related party debt (1,069,000) (302,000) (101,000)
Proceeds from exercise of warrants 45,000 - -
Capitalized costs associated with issuance of
subordinated debt (42,000) (66,000) (102,000)
---------------- ---------------- ---------------
Net cash provided by (used in) financing activities (643,000) 497,000 1,768,000
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents (89,000) 137,000 24,000
Cash and cash equivalents at beginning of year 216,000 79,000 55,000
---------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 127,000 $ 216,000 $ 79,000
================ ================ ===============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Reconciliation of Net Earnings (Loss) to Net Cash Provided by (Used In) Operating Activities:
Year Ended December 31,
---------------------------------------------------
2004 2003 2002
---------------- ---------------- ---------------
Net earnings (loss) $ 937,000 $ (1,611,000) $ (4,614,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 92,000 169,000 144,000
Depreciation, depletion and amortization
discontinued operations - - 2,000
Gain on sale of assets (14,000) (1,000) (27,000)
Gain on sale of assets of discontinued operations (33,000) (51,000) (86,000)
Provision for uncollectible accounts and notes - 17,000 25,000
Impairment of investments and other assets - 82,000 2,433,000
Impairment of investments and other assets of
discontinued operations - 85,000 80,000
Equity in net (earnings) loss of unconsolidated
affiliates (376,000) (236,000) 238,000
Equity in net loss of unconsolidated affiliates of
discontinued operations - - 15,000
Non cash compensation expense and stock warrants 206,000 222,000 126,000
Other 5,000 - (10,000)
Net change in assets and liabilities of discontinued
operations - (17,000) (155,000)
(Increase) decrease in accounts receivable, other
receivables, prepaid expenses and other current assets (126,000) 58,000 (102,000)
Decrease in inventories - - 93,000
Increase (decrease) in trade accounts payable,
accrued expenses and other liabilities (244,000) 551,000 49,000
---------------- ---------------- ---------------
Net cash provided by (used in) operating activities $ 447,000 $ (732,000) $ (1,789,000)
================ ================ ===============
See accompanying notes to financial statements.
THE BEARD COMPANY AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2004, 2003, and 2002
(1) Summary of Significant Accounting Policies
- --- ------------------------------------------
The Beard Company's ("Beard" or the "Company") accounting policies reflect
industry practices and conform to accounting principles generally accepted in
the United States of America. The more significant of such policies are briefly
described below.
Nature of Business
- ------------------
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 United States of America and provides slurry pond core
drilling services, fine coal laboratory analytical services and consulting
services. The CO2 Segment consists of the production of CO2 gas. The China
Segment is pursuing environmental opportunities in China, focusing on the
financing, construction and operation of organic chemical compound fertilizer
plants. The e-Commerce Segment consists of a 71%-owned subsidiary whose current
strategy is to develop business opportunities to leverage starpay's(TM)
intellectual property portfolio of Internet payment methods and security
technologies.
Principles of Consolidation and Basis of Presentation
- -----------------------------------------------------
The accompanying financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries in which the Company has a
controlling financial interest. Subsidiaries and investees in which the Company
does not exercise control are accounted for using the equity method. All
significant intercompany transactions have been eliminated in the accompanying
financial statements.
Use of estimates
- ----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
There were no cash equivalents at December 31, 2004 or 2003. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less at the date of
purchase to be cash equivalents.
Receivables and Credit Policies
- -------------------------------
Accounts receivable include amounts due from the sale of CO2 from properties in
which the Company owns an interest, a tax refund due, accrued interest
receivable and uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice date. Notes receivable
are stated at principal amount plus accrued interest and are normally not
collateralized. Payments of accounts receivable are allocated to the specific
invoices identified on the customers remittance advice or, if unspecified, are
applied to the earliest unpaid invoices. Payments of notes receivable are
allocated first to accrued but unpaid interest with the remainder to the
outstanding principal balance. Trade accounts and notes receivable are stated at
the amount management expects to collect from outstanding balances. The carrying
amounts of accounts receivable are reduced by a valuation allowance that
reflects management's best estimate of the amounts that will not be collected.
Management individually reviews all notes receivable and accounts receivable
balances that exceed 90 days from invoice date and based on an assessment of
current creditworthiness, estimates the portion, if any, of the balance that
will not be collected. Management provides for probable uncollectible accounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are still
outstanding after management has used reasonable collection efforts are written
off through a charge to the valuation account and a credit to trade accounts
receivable. Changes to the valuation allowance have not been material to the
financial statements.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost, net of accumulated
depreciation, and are depreciated by use of the straight-line method using
estimated asset lives ranging from three to 40 years.
The Company charges maintenance and repairs directly to expense as incurred
while betterments and renewals are generally capitalized. When property is
retired or otherwise disposed of, the cost and applicable accumulated
depreciation, depletion and amortization are removed from the respective
accounts and the resulting gain or loss is reflected in operations.
Intangible Assets
- -----------------
Identifiable intangible assets are stated at cost, net of accumulated
amortization, and are amortized on a straight-line basis over their respective
estimated useful lives, ranging from five to 17 years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
- -----------------------------------------------------------------------
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
In 2003, the Company recorded impairments of long-lived assets of $6,000 in the
Coal Segment and $76,000 in Other operations. In 2002, the Company recorded
impairments of long-lived assets of $1,516,000 in the Coal Segment and $45,000
in the e-Commerce Segment. There were no such impairments in 2004.
In addition, in 2002 the Company recognized $872,000 for impairments to the
carrying values of investments and other assets relating to the recoverability
of such investments or assets. There were no such impairments in 2003 or 2004.
Other Long-Term Liabilities
- ---------------------------
Other long-term liabilities consist of various items which are not payable
within the next calendar year.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, other current assets, trade accounts payables, and accrued expenses
approximate fair value because of the short maturity of those instruments. At
December 31, 2004 and 2003, the fair values of the long-term debt and notes
receivable were not significantly different than their carrying values due to
interest rates relating to the instruments approximating market rates on those
dates.
Revenue Recognition
- -------------------
The Company recognizes revenue when it is realized or receivable and earned.
Revenue from the CO2 Segment is recognized in the period of production. Revenue
from Coal Segment projects is recognized in the period the projects are
performed. License fees from the e-Commerce segment are recognized over the term
of the agreement.
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The Company provides a valuation allowance for deferred tax assets for
which it does not consider realization of such assets to be more likely than
not. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Stock Option Plan
- -----------------
The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for its stock options.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. SFAS
No. 123, "Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic value method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, neither net earnings (loss)
nor net earnings (loss) per share would have been affected for any years
presented in the accompanying financial statements.
Convertible Preferred Stock
- ---------------------------
The Company's convertible preferred stock is accounted for at estimated fair
value. Prior to January 1, 2003, the preferred stock had been redeemable and was
carried at its estimated fair value. The excess of the estimated redeemable
value over the fair value at the date of issuance was accreted over the
redemption term. Effective January 1, 2003, the preferred stock ceased to be
mandatorily redeemable and thereafter became convertible at the holder's option
into common stock. Accordingly, it is no longer subject to accretion.
Earnings (Loss) Per Share
- -------------------------
Basic earnings (loss) per share data is computed by dividing earnings (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if the Company's outstanding stock options
(calculated using the treasury stock method) and warrants were exercised and if
the Company's preferred stock, convertible notes and deferred stock compensation
units were converted to common stock.
Diluted earnings (loss) per share from continuing operations in the statements
of operations exclude potential common shares issuable upon conversion of
preferred stock, convertible notes, termination of the deferred stock
compensation plan, or exercise of stock options and warrants as a result of
losses from continuing operations in 2002 and 2003.
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 Year Ended
------------------------------------------------------
December 31, December 31, December 31,
2004 2003 2002
------------------------------------------------------
Basic EPS:
Weighted average common
shares outstanding 4,708,580 4,375,224 3,658,086
Weighted average shares in deferred
stock compensation plan treated
as common stock equivalents 506,026 167,254 534,948
------------------------------------------------------
5,214,606 4,542,478 4,193,034
======================================================
Diluted EPS:
Weighted average common
shares outstanding 4,708,580 4,375,224 3,658,086
Weighted average shares in deferred
stock compensation plan treated as
common stock equivalents 506,026 167,254 534,948
Convertible Preferred Shares
considered to be common
stock equivalents 287,558 - -
Warrants issued in connection
with debt offerings treated
as common stock equivalents 975,750 - -
------------------------------------------------------
6,477,914 4,542,478 4,193,034
======================================================
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts and notes receivable. Accounts
receivable from one party comprised approximately 80% of the December 31, 2004
balances of accounts receivable. Generally, the Company does not require
collateral to support accounts and notes receivable.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Comprehensive Income
- --------------------
SFAS No. 130 establishes standards for reporting and display of "comprehensive
income" and its components in a set of financial statements. It requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. During 2002,
the Company's only significant items of comprehensive income related to foreign
currency translation adjustments resulting from its equity investment in
ITS-Testco. The assets and liabilities of Testco de Mexico, a wholly-owned
subsidiary of ITS-Testco, are stated in the local currency (the Mexican peso)
and are translated into U.S. dollars using the current exchange rate in effect
at the balance sheet date, while income and expenses are translated at average
rates for the respective periods. Translation adjustments have no effect on net
loss and are included in accumulated other comprehensive loss.
Reclassifications
- -----------------
Certain 2003 and 2002 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. Despite the fact that
the Company's revenues from continuing operations had declined in each of the
three preceding years, they increased in 2003 and 2004. The Company has incurred
operating losses and negative cash flows from operations during each of the last
five years; however, the Company is of the belief that it will commence a
project in both its Coal and China Segments in 2005. Moreover, the long-awaited
Settlement in the McElmo Dome litigation has now been received. The first
installment, totaling $1,162,000 and including an $11,000 payment on accounts
receivable, was received on July 31, 2003, the second installment, totaling
$2,826,000 was received on March 26, 2004, and a third installment, totaling
$117,000 was received on May 12, 2004. Receipt of the Settlement enabled 2004 to
become a profitable year while at the same time enhancing the Company's
liquidity. Meanwhile, the Coal Segment is currently pursuing eight different
projects, which are in various stages of negotiation. (See "Additional Details"
below). The Company has arranged for the financing for its initial fertilizer
plant in China. (See "Recent Developments--Financing of Initial Fertilizer
Manufacturing Plant in China"). In addition, the Company finalized its first
licensing arrangement in its e-Commerce Segment in March of 2003. Although the
e-Commerce licensing arrangement did not make the segment profitable in 2004 and
will probably not make it profitable in 2005, the Company believes the
arrangement has the potential to make the segment profitable in 2006 and
subsequent years.
During the three years ended December 31, 2004, the Company took a number of
steps to reduce its negative cash flow. The Company's Chairman and President
deferred a portion of their base salary into two Deferred Stock Compensation
Plans (the "DSC Plans") which terminated in 2003, and the Company's 2003-2
Deferred Stock Compensation Plan (the "2003-2 Plan") which became effective on
September 30, 2003, and is ongoing. The Company's outside directors deferred all
of their directors' fees into such Plans. The Chairman of Beard Technologies
deferred a portion of his salary during such period. The Company has suspended
its 100% matching contribution (up to a cap of 5% of gross salary) under its
401(k) Plan. Five private debt placements raised gross proceeds of $3,374,000
during such period, and an additional $1,755,000 in January of 2005. In
addition, in November of 2003 the Company borrowed $200,000 from a related
party. In December of 2003 and November of 2004 the Company borrowed $103,000
and $200,000, respectively, from an unconsolidated subsidiary. These measures
enabled the Company to continue operating until the Settlement was finalized.
The negative result has been a substantial amount of dilution to the Company's
common equity. During such period 1,157,625 warrants (as adjusted for the
2-for-1 stock split effected in August of 2004) were issued in connection with
such private debt placements, and 819,000 Stock Units were accrued in the
participants' accounts as a result of deferrals of salary into the DSC Plans and
the 2003-2 Plan. During such period 345,000 convertible notes were also issued
which were convertible into 345,000 shares of common stock. Additional dilution
also occurred due to an adjustment to the Preferred Stock conversion ratio
resulting from the issuance of the warrants, the convertible notes and the
salary deferrals. Termination of the two DSC Plans resulted in the issuance of
1,000,000 common shares in 2003 (as adjusted for the 2-for-1 stock split
effected in August of 2004).
Additional Details
- ------------------
To mitigate potential liquidity problems, the Company's lines of credit from an
affiliate of the Company's chairman were increased from $2,250,000 in September
of 2001 to $3,375,000 in November of 2003. The lines of credit were converted to
a term loan and paid down to $2,785,000 in March of 2004. As a result of the
private debt placements completed in 2003, the Company obtained a net additional
$545,000 of working capital. Nevertheless, the funding of operations and the
repayment of a portion of the Company's debt resulted in a $551,000 reduction in
the Company's working capital position during 2003. As a result of the private
debt placements completed in 2004, the Company obtained a net additional working
capital of approximately $1,820,000. However, cash and cash equivalents
decreased from $216,000 at December 31, 2003 to $127,000 at December 31, 2004.
The Company's principal business is coal reclamation, and this is where
management's operating attention is primarily focused. The Coal Segment has a
signed contract to construct and operate a pond fines recovery project in West
Virginia (the "Pinnacle Project") which it expects to commence in the second
quarter of 2005 if it can successfully arrange the financing therefor. The
segment is actively pursuing seven other projects and has a number of other
projects in the pipeline for follow up once these eight projects have come to a
resolution. The Company completed a private placement of $2,100,000 of
convertible notes in January of 2005. To the extent not required for working
capital, a portion of the net proceeds from this offering will be used to
finance the Pinnacle Project, if necessary.
The timing of the projects the Company is actively pursuing is uncertain but,
subject to obtaining the necessary financing, they are considered to have a high
probability of activity. With the exception of the Pinnacle Project, no
definitive contracts have as yet been signed, and there is no assurance that the
required financing will be obtained or that any of the projects will
materialize. However, the Company is diligently pursuing both debt and equity
financing through several different sources, and believes that it will be
successful in arranging financing for at least one or two projects during the
second quarter of 2005.
In February of 2005 the Company announced that it has arranged the financing for
its initial fertilizer manufacturing plant in China (See "General development of
business---Recent Developments."
In addition, the Company expects to generate cash of approximately $30,000 from
the sale of real estate and at least $50,000 from the disposition of the
remaining assets from two of its discontinued segments, and can sell certain
other assets 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 and China
Segments have come on stream and the Company is generating positive cash flow
from operations. If such efforts are not successful or are only partially
successful, then the Company will need to pursue additional outside financing,
which would likely involve further dilution to our shareholders.
(3) Discontinued Operations
- --- -----------------------
ITF Segment
- -----------
In 1999 the Company adopted a formal plan to discontinue its ITF (Interstate
Travel Facilities) Segment and recorded a loss of $2,419,000 from discontinuing
the segment in 1998. The segment disposed of all of its assets except two
convenience stores in 1999 and recorded an additional loss of $214,000 that
year. In 2000, ITF recorded revenues of $1,826,000 and a net loss of $591,000,
including a $360,000 additional impairment loss. In 2001, ITF recorded revenues
of $7,000 and a net loss of $121,000, including an additional $100,000
impairment in the carrying value of the remaining facilities. The Company sold
one of the convenience stores with related property, plant and equipment in 2002
and recorded losses totaling $85,000, including a $1,000 gain on the sale of
assets and an additional charge of $77,000 to impair the carrying value of the
remaining facility in such year. In 2003, the Company sold the remaining
convenience store and related property, plant and equipment and recorded losses
totaling $9,000 for the segment in such year, including a $5,000 gain on the
sale of assets. In 2004, the segment recorded no earnings and income of less
than $1,000. As of December 31, 2004, the segment had no remaining 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 its assets. The
venture was dissolved in 2000 and the Company took over certain remaining assets
and liabilities. The assets included two iodine plants, the larger of which was
shut down in 2000. The smaller plant continued to operate. As a result of the
discontinuance, the Company reflected $540,000 of losses from discontinued
operations in 1999 and $179,000 in income from discontinued operations in 2000.
The Company recorded $88,000 and $111,000 for the years 2002 and 2001,
respectively, in net operating expenses from the smaller of the two plants. In
2003, the Company recorded no net losses related to this segment. In 2004, the
Company recorded $21,000 of earnings related to this segment, resulting from the
sale of equipment in excess of the impaired value on the books. The Company
expects no further material charges to earnings related to the remaining assets.
As of December 31, 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 totaling $54,000. The Company is actively pursuing
opportunities to sell the segment's remaining assets and expects the disposition
to be completed by December 31, 2005.
WS Segment
- ----------
In 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 $1,521,000. 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 net loss from the discontinued operations of the segment was $619,000 in
2001, including a $107,000 loss on the sale of equipment. In 2002, the net loss
of the segment was $50,000, including gains totaling $88,000 from the sale of
equipment. The net loss for 2003 was $112,000, including an impairment provision
of $85,000. The net loss of the segment for 2004 was $21,000. As of December 31,
2004 the significant assets of the WS Segment were fixed assets totaling
$39,000. The Company is actively pursuing the sale of the remaining assets and
expects to have them sold or otherwise disposed of by December 31, 2005. The
significant liabilities of the segment consisted of trade accounts payable and
other accrued expenses totaling $60,000. It is anticipated that all of the
liabilities of the segment will be paid prior to December 31, 2005.
(4) 1993 Restructure; Convertible Preferred Stock
- --- ---------------------------------------------
As the result of a restructure (the "Restructure") effected in 1993, a company
owned by four lenders (the Institutions") received substantially all of the
Company's oil and gas assets, 25% of the Company's then outstanding common
stock, and $9,125,000 stated value (91,250 shares, or 100%) of its preferred
stock. As a result, $101,498,000 of the Company's long-term debt and other
obligations were eliminated.
The Company's preferred stock was mandatorily redeemable through December 31,
2002 from one-third of Beard's consolidated net income. At January 1, 2003, the
stock was no longer redeemable, and each share of Beard preferred stock became
convertible into 4.26237135 (118,655) shares (pre-split) of Beard common stock.
The conversion ratio is adjusted periodically (i) for stock splits, (ii) as
additional warrants or convertible notes are issued, and (iii) as additional
shares of stock are credited to the accounts of the Company's Chairman or
President in the Company's Deferred Stock Compensation Plans, in each case at a
value of less than $1.29165 per share. Fractional shares will not be issued, and
cash will be paid in redemption thereof. At December 31, 2004 (after giving
effect to a 2-for-1 stock split effected in August of 2004) each share of Beard
preferred stock was convertible into 10.32971466 (287,558) shares of Beard
common stock. The preferred stockholder is entitled to one vote for each full
share of common stock into which its preferred shares are convertible. In
addition, preferred shares that have not been converted have preference in
liquidation to the extent of their $100 per share stated value.
From 1995 through 1998 the Company redeemed or repurchased 63,412 of the
preferred shares from the Institutions or from individuals to whom the
Institutions had sold such shares. The last 31,318 of such shares were purchased
for $31.93 per share in 1998.
At December 31, 2004 and 2003, the convertible preferred stock was recorded at
its estimated fair value of $889,000 or $31.93 per share versus its aggregate
stated value of $2,784,000.
(5) Investments and Other Assets
- --- ----------------------------
Investments and other assets consisted of the following:
December 31,
------------
2004 2003
---- ----
Investment in Cibola Corporation $ 92,000 $ 13,000
Investment in real estate limited partnerships 13,000 50,000
Other assets 16,000 18,000
---------- ----------
$ 121,000 $ 81,000
========== ==========
Investment in Cibola Corporation
- --------------------------------
The Company owns 80% of the outstanding common stock of Cibola Corporation
("Cibola"), a natural gas marketing company, but does not consolidate the
assets, liabilities, revenues or expenses of Cibola because Cibola's assets are
controlled by its minority common stockholders and preferred stockholders. The
Company's equity in the earnings of Cibola was $290,000, $238,000, and $123,000,
in 2004, 2003 and 2002, respectively.
Investment in Real Estate Limited Partnerships
- ----------------------------------------------
The Company owns a limited partnership interest in a real estate limited
partnership whose only asset consists of a tract of undeveloped land near
Houston, Texas, most of which was sold in 2004. The Company recorded income of
$86,000 and losses of $2,000 and $4,000 in 2004, 2003 and 2002, respectively,
resulting from its share of the limited partnership's operations for those
years. The Company received a distribution of $122,000 from this investment in
2004 as its share of proceeds from the sale of the portion of land sold by the
partnership.
Other assets
- ------------
The Company recorded a provision of $872,000 in 2002 for economic impairment of
other investments, including those discussed above. There were no impairments of
these assets in 2003 or 2004.
(6) Notes Receivable
- --- ----------------
At December 31, 2003, the Company had a note receivable totaling $30,000
resulting from the sale of equipment. The note was determined to be
uncollectible in December of 2003 and the note was fully impaired. The $30,000
was charged against an impairment reserve.
(7) Property, Plant and Equipment
- --- -----------------------------
Property, plant and equipment consisted of the following:
December 31,
------------
2004 2003
---- ----
Land $ 9,000 $ 9,000
Oil and gas leases 124,000 134,000
Proved carbon dioxide properties 1,291,000 1,256,000
Buildings and land improvements 28,000 65,000
Machinery and equipment 460,000 202,000
Other 178,000 177,000
----------- -----------
$ 2,090,000 $ 1,843,000
=========== ===========
The initial evaluation of long-lived assets on a fair value basis, as required
by the implementation of SFAS No. 144, indicated that an impairment existed in
the Coal Segment. Accordingly, impairment losses of $1,516,000 and $6,000 were
recognized in 2002 and 2003, respectively, to fully impair the coal fines
extraction and beneficiation equipment and certain other long-lived assets of
the Coal Segment. The fair value of the segment was estimated using the expected
present value of future cash flows. The Company also recorded an impairment of
$76,000 in 2003 relating to its oil and gas leases in other operations. The fair
values of these assets were estimated using the expected present value of future
cash flows.
The Company incurred $71,000, $58,000, and $89,000 of depreciation expense for
2004, 2003, and 2002, respectively.
(8) Intangible Assets
- --- -----------------
Intangible assets are summarized as follows:
December 31,
------------
2004 2003
---- ----
Debt issuance costs $ 260,000 $ 169,000
Patent costs 1,000 1,000
Other 31,000 13,000
----------- -----------
$ 292,000 $ 183,000
=========== ===========
Accumulated amortization is summarized as follows:
December 31,
------------
2004 2003
---- ----
Debt issuance costs $ 181,000 $ 159,000
Patent costs 1,000 1,000
Other 7,000 8,000
----------- -----------
$ 189,000 $ 168,000
=========== ===========
During 2004, the Company capitalized $65,000 of costs associated with the
issuance of the 10% Participating Subordinated and 12% Convertible Subordinated
notes. The costs of the 10% notes are being amortized over 31 months and will be
fully amortized in November of 2006; the costs of the 12% notes are being
amortized over five years and will be fully amortized by the first quarter of
2010, all as a result of such notes having been paid off.
The initial evaluation of long-lived assets on a fair value basis, as required
by the implementation of SFAS No. 144, indicated that an impairment existed in
the e-Commerce Segment. Accordingly, patent and patent application costs
totaling $45,000 were written off in 2002. The fair value of the affected asset
group was estimated using the expected present value of future cash flows.
The Company incurred $21,000, $111,000, and $55,000 of amortization expense for
2004, 2003 and 2002, respectively. If no capital assets are added, amortization
expense is expected to be as follows.
2005 $ 21,000
2006 20,000
2007 7,000
2008 7,000
2009 6,000
2010 1,000
----------
$ 62,000
==========
(9) Long-term Debt
- --- --------------
Long-term debt is summarized as follows:
December 31,
------------
2004 2003
---- ----
Coal $ $ 1,000
-
e-Commerce (a) 3,000 9,000
Other - 2,000
10% Subordinated Notes (b)(f) - 1,240,000
10% Participating Notes (c)(f) 1,200,000 -
12% Convertible Subordinated Notes (d) 255,000 -
Loans including accrued interest -
affiliated entities (e) 3,123,000 4,329,000
------------ ------------
4,581,000 5,581,000
Less current maturities 774,000 698,000
------------ ------------
Long-term debt $ 3,807,000 $ 4,883,000
============ ============
____________________
(a) At December 31, 2004, the Company's e-Commerce Segment had one note payable
with a balance due of $3,000. The note bears interest at 12%, requires
monthly payments of interest and principal and matures in July 2005. The
note is secured by an automobile with an approximate book value of $3,000
at December 31, 2004.
(b) In 2002, the Company completed the private placement of $1,200,000
($1,157,000 net of discount) of 10% subordinated notes due September 30,
2003 (the "2002 Notes"). The notes were mandatorily redeemable within 10
days of the receipt of the McElmo Dome settlement. Since the notes had not
been redeemed by their maturity date, they were automatically extended to
March 31, 2005. An investment banking firm received warrants to purchase
90,000 shares of Company common stock as part of its sales compensation in
connection with the offering. The note holders received 458,000 warrants.
Related parties purchased $320,000 of the offering, and received 122,500 of
such warrants. All of the warrants have a 5-year term and have exercise
prices ranging from $0.353949 to $0.3570475 per share. As a condition of
the private placement, a Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement has been recorded against the Company's
working and overriding royalty interests in the McElmo Dome field pursuant
to which the related entity which has made a $3 million line of credit
available to the Company has been granted a security interest. Because the
Company had not redeemed the 2002 Notes by September 30, 2003, the note
holders were granted a security interest pari passu with the related
entity. The assets serving as collateral for these debt instruments had a
recorded value on the Company's books of $338,000 as of December 31, 2004.
The 2002 Notes, along with $45,000 of accrued interest, were paid in full
on March 26, 2004, and the holders of the 2002 Notes no longer have a
security interest in the McElmo Dome collateral.
In February of 2003 the Company completed the private placement of $600,000
of subordinated notes (the "2003A Notes") to accredited investors. A
$550,000 note was sold by an investment banking firm which received a 5%
commission thereon. The purchaser received a 5% loan fee on this note,
which bears a 5% coupon. A $50,000 note was sold by the Company to
affiliates of the Company and bears a 10% coupon. The 2003A Notes were
accompanied by warrants to purchase a total of 130,000 shares of Beard
common stock at $0.242365 per share. A new Deed of Trust was recorded which
established the priorities as to repayment among the 2002 note holders, the
2003 note holders and the related party. The 2003A Notes were due to mature
on April 1, 2004; such maturity would have extended to January 1, 2005 if
they had not been redeemed by such date. The 2003A Notes, along with
$16,000 of accrued interest, were paid in full on March 26, 2004, and the
note holders no longer have a security interest in the McElmo Dome
collateral.
In July of 2003 the Company completed the private placement of $29,000 of
subordinated notes (the "2003B Notes") to accredited investors. The
$300,000 offering was terminated early when it became clear the Company
would receive the first installment of the Settlement by August 1. The
2003B Notes bore interest at 10% per annum from the date of original
issuance, payable at maturity. The notes were subject to a 4%
non-refundable loan fee, payable upon issuance to the investors. $4,000 of
the notes were sold by an investment banking firm which received a 5%
commission thereon. The 2003B Notes, along with $2,000 of accrued interest,
were paid in full on March 26, 2004.
(c) In June of 2004, the Company completed the sale of $1,200,000 of its 10%
Participating Notes raising a net of $1,163,000 of working capital after
reductions for expenses. 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 paid interest only until
November 30, 2004. The Company 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 a coal project described in the
offering document. 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%. Related
entities purchased a total of $700,000 of these notes. The Company prepaid
$280,000 of the notes, along with accrued interest totaling $14,000, on
February 10, 2005.
(d) In September of 2004, the Company arranged for an investment firm to sell
$1,800,000 of 9% convertible subordinated notes (the "9% Notes") in a
private placement. As of December 15, 2004, a total of $255,000 of the
offering had been subscribed and closed, including $150,000 by directors of
the Company, and the offering was terminated. On December 29, a new private
placement of the Company's 12% Convertible Subordinated Notes (the "12%
Notes") was commenced. In December of 2004 the 9% Notes were exchanged for
a like amount of 12% Notes and the holders forgave all accrued interest on
the 9% Notes, totaling $5,000. An additional $1,845,000 of the 12% Notes
were subscribed and closed in January bringing the total offering amount to
$2,100,000. The Company will pay interest only on a semi-annual basis
beginning August 15, 2005 until the February 15, 2010 maturity date, at
which time the Company will make a balloon payment of the outstanding
principal balance plus accrued and unpaid interest. The Company has granted
a security interest in Beard Technologies' equipment to the holders of the
12% Notes. The security interest will be released in the event the Company
raises sufficient funds to proceed with a certain coal reclamation project.
The notes are convertible into shares of the Company's stock at an initial
conversion price of $1.00 per share. The Company may force conversion of
the notes after February 15, 2007 if the weighted average sales price of
the Company's common stock has been more than two times the conversion
price for more than sixty (60) consecutive trading days.
(e) At December 31, 2004, the Company had borrowed $2,785,000 from an
affiliated entity of the Chairman of the Company under terms of a note that
bears interest at 10%. The note is due to be repaid on April 1, 2006.
On December 31, 2004, the Company borrowed $200,000 from an unconsolidated
subsidiary. The note bears interest at 15% and is due to be repaid no later
than July 31, 2005. The note is unsecured.
(f) The number and exercise prices of the warrants shown in footnotes (b) and
(c) have been adjusted to reflect the 2-for-1 stock split effected as of
August 6, 2004.
At December 31, 2004, the annual maturities of long-term debt were $774,000 in
2005, $3,552,000 in 2006 and $255,000 in 2010. Following receipt of the proceeds
of the 12% Convertible debt, $280,000 of the 10% Participating Notes, along with
$14,000 of accrued interest, was repaid on February 10, 2005.
The Company incurred $455,000, $370,000 and $294,000 of interest expense
relating to debt to related parties in 2004, 2003, and 2002, respectively. The
Company paid $189,000, $48,000, and $363,000 of those amounts for 2004, 2003,
and 2002, respectively.
The weighted average interest rates for the Company's short-term borrowings were
15% and 10.65% as of December 31, 2004 and 2003, respectively.
(10) Operating Leases
- ---- ----------------
Noncancelable operating leases relate principally to office space, vehicles and
operating equipment. Gross future minimum payments under such leases as of
December 31, 2004 are summarized as follows:
2005 $ 206,000
2006 71,000
2007 5,000
-------------
$ 282,000
=============
Rent expense under operating leases aggregated $281,000, $313,000, and $315,000
in 2004, 2003, and 2002, respectively.
(11) Income Taxes
- ---- ------------
Total income tax expense (benefit) was allocated as follows:
Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Continuing operations $ 118,000 $ - $ (31,000)
Discontinued operations - - -
----------- ---------- ----------
$ 118,000 $ - $ (31,000)
=========== ========== ==========
Current income tax expense (benefit) from continuing operations consisted of:
Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
U. S. federal $ 118,000 $ - $ (31,000)
Various states - - -
----------- ---------- ----------
$ 118,000 $ - $ (31,000)
=========== ========== ==========
Total income tax expense (benefit) allocated to continuing operations differed
from the amounts computed by applying the U. S. federal income tax rate to loss
from continuing operations before income taxes as a result of the following:
Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Computed U. S. federal statutory expense
(benefit) $ 401,000 $ (566,000) $(1,680,000)
Federal alternative minimum tax (benefit) 118,000 - (31,000)
Increase (decrease) in the valuation allowance
for deferred tax assets (401,000) 566,000 1,680,000
State income tax (benefit) - - -
----------- ---------- -----------
$ 118,000 $ - $ (31,000)
=========== ========== ===========
The components of deferred tax assets and liabilities are as follows:
December 31,
------------
2004 2003
---- ----
Deferred tax assets - tax effect of:
Net operating loss carryforwards $ 17,782,000 $ 20,811,000
Statutory depletion and investment tax credit
carryforwards 1,275,000 1,275,000
Other, principally investments and property, plant
and equipment 116,000 70,000
------------- --------------
Total gross deferred tax assets 19,173,000 22,156,000
Less valuation allowance (19,126,000) (22,116,000)
Deferred tax liabilities (47,000) (40,000)
------------- --------------
Net deferred tax asset/liability $ - $ -
============= ==============
In assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
At December 31, 2004, the Company had federal regular tax operating loss
carryforwards of approximately $46.8 million and tax depletion carryforwards of
approximately $3.35 million. Approximately $44.8 of such NOLs will expire from
2006 to 2008.. These carryforwards may be limited if the Company undergoes a
significant ownership change.
(12) Stock Option and Deferred Compensation Plans
- ---- --------------------------------------------
The Company reserved 175,000 shares of its common stock for issuance to key
management, professional employees and directors under The Beard Company 1993
Stock Option Plan (the "1993 Plan") adopted in August 1993. In April 1998 the
Board of Directors voted to increase the number of shares authorized under the
1993 Plan to 275,000, and the shareholders approved the increase in June 1998.
As a result of the 3-for-4 reverse stock split effected in September 2000 and
the 2-for-1 stock split effected in August 2004, the number of shares authorized
under the 1993 Plan was increased to 412,500. The 1993 Plan terminated on August
26, 2003. At December 31, 2004, there were 26,250 options outstanding under the
Plan.
The per share weighted-average fair value of stock options granted during 1997
was $2.67 on the date of grant using the Black-Scholes option pricing model with
the following assumptions: no expected dividend yield; risk-free interest rate
of 6.5%; expected life of ten years; and expected volatility of 39%. No options
were granted in 2002, 2003 or 2004.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
------------- ---------------
Balance at December 31, 2001 81,742 $1.58
Granted - -
Exercised - -
Forfeited - -
Expired - -
------------- ------------
Balance at December 31, 2002 81,742 $1.58
Granted - -
Exercised - -
Forfeited - -
Expired - -
------------- ------------
Balance at December 31, 2003 81,742 $1.58
Granted - -
Exercised - -
Forfeited - -
Expired 55,492 -
------------- ------------
Balance at December 31, 2004 26,250 $2.08
============= ============
At December 31, 2004, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.75 - $2.92 and 2.0
years, respectively.
The Company has adopted a series of deferred compensation plans for certain key
executives and the board of directors which provide for payments in the form of
the Company's common stock upon (i) the death, disability, retirement or
termination of the participant or (ii) termination of the plans. Under such
plans, the number of shares of stock credited to each participant's account is
equal to the amount of compensation deferred divided by the fair market value of
the stock on the deferral date. 700,000 shares of stock were authorized for
issuance under the initial plan, adopted in 1996, and such shares were issued
effective January 31, 2003 upon termination of the plan. 300,000 shares of stock
were authorized for issuance under the second plan, adopted in January of 2003,
and such shares were issued effective September 30, 2003 upon termination of
this plan. 800,000 shares of stock are authorized for issuance under the third
plan, adopted in September of 2003 and amended in February of 2004. The
weighted-average fair values of stock units issued under the plans were $0.371,
$0.385 and $0.545 for 2004, 2003 and 2002, respectively.
As of December 31, 2002, there were 670,000 shares reserved for distribution
under the initial plan, which were subsequently issued effective January 31,
2003. As of December 31, 2004, there were 713,000 shares reserved for
distribution under the third plan, none of which have to date been issued.
(13) Employee Benefit Plan
- ---- ---------------------
Employees of the Company participate in either of two defined contribution plans
with features under Section 401(k) of the Internal Revenue Code. The purpose of
the Plans is to provide retirement, disability and death benefits for all
full-time employees of the Company who meet certain service requirements. One of
the plans allows voluntary "savings" contributions up to a maximum of 50%, and
the Company matches 100% of each employee's contribution up to 5% of such
employee's compensation. The second plan covers those employees in the Coal
Segment and allows voluntary "savings" contributions up to a maximum of 40%.
Under this plan, the Company contributes $1.00 per hour of service performed for
hourly employees and up to 6% of compensation for salaried employees regardless
of the employees' contribution. The Company's contributions under both plans are
limited to the maximum amount that can be deducted for income tax purposes.
Benefits payable under the plans are limited to the amount of plan assets
allocable to the account of each plan participant. The Company retains the right
to modify, amend or terminate the plans at any time. During 2002 the Company
made matching contributions of $32,000 to the plans. Effective July 16, 2002 the
Company notified all participants in the two plans that it was suspending the
100% match until further notice. Accordingly, no contributions were made to the
plans in 2003 or 2004.
(14) 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 future 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 the
Restructure (collectively, the "Obligations" - see note 4).
The Company has no liability under the indemnity obligation unless the
accumulated damage or loss incurred by the Buyer or its assignees in connection
with such Claims exceeds $250,000 in the aggregate. The maximum amount of future
payments that could be required under the indemnity has no limitation. The
principal exposure under the obligation would have been for any environmental
problems which existed, at the time of the sale, on the oil and gas properties
sold. If any Claims were to be made at this point they would presumably need to
be made first against any and all of the subsequent owners of the properties
involved; if any liability was then determined to exist it would presumably be
assigned first to such subsequent owners. In the event the Company should be
required to pay an amount under this obligation, it does not believe any of such
amount could be recovered from third parties. However, during the more than 11
years subsequent to the date of the Restructure there have been no Claims, and
the Company has no reason to believe that there will be any. For these reasons,
no reserve has ever been established for the liability, because none is believed
to exist.
(15) 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 2004, 2003 and 2002: Coal, Carbon Dioxide, China,
and e-Commerce.
The Coal Segment is in the business of operating coal fines reclamation
facilities in the U.S. and provides slurry pond core drilling services, fine
coal laboratory analytical services and consulting services. The CO2 Segment
consists of the production of CO2 gas. The China Segment is pursuing
environmental opportunities in China, focusing on the financing, construction
and operation of organic chemical compound fertilizer plants. The e-Commerce
Segment consists of a 71%-owned subsidiary whose current strategy is to develop
business opportunities to leverage a subsidiary's intellectual property
portfolio of Internet payment methods and security technologies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in note 1.
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.
Coal Dioxide China e-Commerce Totals
---- ------- ----- ---------- ------
2004
----
Revenues from external
customers $ 189 $ 754 $ - $ 29 $ 972
Interest income - - - - -
Interest expense - - - 1 1
Depreciation, depletion and
amortization 17 40 1 6 64
Segment profit (loss) (682) 585 (549) (124) (770)
Segment assets 259 485 31 4 779
Expenditures for segment 216 35 1 1 253
assets
2003
----
Revenues from external
customers $ 59 $ 508 $ - $ 25 $ 592
Interest income - - - - -
Interest expense 1 - - 2 3
Depreciation, depletion and
amortization - 38 1 6 45
Segment profit (loss) (516) 363 (724) (100) (977)
Segment assets 37 459 52 11 559
Expenditures for segment 7 33 - 2 42
assets
2002
----
Revenues from external
customers $ 12 $ 445 $ - $ - $ 457
Interest income - - - - -
Interest expense 1 - 98 2 101
Depreciation, depletion and
amortization 21 35 3 6 65
Segment profit (loss) (2,105) 291 (714) (202) (2,730)
Segment assets 33 458 439 15 945
Expenditures for segment 7 62 - 2 71
assets
Reconciliation of reportable segment revenues to consolidated revenues is as follows (in thousands):
2004 2003 2002
-------------------- -------------------- --------------------
Total revenues for reportable segments $ 972 $ 592 $ 457
Revenues from corporate activities not
allocated to segments - 1 12
-------------------- -------------------- --------------------
Total consolidated revenues $ 972 $ 593 $ 469
==================== ==================== ====================
Reconciliation of reportable segment interest expense to consolidated interest expense is as follows (in thousands):
2004 2003 2002
-------------------- -------------------- --------------------
Total interest expense for
reportable segments $ 1 $ 3 $ 101
Interest expense from China operations
accounted for as an equity investment - - (98)
Interest expense from corporate activities not
allocated to segments 571 516 397
-------------------- -------------------- --------------------
Total consolidated interest expense $ 572 $ 519 $ 400
==================== ==================== ====================
Reconciliation of reportable segment depreciation, depletion and amortization to consolidated depreciation, depletion and
amortization is as follows (in thousands):
2004 2003 2002
-------------------- -------------------- --------------------
Total depreciation, depletion and
amortization for reportable segments $ 64 $ 45 $ 65
Corporate depreciation and amortization
not allocated to segments 28 124 79
-------------------- -------------------- --------------------
Total consolidated depreciation,
depletion and amortization $ 92 $ 169 $ 144
==================== ==================== ====================
Reconciliation of total reportable segment profit (loss) to consolidated loss from continuing operations is as follows
(in thousands):
2004 2003 2002
-------------------- -------------------- --------------------
Total loss for reportable segments $ (770) $( 977) $(2,730)
Eliminate loss from China operations
accounted for as an equity investment - - 714
Equity in loss from China operations accounted
for as an equity investment - - (357)
Net corporate income (costs) not allocated
to segments 1,812 (513) (2,049)
-------------------- -------------------- --------------------
Total consolidated earnings (loss) from
continuing operations $ 1,042 $(1,490) $(4,422)
==================== ==================== ====================
Reconciliation of reportable segment assets to consolidated assets is as follows
(in thousands):
2004 2003
----------- ---------
Total assets for reportable segments $ 779 $ 559
Assets of discontinued operations 40 55
Corporate assets not allocated to segments 454 327
----------- ---------
Total consolidated assets $ 1,273 $ 941
=========== =========
Reconciliation of expenditures for segment assets to total expenditures for
assets is as follows (in thousands):
2004 2003
----------- -----------
Total expenditures for assets for reportable
Segments $ 253 $ 42
Corporate expenditures not allocated to segments - 20
----------- -----------
Total expenditures for assets $ 253 $ 62
=========== ===========
All of 2002, 2003 and 2004 segment revenues were derived from customers in the
United States of America. Certain long-lived assets with recorded values
approximating $5,000 at December 31, 2004 were located in China. All remaining
segment assets are located in the United States of America.
For the year 2004, one customer accounted for 71% of the Coal Segment's and 14%
of the Company's revenues. During 2003, two customers accounted for 90% of the
Coal Segment's and 9% of the Company's revenues. During 2002, one customer
accounted for 93% of the Coal Segment's and 2% of the Company's revenues. All of
the e-Commerce Segment's 2003 and 2004 revenues were derived from one customer.
The Company's CO2 revenues are received from two operators in the CO2 Segment
who market the CO2 gas to numerous end users on behalf of the interest owners
who elect to participate in such sales. During 2004, 2003, and 2002, sales by
these two operators accounted for 78%, 86%, and 95%, respectively, of the
Company's segment revenues and all of the Carbon Dioxide Segment's revenues.
(16) Quarterly Financial Data (unaudited)
- -----------------------------------------
Three Months Ended
------------------- ------------------- ------------------- -----------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
------------------- ------------------- ------------------- -----------------
(in thousands except per share data)
Revenues $ 188 $ 185 $ 249 $ 350
Operating loss (373) (419) (409) (499)
Earnings (loss) from
continuing operations 2,300 (307) (509) (547)
Earnings (loss) from
discontinued operations 3 4 (3) (4)
Net earnings (loss) 2,303 (303) (512) (551)
Basic earnings (loss) per share 0.46 (0.06) (0.10) (0.10)
Diluted earnings (loss) per share 0.40 (0.06) (0.09) (0.10)
Three Months Ended
------------------- ------------------- ------------------- -----------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
------------------- ------------------- ------------------- -----------------
(in thousands except per share data)
Revenues $ 194 $ 117 $ 137 $ 145
Operating loss (433) (541) (583) (581)
Earnings (loss) from
continuing operations (518) (622) 274 (624)
Earnings (loss) from
discontinued operations 20 (15) (18) (108)
Net earnings (loss) (498) (637) 256 (732)
Basic earnings loss per share (0.12) (0.14) 0.06 (0.15)
Diluted earnings loss per share (0.12) (0.14) 0.06 (0.15)
The quarterly information presented above has been restated to conform to the
final year-end 2004 presentation.
During the fourth quarter of 2003, the Company recorded economic impairment
losses on certain long-lived assets in the Coal Segment and Other operations of
$6,000 and $76,000, respectively. The Company recorded no such economic
impairments in the fourth quarter of 2004.
(17) Subsequent events
- ---- -----------------
Oil and Gas Business. In January of 2005 the Company announced that it was back
in the oil and gas business. The Company's wholly-owned subsidiary, Beard Oil
Company ("BOC") has filed on a number of federal and state oil and gas leases,
including a lease on a 640-acre tract subsequently acquired in Yuma County,
Colorado. In January of 2004 BOC farmed out this tract to Vista Resources
("Vista"). Vista has now drilled six wells in the Niobrara Formation on the farm
out lands, two of which were completed and tested in January 2005. Four
additional wells were drilled in February and March of 2005 which are awaiting
completion and test results. (See "General development of business---Recent
Developments---Oil and Gas Business" for complete details).
Placement of Convertible Subordinated Notes. In January of 2005 the Company
completed the sale of $2,100,000 of its 12% Convertible Subordinated Notes due
February 15, 2010 (the "Notes") to a group of private investors. $255,000 of the
Notes were exchanged for previously issued notes. The Notes, which are
convertible at $1.00 per share into the Company's common stock, generated
approximately $1,700,000 of net proceeds to the Company in 2005. The proceeds
will be used for working capital and for a coal project, if necessary. (See
"General development of business---Recent Developments---Placement of
Convertible Subordinated Notes" for complete details).
Financing of Initial Fertilizer Manufacturing Plant in China. In February of
2005 the Company arranged for the financing of its initial fertilizer
manufacturing plant in China by a private investor. The Company's wholly-owned
subsidiary, Beard Environmental Engineering, L.L.C., and the investor have
formed a limited liability company, owned 50% by each party, that will control
and manage the facility. The investor will loan funds between February 14 and
July 1, 2005 sufficient to fund the costs of the facility. (See "General
development of business---Recent Developments---Financing of Initial Fertilizer
Manufacturing Plant in China" for complete details).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
-----------------------------------------------------------------------
No matters require disclosure here.
Item 9A. Controls and Procedures.
-----------------------
We, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of December 31, 2004 to ensure that information
required to be disclosed by us in reports that it files or submits under the
1934 Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms.
There were no changes in our internal control over financial reporting
during our fiscal fourth quarter ended December 31, 2004, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
There was no information required to be disclosed in a report on Form 8-K
during the fourth quarter ended December 31, 2004, that was not reported.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The information regarding our directors will be contained in the definitive
proxy statement which will be filed pursuant to Regulation 14A with the
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-K, and the information to be contained therein is incorporated
herein by reference.
The information regarding our executive officers has been furnished in a
separate item captioned "Executive Officers and Significant Employees of the
Company" and included as Item 4a in Part I of this report at pages 21 through
22.
Item 11. Executive Compensation.
-----------------------
The information regarding executive compensation will be contained in the
definitive proxy statement which will be filed pursuant to Regulation 14A with
the Commission not later than 120 days after the end of the fiscal year covered
by this Form 10-K, and the information to be contained therein is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The information regarding security ownership of certain beneficial owners
and management and related stockholder matters will be contained in the
definitive proxy statement which will be filed pursuant to Regulation 14A with
the Commission not later than 120 days after the end of the fiscal year covered
by this Form 10-K, and the information to be contained therein is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information regarding transactions with management and others will be
contained in the definitive proxy statement which will be filed pursuant to
Regulation 14A with the Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, and the information to be contained
therein is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
---------------------------------------
The information regarding principal accountant fees and services will be
contained in the definitive proxy statement which will be filed pursuant to
Regulation 14A with the Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, and the information to be contained
therein is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
----------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements. Reference is made to the Index to Financial
Statements and Financial Statement.
2. Financial Statement Schedules. Financial Statement Schedules are
omitted as inapplicable or not required, or the required
information is shown in the financial statements or in the notes
thereto.
3. Exhibits. The following exhibits are filed with this Form 10-K
and are identified by the numbers indicated:
3.1 Restated Certificate of Incorporation of Registrant as filed with
the Secretary of State of Oklahoma on September 20, 2000. (This
Exhibit has been previously filed as Exhibit 3(i) 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* Amendment No. One to The Beard Company 1993 Stock Option Plan
dated August 27, 1993, as amended June 4, 1998. (The Amended Plan
supersedes the original Plan adopted on August 27, 1993. This
Exhibit has previously been filed as Exhibit A, filed on April 30,
1998 to Registrant's Proxy Statement dated April 30, 1998, and
same is incorporated herein by reference).
10.2 Form of Indemnification Agreement dated December 15, 1994, by and
between Registrant and eight directors. (This Exhibit has been
previously filed as Exhibit 10(b) to Registrant's Form 10-K for
the period ended December 31, 2000, filed on April 2, 2001, and
same is incorporated herein by reference).
10.3* Amendment No. One to The Beard Company 2003-2 Deferred Stock
Compensation Plan, adopted by the Board of Directors effective
February 13, 2004. (This Amendment, which supersedes the original
Plan adopted on September 30, 2003, has been previously filed as
Exhibit 10.5 to Registrant's Form 10-K for the period ended
December 31, 2003, filed on March 30, 2004, and same is
incorporated herein by reference).
10.4* Incentive Stock Option Agreement by and between Philip R. Jamison
and Beard Technologies, Inc., dated May 18, 1998. (This Exhibit
has been previously filed as Exhibit 10(k) to Registrant's Form
10-K for the period ended December 31, 1998, filed on April 15,
1999, and same is incorporated herein by reference).
10.5 Subscription Agreement by and between Cibola Corporation
("Cibola") and Registrant, dated April 10, 1996. (This Exhibit has
been previously filed as Exhibit 10.1 to Registrant's Form 10-Q
for the period ended June 30, 1996, filed on August 14, 1996, and
same is incorporated herein by reference).
10.6 Nonrecourse Secured Promissory Note from Registrant to Cibola,
dated April 10, 1996. (This Exhibit has been previously filed as
Exhibit 10.2 to Registrant's Form 10-Q for the period ended June
30, 1996, filed on August 14, 1996, and same is incorporated
herein by reference).
10.7 Security Agreement by and among Registrant, Cibola and the Cibola
shareholders, dated April 10, 1996. (This Exhibit has been
previously filed as Exhibit 10.3 to Registrant's Form 10-Q for the
period ended June 30, 1996, filed on August 14, 1996, and same is
incorporated herein by reference).
10.8 Tax Sharing Agreement by and among Registrant, Cibola and the
Cibola shareholders, dated April 10, 1996. (This Exhibit has been
previously filed as Exhibit 10.4 to Registrant's Form 10-Q for the
period ended June 30, 1996, filed on August 14, 1996, and same is
incorporated herein by reference).
10.9 Supplemental Letter Loan Agreement by and between Registrant and
The William M. Beard and Lu Beard 1988 Charitable Unitrust (the
"Unitrust") dated November 13, 2003. (This Exhibit, which
superseded all prior Letter Loan Agreements between the parties,
has been previously filed as Exhibit 10.12 to Registrant's Form
10-K for the period ended December 31, 2003, filed on March 30,
2004, and same is incorporated herein by reference).
10.10 Restated and Amended Letter Loan Agreement by and between
Registrant and the Unitrust dated March 26, 2004. (This Exhibit,
which superseded all prior Letter Loan Agreements between the
parties, has been previously filed as Exhibit 10.13 to
Registrant's Form 10-K for the period ended December 31, 2003,
filed on March 30, 2004, and same is incorporated herein by
reference).
10.11 Amendment to Restated and Amended Letter Loan Agreement by and
between Registrant and the Unitrust dated June 25, 2004.
10.12 Supplemental Promissory Note from Registrant to the Trustees of
the Unitrust dated November 13, 2003. (This Exhibit, which
superseded all prior Supplemental Promissory Notes between the
parties, has been previously filed as Exhibit 10.15 to
Registrant's Form 10-K for the period ended December 31, 2003,
filed on March 30, 2004, and same is incorporated herein by
reference).
10.13 Renewal and Extension Promissory Note from Registrant to the
Trustees of the Unitrust dated March 26, 2004. (This Exhibit,
which superseded all prior Notes between the parties, has been
previously filed as Exhibit 10.16 to Registrant's Form 10-K for
the period ended December 31, 2003, filed on March 30, 2004, and
same is incorporated herein by reference).
10.14 Replacement Renewal and Extension Promissory Note from Registrant
to the Trustees of the Unitrust dated March 26, 2004. (This Note
superseded all prior Notes between the parties).
10.15 Form of 10% Subordinated Note due September 30, 2003. (This
Exhibit has been previously filed as Exhibit 10(c) to Registrant's
Form 10-Q for the period ended June 30, 2002, and same is
incorporated herein by reference).
10.16 Form of 2002 Warrant. (This Exhibit has been previously filed as
Exhibit 10(d) to Registrant's Form 10-Q for the period ended June
30, 2002, and same is incorporated herein by reference).
10.17 Promissory Note from Registrant to B & M Limited, a Partnership,
dated February 7, 2003. (This Exhibit has been previously filed as
Exhibit 10(a) to Registrant's Form 10-Q for the period ended March
31, 2003, filed on May 15, 2003, and same is incorporated herein
by reference).
10.18 Promissory Note from Registrant to Boatright Family, L.L.C.
("Boatright"), dated February 21, 2003. (This Exhibit has been
previously filed as Exhibit 10(b) to Registrant's Form 10-Q for
the period ended March 31, 2003, filed on May 15, 2003, and same
is incorporated herein by reference).
10.19 Form of 2003 Warrant. (This Exhibit has been previously filed as
Exhibit 10(c) to Registrant's Form 10-Q for the period ended March
31, 2003, filed on May 15, 2003, and same is incorporated herein
by reference).
10.20 Form of Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of February 21, 2003.
(This Exhibit has been previously filed as Exhibit 10(d) to
Registrant's Form 10-Q for the period ended March 31, 2003, filed
on May 15, 2003, and same is incorporated herein by reference).
10.21 Subordination and Nominee Agreement dated February 21, 2003. (This
Exhibit has been previously filed as Exhibit 10.26 to Registrant's
Form 10-K for the period ended December 31, 2003, filed on March
30, 2004, and same is incorporated herein by reference).
10.22 Form of 10% Participating Note due November 30, 2006. (This
Exhibit has been previously filed as Exhibit 10.1 to Registrant's
Form 10-Q for the period ended June 30, 2004, filed on August 16,
2004, and same is incorporated herein by reference).
10.23 Form of 2004 Warrant. (This Exhibit has been previously filed as
Exhibit 10.2 to Registrant's Form 10-Q for the period ended June
30, 2004, filed on August 16, 2004, and same is incorporated
herein by reference).
10.24 Form of 2004 Production Payment. (This Exhibit has been previously
filed as Exhibit 10.3 to Registrant's Form 10-Q for the period
ended June 30, 2004, filed on August 16, 2004, and same is
incorporated herein by reference).
10.25 Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement by and between Registrant and McElmo Dome
Nominee, LLC, dated as of May 21, 2004.
10.26 Form of Convertible Subordinated Promissory Note.
10.27 Subordination and Nominee Agreement dated May 21, 2004, by and
between the Unitrust and Boatright Family, L.L.C.
10.28 Amended and Restated Promissory Note from Registrant to The John
M. Beard Trust dated November 19, 2003. (This Exhibit has been
previously filed as Exhibit 10.27 to Registrant's Form 10-K for
the period ended December 31, 2003, filed on March 30, 2004, and
same is incorporated herein by reference).
10.29 Advancing Term Promissory Note from Registrant to Cibola
Corporation dated December 31, 2003. (This Exhibit has been
previously filed as Exhibit 10.28 to Registrant's Form 10-K for
the period ended December 31, 2003, filed on March 30, 2004, and
same is incorporated herein by reference).
10.30 Promissory Note from Registrant to Bank of Nichols Hills dated
February 27, 2004.
10.31 Advancing Term Promissory Note from Registrant to Cibola
Corporation dated December 1, 2004.
10.32 Dredging Services Agreement by and between DTE Dickerson LLC and
Beard Technologies, Inc., dated July 14, 2004. (This Exhibit has
been previously filed as Exhibit 10.4 to Registrant's Form 10-Q
for the period ended September 30, 2004, filed on Nov 16, 2004,
and same is incorporated herein by reference).
14 Code of Ethics (This Exhibit has been previously filed as Exhibit
14 to Registrant's Form 10-K for the period ended December 31,
2002, filed on April 8, 2003, and same is incorporated herein by
reference).
21 Subsidiaries of the Registrant
23 Consents of Experts and Counsel:
23.1 Consent of Cole & Reed, P.C.
31 Rule 13a-14(a)/15d-14(a) Certifications:
31.1 Chief Executive Officer Certification required by Rule 13a-14(a)
or Rule 15d-14(a).
31.2 Chief Financial Officer Certification required by Rule 13a-14(a)
or Rule 15d-14(a).
32 Section 1350 Certifications:
32.1 Chief Executive Officer Certification required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
32.2 Chief Financial Officer Certification required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code.
____________________
* Compensatory plans or arrangements.
The Company will furnish to any shareholder a copy of any of the above
exhibits upon the payment of $.25 per page. Any request should be sent to The
Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma
City, Oklahoma 73112.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE BEARD COMPANY
(Registrant)
/s/Herb Mee, Jr.
DATE: March 29, 2005 By Herb Mee, Jr., President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated below.
Signature Title Date
- --------- ----- ----
/s/W. M. Beard
By _________________________________ Chief Executive Officer March 29, 2005
W.M. Beard
/s/Herb Mee, Jr.
By _________________________________ President and Chief March 29, 2005
Herb Mee, Jr. Financial Officer
/s/Jack A. Martine
By _________________________________ Controller and March 29, 2005
Jack A. Martine Chief Accounting Officer
/s/W. M. Beard
By _________________________________ Chairman of the Board March 29, 2005
W.M. Beard
/s/Herb Mee, Jr.
By _________________________________ Director March 29, 2005
Herb Mee, Jr.
/s/Allan R. Hallock
By _________________________________ Director March 29, 2005
Allan R. Hallock
/s/Harlon E. Martin, Jr.
By___________________________________ Director March 29, 2005
Harlon E. Martin, Jr.
/s/Ford C. Price
By _________________________________ Director March 29, 2005
Ford C. Price
INDEX TO EXHIBITS
Exhibit
No. Description Method of Filing
--- ----------- ----------------
3.1 Restated Certificate of Incorporation Incorporated herein by reference
of Registrant as filed with the
Secretary of State of Oklahoma on
September 20, 2000.
3.2 Registrant's By-Laws as currently in Incorporated herein by reference
effect.
4.1 Certificate of Designations, Powers, Incorporated herein by reference
Preferences and Relative,
Participating, Option and Other Special
Rights, and the Qualifications,
Limitations or Restrictions Thereof of
the Series A Convertible Voting
Preferred Stock of the Registrant.
4.2 Settlement Agreement, with Certificate Incorporated herein by reference
of Amendment attached thereto, by and
among Registrant, Beard Oil, New York
Life Insurance Company, New York Life
Insurance and Annuity Company, John
Hancock Mutual Life Insurance Company,
Memorial Drive Trust and Sensor Oil &
Gas, Inc., dated as of April 13, 1995.
10.1 Amendment No. One to The Beard Company Incorporated herein by reference
1993 Stock Option Plan dated August 27,
1993, as amended June 4, 1998.
10.2 Form of Indemnification Agreement dated Incorporated herein by reference
December 15, 1994, by and between
Registrant and eight directors.
10.3 Amendment No. One to The Beard Company Incorporated herein by reference
2003-2 Deferred Stock Compensation
Plan, adopted by the Board of Directors
effective February 13, 2004.
10.4 Incentive Stock Option Agreement by and Incorporated herein by reference
between Philip R. Jamison and Beard
Technologies, Inc., dated May 18, 1998.
10.5 Subscription Agreement by and between Incorporated herein by reference
Cibola Corporation ("Cibola") and
Registrant, dated April 10, 1996.
10.6 Nonrecourse Secured Promissory Note Incorporated herein by reference
from Registrant to Cibola, dated April
10, 1996.
10.7 Security Agreement by and among Incorporated herein by reference
Registrant, Cibola and the Cibola
shareholders, dated April 10, 1996.
10.8 Tax Sharing Agreement by and among Incorporated herein by reference
Registrant, Cibola and the Cibola
shareholders, dated April 10, 1996.
10.9 Supplemental Letter Loan Agreement by Incorporated herein by reference
and between Registrant and The William
M. Beard and Lu Beard 1988 Charitable
Unitrust (the "Unitrust") dated
November 13, 2003.
10.10 Restated and Amended Letter Loan Incorporated herein by reference
Agreement by and between Registrant and
the Unitrust dated March 26, 2004.
10.11 Amendment to Restated and Amended Filed herewith electronically
Letter Loan Agreement by and between
Registrant and the Unitrust dated June
25, 2004.
10.12 Supplemental Promissory Note from Incorporated herein by reference
Registrant to the Trustees of the
Unitrust dated November 13, 2003.
10.13 Renewal and Extension Promissory Note Incorporated herein by reference
from Registrant to the Trustees of the
Unitrust dated March 26, 2004.
10.14 Replacement Renewal and Extension Filed herewith electronically
Promissory Note from Registrant to the
Trustees of the Unitrust dated March
26, 2004.
10.15 Form of 10% Subordinated Note due Incorporated herein by reference
September 30, 2003.
10.16 Form of 2002 Warrant. Incorporated herein by reference
10.17 Promissory Note from Registrant to B & Incorporated herein by reference
M Limited, a Partnership, dated
February 7, 2003.
10.18 Promissory Note from Registrant to Incorporated herein by reference
Boatright Family, L.L.C. ("Boatright"),
dated February 21, 2003.
10.19 Form of 2003 Warrant. Incorporated herein by reference
10.20 Form of Deed of Trust, Assignment of Incorporated herein by reference
Production, Security Agreement and
Financing Statement dated as of
February 21, 2003.
10.21 Subordination and Nominee Agreement Incorporated herein by reference
dated February 21, 2003.
10.22 Form of 10% Participating Note due Incorporated herein by reference
November 30, 2006.
10.23 Form of 2004 Warrant. Incorporated herein by reference
10.24 Form of 2004 Production Payment. Incorporated herein by reference
10.25 Deed of Trust, Assignment of Production, Filed herewith electronically
Security Agreement and Financing
Statement by and between Registrant
Registrant and McElmo Dome Nominee,
LLC, dated as of May 21, 2004.
10.26 Form of Convertible Subordinated Filed herewith electronically
Promissory Note.
10.27 Subordination and Nominee Agreement Filed herewith electronically
dated May 21, 2004, by and between the
Unitrust and Boatright Family, L.L.C.
10.28 Amended and Restated Promissory Note Incorporated herein by reference
from Registrant to The John M. Beard
Trust dated November 19, 2003.
10.29 Advancing Term Promissory Note from Incorporated herein by reference
Registrant to Cibola Corporation dated
December 31, 2003.
10.30 Promissory Note from Registrant to Bank Filed herewith electronically
of Nichols Hills dated February 27,
2004.
10.31 Advancing Term Promissory Note from Filed herewith electronically
Registrant to Cibola Corporation dated
December 1, 2004.
10.32 Dredging Services Agreement by and Incorporated herein by reference
between DTE Dickerson LLC and Beard
Technologies, Inc., dated July 14,
2004.
14 Code of Ethics Incorporated herein by reference
21 Subsidiaries of the Registrant Filed herewith electronically
23.1 Consent of Cole & Reed, P.C. Filed herewith electronically
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.