EX-10.9 2 cibolaexh-41706.txt CIBOLA CORPORATION Financial Statements December 31, 2004, 2003 and 2002 (Information with respect to 2003 and 2002 is unaudited) CIBOLA CORPORATION TABLE OF CONTENTS INDEPENDENT AUDITORS' REPORT..................................................1 FINANCIAL STATEMENTS - Information with respect to 2003 and 2002 is unaudited Balance Sheets December 31, 2004 and 2003............................................2 Statements of Earnings Years Ended December 31, 2004, 2003 and 2002..........................3 Statements of Stockholders' Equity Years Ended December 31, 2004, 2003 and 2002..........................4 Statements of Cash Flows Years Ended December 31, 2004, 2003 and 2002..........................5 Notes to the Financial Statements........................................6 INDEPENDENT AUDITORS' REPORT To the Board of Directors Cibola Corporation: We have audited the accompanying balance sheet of Cibola Corporation as of December 31, 2004, and the related statements of earnings, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of Cibola's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the auditing 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. An audit includes 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 audit provides 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 Cibola Corporation as of December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying balance sheet of Cibola Corporation as of December 31, 2003 and the related statements of earnings, stockholders' equity and cash flows for the years ended December 31, 2003 and 2002 were not audited by us and, accordingly, we do not express an opinion on them. COLE & REED P.C. Oklahoma City, Oklahoma April 11, 2006 Cibola Corporation Balance Sheets December 31, 2004 and 2003
(unaudited) 2004 2003 ---- ---- Assets Current assets: Cash and cash equivalents $ 5,470 $ 18,948 Accounts receivable 635,178 667,185 Accrued interest 27,585 25,037 Notes receivable 91,544 103,464 Deposits -- 729,600 Other 16,374 41,095 -------------- -------------- Total current assets 776,151 1,585,329 -------------- -------------- Restricted assets: Cash and cash equlvalents 3,742,603 2,726,356 Investment securities 11,912,417 11,656,973 Certificates of deposit -- 122,000 Accrued Interest 478,052 134,762 Notes receivable 7,184,203 3,758,202 -------------- -------------- Total restricted assets 23,317,275 18,398,293 -------------- -------------- Total assets $ 24,093,426 19,983,622 ============== ============== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 371,494 371,494 Deferred Income taxes 109,000 83,000 -------------- -------------- Total current liabilities 480,494 454,494 -------------- -------------- Stockholders' equity: Preferred stock, $1,000 par, 16,200 shares authorized, issued and 2,127,929 2,127,929 outstanding Common stock, $0.01 par, 180,000 shares authorized, issued and 1,800 1,800 outstanding Contributed capital 1,474,200 1,474,200 Retained enarnings 20,408,712 16,596,141 Accumulated other comprehansive income 1,038,851 767,618 Note receivable - common stock (1,438,560) (1,438,560) -------------- -------------- Total stockholders' equity 23,612,932 19,529,128 -------------- -------------- Total liabilities and stockholders' equity $ 24,093,426 19,983,622 ============== ==============
See accompanying notes to the financial statements Cibola Corporation Statement of Earnings Years Ended December 31, 2004, 2003 and 2002
(unaudited) (unaudited) 2004 2003 2002 -------------------------------------------- Natural gas marketing sales $ 7,261,830 6,887,241 6,561,718 Cost of natural gas sold 4,410,748 4,398,696 4,405,485 ------------- ------------- ------------- Gross margin 2,851,082 2,488,545 2,156,233 Operating expenses General and administrative expenses 30,275 58,191 29,344 ------------- ------------- ------------- Operating Income 2,820,807 2,430,354 2,126,889 Investment Income (loss), net 1,462,659 564,894 (1,140,047) Other expense (62,164) -- -- ------------- ------------- ------------- Earnings before income tax 4,221,302 2,995,248 986,842 Income tax expense 408,731 356,188 241,432 ------------- ------------- ------------- Net earnings $ 3,812,571 2,639,060 745,410 ============= ============= =============
See accompanying notes to the financial statements Cibola Corporation Statements of Stockholders' Equity Years Ended December 31, 2004, 2003 and 2002
Number of Shares Outstanding Accumulated Note ----------------- Other Receivable Total Preferred Common Preferred Common Contributed Retained Comprehensive Common Stockholders' Stock Stock Stock Stock Earnings Earnings Income (Loss) Stock Equity ------ ------- ---------- ----- --------- ---------- ----------- ---------- --------- Balance as of December 31, 2001 | (unaudited) 16,200 180,000| $2,127,929 1,800 1,474,200 13,211,671 (1,611,226) (1,438,560) 13,765,814 | Comprehensive income (unaudited): | Net earnings -- --| -- -- -- 745,410 -- -- 745,410 Other comprehensive income, net of tax: | Net unrealized gains on investment -- --| -- -- -- -- 377,776 -- 377,776 securitiesarising during the year | net of reclassification adjustment | for gains the year not of | reclassification adjustment for | gains included in net earnings | | ---------- Total comprehensive income | 1,123,186 | ---------- ------ -------| ---------- ----- --------- ---------- ---------- ---------- ---------- Balance as of December 31, 2002 | (unaudited) 16,200 180,000| $2,127,929 1,800 1,474,200 13,957,081 (1,233,450) (1,438,560) 14,889,000 | Comprehensive income (unaudited) | Net Earnings -- --| -- -- -- 2,639,060 -- -- 2,639,060 Other comprehensive income, net of tax: | Net unrealized gains on investment -- --| -- -- -- -- 2,001,068 -- 2,001,068 securities arising during the year | net of reclassification adjustment | for gains the year not of | reclassification adjustment for | gains included in net earnings | | ---------- Total comprehensive income | 4,640,128 | ---------- ------ -------| ---------- ----- --------- ---------- ---------- ---------- ---------- Balance as of December 31, 2003 | (unaudited) 16,200 180,000| $2,127,929 1,800 1,474,200 16,596,141 767,618 (1,438,560) 19,529,128 | Comprehensive income | Net Earnings -- --| -- -- -- 3,812,571 -- -- 3,812,571 Other comprehensive income, net of tax: | Net unrealized gains on investment -- --| -- -- -- -- 271,233 -- 271,233 securities arising during the year | net of reclassification adjustment | for gains the year not of | reclassification adjustment for | gains included in net earnings | | ---------- Total comprehensive income | 4,083,804 | ---------- ------ -------| ---------- ----- --------- ---------- ---------- ---------- ---------- Balance as of December 31, 2004 16,200 180,000| $2,127,929 1,800 1,474,200 20,408,712 1,038,851 (1,438,560) 23,612,932 ====== =======| ========== ===== ========= ========== ========= ========== ==========
See accompanying notes to the financial statements Cibola Corporation Statements of Cash Flows Years Ended December 31, 2004, 2003 and 2002
(unaudited) (unaudited) 2004 2003 2002 ----------- ----------- ----------- Cash flows from operating activities Net earnings $ 3,812,571 $ 2,639,060 $ 745,410 Adjustments to reconcile net earnings to net cash provided by operating activities: Realized (gain) loss on sale of investment securities (606,942) 58,456 1,612,197 Amortization of bond premiums and discounts, net (57,766) (56,977) (35,851) Changes in operating assets and liabilities: Accounts receivable 32,007 526,163 (582,708) Accrued interest (345,838) (69,928) (29,628) Deposits 729,600 -- (729,600) Other assets 24,721 24,653 24,653 Accounts payable -- (359,510) 359,574 Income taxes payable -- (27,443) (37,218) ----------- ----------- ----------- Net cash provided by operating activities 3,588,353 2,734,474 1,326,829 ----------- ----------- ----------- Cash flows from investing activities Purchase of investment securities (4,437,108) (3,404,384) (8,339,825) Proceeds from the sale or maturity of investment securities 5,143,605 2,548,443 6,040,081 Receipts on notes receivable 211,920 275,000 20,000 Funding of notes receivable (3,626,001) (2,769,282) (700,000) Purchase of certificates of deposit -- (97,000) (672,000) Proceeds from the maturity of certificates of deposit 122,000 552,000 515,000 ----------- ----------- ----------- Net cash used for investing activities (2,585,584) (2,895,223) (3,136,744) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,002,769 (160,749) (1,809,915) Cash and cash equivalents as of beginning of year 2,745,304 2,906,053 4,715,968 ----------- ----------- ----------- Cash and cash equivalents as of end of year $ 3,748,073 $ 2,745,304 $ 2,906,053 =========== =========== =========== Supplemental disclosure of cash flow information - Cash paid during the year for income taxes $ 408,731 $ 383,631 $ 278,650 =========== =========== ===========
See accompanying notes to the financial statements Cibola Corporation Notes to the Financial Statements December 31, 2004, 2003 and 2002 (Information with respect to 2003 and 2002 is unaudited) 1 NATURE OF OPERATIONS Cibola Corporation (Cibola), a Wyoming corporation formed in 1996, is a natural gas marketing company located in Cody, Wyoming. NATURAL GAS MARKETING OPERATIONS Cibola's natural gas marketing operations are limited to one long-term sales contract and at least two long term purchase contracts. Cibola sells natural gas to a third party under a long-term sales agreement that expires August 31, 2005. Under the terms of the agreement, Cibola delivers a specified quantity of gas daily to the third party at a mandated deliver point at a fixed price that increases 5% annually. To provide the supply of natural gas to fulfill the sales agreement, Cibola has entered into purchase contracts with another third party to receive the same quantity of gas daily at the deliver point mandated by the sales agreement. With the excess cash flow generated from its gas marketing operations since 1996, Cibola has invested in a portfolio of investment securities and notes receivable. 2 SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING Cibola's 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. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments with an original maturity of three months or less at the date of purchase. This includes money market accounts held at brokerage firms. ACCOUNTS RECEIVABLE Accounts receivable are recorded at their invoiced amount and are not interest bearing. Uncollectible accounts have been historically infrequent and insignificant. In addition, management believes the risk of loss associated with uncollectible accounts is minimal. Accordingly, no allowance for uncollectible accounts has been recorded. RESTRICTED ASSETS As discussed in note 6, the preferred stock provides for individual sinking funds for Series A, Series B and Series C. The sinking fund provides for a periodic irrevocable pro rata transfer of excess cash flows to each sinking fund. Such assets are classified as restricted assets on the balance sheets. INVESTMENT SECURITIES Publicly-traded equity securities and debt securities are classified as available for sale and are recorded at market using the specific identification method. The fair value of investments available for sale is based on quoted market prices. Unrealized gains and losses (excluding other-than-temporary impairments) are reflected as accumulated other comprehensive income in equity. Equity investments in privately-held companies are recorded at cost. Premiums and discounts on investments are deferred and amortized/accreted to income over the term of the investment using a method that approximates the interest method. Gains and losses on sales are included in the statement of earnings and are computed on the basis of specific identification of the cost of each security. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, including operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. MAJORITY STOCKHOLDER Since formation of Cibola, The Beard Company (Beard) owns 144,000 of Cibola's 180,000 shares of common stock. REVENUE RECOGNITION Natural gas marketing sales are recognized when delivery has occurred and title has transferred. INCOME TAXES The results of Cibola's operations are included in the consolidated federal tax return of Beard. Under the tax allocation policy, Cibola calculates and remits its federal tax liability quarterly to Beard. Cibola, with its Wyoming operation, is not subject to state income tax. Cibola accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases. 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 and carryforwards are expected to be recovered or settled. 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. The principal items, which give rise to these differences, are the change in unrealized gains (losses) on investment securities. USE OF ESTIMATES Management 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 the financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates. 3 CASH AND CASH EQUIVALENTS Cibola maintains cash balances at a banking institution, which at times, exceed federally insured limits. Cibola has not experienced any losses in such accounts and believes there is no exposure to any significant credit risk on cash and cash equivalents. 4 INVESTMENT SECURITIES A summary of investment securities at December 31, 2004 and 2003 is as follows:
(unaudited) 2004 2003 ------------------ ------------------- Investments available for sale, at fair value $ 9,294,417 10,046,973 Equity investments, at the lower of cost or impaired value 2,618,000 1,610,000 ------------------ ------------------- $ 11,912,417 11,656,973 ================== ===================
Investments available for sale at December 31, 2004 and 2003 consist of the following:
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------- ---------------- ---------------- ---------------- December 31, 2004 Publicly-traded equity stocks $ 4,717,162 1,221,835 (64,437) 5,874,560 Mutual funds 1,867,004 185,629 (68,488) 1,984,145 Corporate bonds 1,098,618 32,732 (1,933) 1,129,417 Government bonds 297,132 9,354 (191) 306,295 --------------- ---------------- ---------------- ---------------- $ 7,979,916 1,444,550 (135,049) 9,294,417 =============== ================ ================ ================ December 31, 2003 (unaudited) Publicly-traded equity stocks $ 5,075,009 954,449 (84,740) 5,944,718 Mutual funds 1,904,484 74,421 (125,010) 1,853,895 Corporate bonds 1,371,791 165,709 -- 1,537,500 Government bonds 678,421 34,947 (2,508) 710,860 --------------- ---------------- ---------------- ---------------- $ 9,029,705 1,229,526 (212,258) 10,046,973 =============== ================ ================ ================
A summary of proceeds from the sale of investment securities available for sale, as well as gross realized gains and losses for the years ended December 31, 2004 and 2003, is as follows:
(unaudited) (unaudited) 2004 2003 2002 ------------------ ------------------ ------------------- Proceeds $ 5,143,605 2,548,443 6,040,081 ------------------ ------------------ ------------------- Gross realized gains 664,993 129,432 433,328 ------------------ ------------------ ------------------- Gross realized losses (58,051) (187,888) (2,045,525) ================== ================== ====================
The contractual maturities of investments available for sale at December 31, 2004 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties: Due in less than one year $ 302,920 Due in one to five years 1,132,792 ------------------- 1,435,712 Non-debt securities 7,858,705 ------------------- $ 9,294,417 =================== Management believes cost of equity investments approximates fair value and fully expects to receive all principal and interest related to each of the underlying investments. Further, management expects to realize no actual loss related to any of the underlying investments at any time in the future and accordingly has not recognized any loss at December 31, 2004. A summary of investment income for the years ended December 31, 2004, 2003 and 2002 is as follows:
(unaudited) (unaudited) 2004 2003 2002 ------------------ ----------------- -------------------- Interest $ 647,305 458,722 368,160 Dividend 210,523 160,203 108,568 Realized gains (losses), net 606,942 (58,456) (1,612,197) Amortization of bond premiums and discounts, net 57,766 56,977 35,851 Capital gains distributions 661 521 912 Investment fees (60,538) (53,073) (41,341) ------------------ ----------------- -------------------- $ 1,462,659 564,894 (1,140,047) ================== ================= ====================
5 NOTES RECEIVABLE A summary of notes receivable at December 31, 2004 and 2003 is as follows:
(unaudited) 2004 2003 ----------------- -------------- Note receivable from an affiliate of a stockholder with principal $ 3,220,000 1,730,000 and interest accruing at prime rate plus 1.00% (effective rate of 6.25% at December 31, 2004) due at maturity on December 31, 2006 Note receivable from an affiliate of a stockholder with principal 1,875,000 1,125,000 and interest accruing at 10.00% due at maturity on December 31, 2005 Note receivable from a stockholder with principal and interest 530,000 -- accruing at prime rate (effective rate of 5.25% at December 31, 2004) due at maturity on December 31, 2005 Note receivable from a third party with interest at 8% due 500,000 500,000 quarterly and principal due at October 31, 2004 secured by an aircraft and a personal guarantee (subsequently collected in full) Note receivable from a stockholder with interest paid annually at 400,202 400,202 prime rate plus 0.50% (effective rate of 5.75% at December 31, 2004) and principal due at maturity on December 31, 2005 Note receivable from a third party with interest at 6% due 389,001 3,000 quarterly and principal due on demand Note receivable from an affiliate of a stockholder with interest 145,000 -- paid monthly at 5.50% and principal due monthly from November 2005 through October 2010 secured by a second mortgage on borrower's corporate facility Note receivable from an affiliate of a stockholder with interest 125,000 -- paid annually at prime rate plus 0.50% (effective rate of 5.75% at December 31, 2004) and principal due at maturity on December 31, 2006 Note receivable from a stockholder with principal and interest 91,544 -- accruing at 15% due at maturity on July 31, 2005 Note receivable from a stockholder with principal and interest -- 103,464 accruing at 15% due at maturity on July 31, 2004 ---------------- -------------- $ 7,275,747 3,861,666 ================ ==============
6 PREFERRED STOCK In 1996, Cibola issued 9,979, 3,370 and 2,851 shares of, Series A, Series B and Series C preferred stock, respectively. In the event of any voluntary or involuntary dissolution, the preferred stock has a liquidation preference over the common stock of $50 million. The preferred stockholders are not entitled to receive dividends. The preferred stock provides for individual sinking funds for Series A, Series B and Series C. The sinking fund provides for a periodic irrevocable pro rata transfer of excess cash flows to each sinking fund. The assets that are included on the balance sheet at December 31, 2004 are allocated to the sinking funds as follows: (unaudited) 2004 2003 ------------------ ------------------- Series A $ 14,459,918 11,280,958 Series B 4,583,032 3,596,452 Series C 4,274,325 3,520,883 ------------------ ------------------- $ 23,317,275 18,398,293 ------------------ ------------------- The Series A, B and C preferred stockholders also own 36,000 shares of common stock. 7 NOTES RECEIVABLE - COMMON STOCK During April 1996, The Beard Company purchased 144,000 shares of Cibola's common stock. Such ownership represents 80% of the common stock outstanding. The $1,440,000 purchase price was paid with cash and a $1,438,560 note receivable. The note receivable balance remains at $1,438,560. Interest is payable semiannually at 8.25%. The note receivable is due June 30, 2006. 8 INCOME TAXES Income tax expense represents the amounts due to Beard under the tax sharing arrangement. The deferred tax liability at December 31, 2004 and 2003 consists of the tax effect of the net unrealized gains on investment securities. Cibola has no deferred tax assets at December 31, 2004. 9 MAJOR CUSTOMER AND MAJOR SUPPLIER As discussed in note 1, all of the natural gas purchases are generated from one supplier and all of the natural gas sales are generated from one customer. The associated risks are significant. In the event one of the third parties failed to meet its obligation, Cibola would have to go to the current natural gas markets to satisfy Cibola's obligation by buying or selling at the then current price. The prices obtained in the current natural gas markets could result in a significant loss to Cibola. Both third parties have historically met their obligation. Cibola does not expect either third party to fail to meet its obligations. 10 UNCONDITIONAL PURCHASE COMMITMENTS As discussed in note 1, Cibola has entered into unconditional purchase commitments during 1996 and 1997 for natural gas that Cibola will use to satisfy its long term sales commitments. The purchase commitments covered by the two agreements are with one supplier. This commitment is not recorded on Cibola's balance sheet. Cibola purchased $4.3 million of natural gas under this commitment during 2005. Cibola's future obligation (undiscounted) under these purchase commitments approximates $2.9 million. 11 SUBSEQUENT EVENTS Effective December 1, 2005, Cibola's minority stockholders exercised an option to purchase the 144,000 shares of common stock owned by Beard. In January 2006, Cibola redeemed the Series B and Series C preferred stock and the common stock held by the Series B and Series C preferred stockholders. As a result, the sinking funds associated with Series B and Series C with certain holdbacks were distributed to the respective preferred stockholders.