-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2Ql2wBvWxgIqVaFHHlAMCSPCoQVJifl3Yxm/p68fQ5r81i0xHjWoupStBHxVUVf r4vERJNBA5mC9Tv7iKvuOw== 0000909334-02-000283.txt : 20021114 0000909334-02-000283.hdr.sgml : 20021114 20021114125948 ACCESSION NUMBER: 0000909334-02-000283 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEARD CO /OK CENTRAL INDEX KEY: 0000909992 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 730970298 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12396 FILM NUMBER: 02823458 BUSINESS ADDRESS: STREET 1: 5600 N MAY AVE STREET 2: STE 320 CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 BUSINESS PHONE: 4058422333 MAIL ADDRESS: STREET 1: 5600 N MAY STREET 2: STE 320 CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 FORMER COMPANY: FORMER CONFORMED NAME: BEARD INVESTMENT CO DATE OF NAME CHANGE: 19930730 10-Q 1 bc3rdq-112002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-12396 THE BEARD COMPANY (Exact name of registrant as specified in its charter) Oklahoma 73-0970298 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Enterprise Plaza, Suite 320 5600 North May Avenue Oklahoma City, Oklahoma 73112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (405) 842-2333 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock as of October 31, 2002. Common Stock $.001333 par value - 1,828,845 THE BEARD COMPANY INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements.............................................. Balance Sheets - September 30, 2002 (Unaudited) and December 31, 2001.................................................... Statements of Operations - Three Months and Nine Months ended September 30, 2002 and 2001 (Unaudited)........................ Statements of Shareholders' Equity - Year ended December 31, 2001 and Nine Months ended September 30, 2002 (Unaudited)................. Statements of Cash Flows - Nine Months ended September 30, 2002 and 2001 (Unaudited).............................. Notes to Financial Statements (Unaudited)............................... Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... Item 3. Quantitative and Qualitative Disclosures About Market Risk........ PART II. OTHER INFORMATION Item 2. Changes in Securities............................................. Item 6. Exhibits and Reports on Form 8-K.................................. Signatures.................................................................. Certifications for Form 10-Q ............................................... PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE BEARD COMPANY AND SUBSIDIARIES Balance Sheets
September 30, December 31, Assets 2002 2001 ------ ------------- ------------ Current assets: Cash and cash equivalents $ 22,000 $ 55,000 Accounts receivable, less allowance for doubtful receivables of $107,000 in 2002 and 2001 146,000 175,000 Inventory 6,000 76,000 Prepaid expenses and other assets 17,000 56,000 Current portion of notes receivable 154,000 180,000 ------------ ------------ Total current assets 345,000 542,000 ------------ ------------ Notes receivable 54,000 108,000 Investments and other assets 911,000 652,000 Property, plant and equipment, at cost 4,456,000 4,894,000 Less accumulated depreciation, depletion and amortization 1,905,000 2,184,000 ------------ ------------ Net property, plant and equipment 2,551,000 2,710,000 ------------ ------------ Intangible assets and other assets, at cost 159,000 48,000 Less accumulated amortization 33,000 2,000 ------------ ------------ Net intangible assets 126,000 46,000 ------------ ------------ $ 3,987,000 $ 4,058,000 ============ ============ Liabilities and Shareholders' Equity (Deficiency) ------------------------------------------------- Current liabilities: Trade accounts payable $ 230,000 $ 156,000 Accrued expenses 267,000 429,000 Short term debt 300,000 300,000 Current maturities of long-term debt 8,000 7,000 ------------ ------------ Total current liabilities 805,000 892,000 ------------ ------------ Long-term debt less current maturities 848,000 19,000 Long-term debt - related entities 3,161,000 2,494,000 Other long-term liabilities 108,000 108,000 Redeemable preferred stock of $100 stated value; 5,000,000 shares authorized; 27,838 shares issued outstanding in 2002 and 2001 (note 4) 889,000 889,000 Common shareholders' equity (deficiency): Common stock of $.001333 par value per share; 7,500,000 shares authorized; 2,123,898 shares issued and outstanding in 2002 and 2001 3,000 3,000 Capital in excess of par value 38,151,000 38,081,000 Accumulated deficit (38,117,000) (36,568,000) Accumulated other comprehensive loss (15,000) (14,000) Treasury stock, 295,053 shares, at cost, in 2002 and 2001 (1,846,000) (1,846,000) ------------ ------------ Total common shareholders' equity (deficiency) (1,824,000) (344,000) ------------ ------------ Commitments and contingencies (note 7) $ 3,987,000 $ 4,058,000 ============ ============
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Operations (Unaudited)
For Three Months Ended For Nine Months Ended ----------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues: Coal reclamation $ - $ 23,000 $ 12,000 $ 120,000 Carbon dioxide 129,000 100,000 324,000 342,000 China - - - - e-Commerce - - - - Other 2,000 6,000 12,000 18,000 ----------- ----------- ----------- ----------- 131,000 129,000 348,000 480,000 ----------- ----------- ----------- ----------- Expenses: Coal reclamation 105,000 135,000 338,000 395,000 Carbon dioxide 35,000 28,000 85,000 73,000 China - - - - e-Commerce - - - - Selling, general and administrative 270,000 288,000 830,000 904,000 Depreciation, depletion & amortization 41,000 24,000 100,000 68,000 Other 7,000 3,000 26,000 20,000 ----------- ----------- ----------- ----------- 458,000 478,000 1,379,000 1,460,000 ----------- ----------- ----------- ----------- Operating profit (loss): Coal reclamation (139,000) (143,000) (425,000) (385,000) Carbon dioxide 85,000 64,000 213,000 244,000 China - - - - e-Commerce (48,000) (34,000) (123,000) (137,000) Other, primarily corporate (225,000) (236,000) (696,000) (702,000) ----------- ----------- ----------- ----------- (327,000) (349,000) (1,031,000) (980,000) Other income (expense): Interest income 36,000 54,000 95,000 130,000 Interest expense (114,000) (56,000) (276,000) (144,000) Equity in operations of unconsolidated affiliates (45,000) (50,000) (165,000) (156,000) Gain on sale of assets - 11,000 10,000 79,000 Other - (1,000) (1,000) 5,000 ----------- ----------- ----------- ----------- Loss from continuing operations before income taxes (450,000) (391,000) (1,368,000) (1,066,000) Income taxes (note 6) - - - 60,000 ----------- ----------- ----------- ----------- Loss from continuing operations (450,000) (391,000) (1,368,000) (1,006,000) Loss from discontinued operations (78,000) (58,000) (181,000) (516,000) ----------- ----------- ----------- ----------- Net loss $ (528,000) $ (449,000) $(1,549,000) $(1,522,000) =========== =========== =========== =========== Net loss per average common share outstanding: Basic and diluted: Loss from continuing operations $ (0.25) $ (0.21) $ (0.75) $ (0.55) Loss from discontinued operations (0.04) (0.03) (0.10) (0.28) ----------- ----------- ----------- ----------- Net loss $ (0.29) $ (0.24) $ (0.85) $ (0.83) =========== =========== =========== =========== Weighted average common shares outstanding - basic and diluted 1,829,000 1,829,000 1,829,000 1,829,000 =========== =========== =========== ===========
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Shareholders' Equity (Deficiency)
Total Accumulated Common Capital in Other Shareholders' Common Excess of Accumulated Comprehensive Treasury Equity Stock Par Value Deficit Income Stock (Deficiency) ----------- ------------- -------------- -------------- ------------- ------------- Balance, December 31, 2000 $ 3,000 $ 37,986,000 $( 34,247,000) $( 13,000) $( 1,846,000) $ 1,883,000 Net loss - - (2,321,000) - - (2,321,000) Comprehensive income: Foreign currency translation adjustment - - - (1,000) - (1,000) ------------- Comprehensive loss - - - - - (2,322,000) ------------- Reservation of shares pursuant to deferred compensation plan - 95,000 - - - 95,000 ----------- ------------- -------------- -------------- ------------- ------------- Balance, December 31, 2001 3,000 38,081,000 (36,568,000) (14,000) ( 1,846,000) (344,000) Net loss, nine months ended September 30, 2002 (unaudited) - - (1,549,000) - - (1,549,000) Comprehensive income: Foreign currency translation adjustment (unaudited) - - - (1,000) - (1,000) ------------- Comprehensive loss (unaudited) - - - - - (1,550,000) ------------- Issuance of stock warrants - 5,000 - - - 5,000 Reservation of shares pursuant to deferred compensation plan (unaudited) - 65,000 - - - 65,000 ----------- ------------- -------------- -------------- ------------- ------------- Balance, September 30, 2002 (unaudited) $ 3,000 $ 38,151,000 $( 38,117,000) $( 15,000) $( 1,846,000) $( 1,824,000) =========== ============= ============== ============== ============= =============
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Cash Flows (Unaudited)
For the Nine Months Ended ------------------------- September 30, 2002 September 30, 2001 ------------------ ------------------ Operating activities: Cash received from customers $ 561,000 $ 646,000 Cash paid to suppliers and employees (1,488,000) (1,841,000) Interest received 30,000 107,000 Interest paid (201,000) (98,000) Tax refunds - 60,000 ----------- ----------- Net cash used in operating activities (1,098,000) (1,126,000) ----------- ----------- Investing activities: Acquisition of property, plant and equipment (17,000) (71,000) Acquisition of intangibles (2,000) - Proceeds from sale of assets 129,000 162,000 Investment in and advances to fifty percent-owned subsidiary in Mexico (10,000) (418,000) Investment in and advances to fifty percent-owned investment in China (539,000) (335,000) Advances for notes receivable (7,000) (372,000) Payments on notes receivable 109,000 979,000 Other 109,000 6,000 ----------- ----------- Net cash used in investing activities (228,000) (49,000) ----------- ----------- Financing activities: Proceeds from term notes 1,858,000 1,563,000 Payments on line of credit and term notes (456,000) (387,000) Capitalized costs associated with issuance of subordinated debt (109,000) - ----------- ----------- Net cash provided by investing activities 1,293,000 1,176,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents (33,000) 1,000 Cash and cash equivalents at beginning of period 55,000 31,000 ----------- ----------- Cash and cash equivalents at end of period $ 22,000 $ 32,000 =========== ===========
Continued THE BEARD COMPANY AND SUBSIDIARIES Statements of Cash Flows (Unaudited) Reconciliation of Net loss to Net Cash Used in Operating Activities
For the Nine Months Ended ------------------------- September 30, 2002 September 30, 2001 ------------------ ------------------ Net loss $(1,549,000) $(1,522,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion and amortization 100,000 107,000 Gain on sale of assets (97,000) (96,000) Equity in net loss of unconsolidated affiliates 175,000 468,000 Impairment of fixed assets 77,000 - Net cash used by discontinued operations offsetting accrued impairment loss (9,000) (44,000) Noncash compensation expense 5,000 - ----------- ----------- Net cash used in operations before changes in current assets and liabilities (1,298,000) (1,087,000) Decrease in accounts receivable, prepaid expenses and other current assets 103,000 47,000 Decrease in inventories 70,000 51,000 Increase (decrease) in accounts payable, accrued expenses and other liabilities 27,000 (137,000) ----------- ----------- Net cash used in operating activities $(1,098,000) $(1,126,000) =========== ===========
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Notes to Financial Statements September 30, 2002 and 2001 (Unaudited) (1) Summary of Significant Accounting Policies ------------------------------------------ Basis of Presentation --------------------- The accompanying financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally prepared in accordance with accounting principles generally accepted in the United States have been omitted. The accompanying financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in The Beard Company's 2001 annual report on Form 10-K. The accompanying financial statements include the accounts of The Beard Company and its wholly and majority-owned subsidiaries in which The Beard Company has a controlling financial interest ("Beard or the Company"). Subsidiaries and investees in which Beard does not exercise control are accounted for using the equity method. All significant intercompany transactions have been eliminated in the accompanying financial statements. The financial information included herein is unaudited; however, such information reflects solely normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine month periods ended September 30, 2002, are not necessarily indicative of the results to be expected for the full year. The Company's current significant operations are within the following segments: (1) the Coal Reclamation ("Coal") Segment, (2) the Carbon Dioxide ("CO2") Segment, (3) the China ("China") Segment, and (4) the e-Commerce ("e-Commerce") Segment. The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is continuing to pursue environmental opportunities in China through a 50%-owned subsidiary ("ABT-Beard") which focuses on the installation and construction of composting facilities. The e-Commerce Segment consists of a 71%-owned subsidiary which is pursuing the development of a virtually secure payment system to be used exclusively for Internet transactions. Its current focus is to develop licensing arrangements and other fee based arrangements with companies implementing technology in conflict with its intellectual property. As discussed in note 3: (1) In 1999, the Company's Board of Directors adopted a formal plan to discontinue its interstate travel facilities business (the "ITF" Segment); (2) in 1999 the Management Committee of North American Brine Resources ("NABR") adopted a plan to discontinue its brine extraction/iodine manufacturing business which comprised the Company's ("BE/IM") Segment; (3) in May 2001 the fixed assets of the 50%-owned company (accounted for as an equity investment) involved in the Natural Gas Well Servicing ("WS") Segment were sold and in August 2001, the Company ceased pursuing opportunities in Mexico and the segment was discontinued; and (4) in March 2001 the Company ceased providing financial support to its environmental remediation ("ER") subsidiary, its exclusive marketing license was subsequently cancelled, and the ER Segment was discontinued. Investments ----------- The Company owns a 50% interest in ABT-Beard, L.L.C., a company involved in pursuing environmental opportunities in China. ABT-Beard had no revenues for either the first nine months of 2002 or 2001. ABT-Beard incurred losses of $191,000 and $170,000 for the third quarter of 2002 and 2001, respectively. ABT-Beard incurred losses of $581,000 and $525,000 for the first nine months of 2002 and 2001, respectively. Impact of Recently Issued Accounting Standards Not Yet Adopted -------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 applies to intangible assets acquired individually or with a group of other assets at acquisition and subsequent to acquisition. According to Statement No. 142, intangible assets are to be recorded at fair value and goodwill will not be amortized, but assessed annually for impairment. In September 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 applies to the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets. The statement requires that asset retirement obligations be recognized at fair value when the obligation is incurred. In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The assets covered by the statement include those to be held and used or to be disposed of, such as assets under capital leases of lessees, assets subject to operating leases of lessors, and prepaid assets. This statement provides guidance for the recognition and measurement of an impairment loss for certain types of long-lived assets and expands the scope of discontinued operations. The Company has adopted FASB Statements No. 142 and 144 effective January 1, 2002 for the fiscal year ended December 31, 2002 and the impact is not material. The Company will be required to adopt FASB Statement 143 effective January 1, 2003 for the fiscal year ended December 31, 2003. The Company has not evaluated the effects of Statement No. 143, but does not believe that adoption of this accounting standard will have a significant effect on the financial position or results of operations of the Company. Reclassifications ----------------- Certain 2001 balances have been reclassified to conform to the 2002 presentation. As described in note 3, the Company discontinued two of its segments. As a result the 2001 statement of operations has been reclassified to reflect the two segments' operations as discontinued. (2) Liquidity and Ability to Fund Operations ---------------------------------------- As a result of continuing operating losses during the past nine months, the Company's cash and cash equivalents decreased slightly from $55,000 at December 31, 2001 to $22,000 at September 30, 2002. To mitigate potential liquidity problems, the Company obtained financing of $1.8 million in 2000, including $1.5 million from an affiliate of the Company's chairman. This credit line was increased to a total of $2,250,000 in September of 2001, to $2,625,000 in February of 2002 and to $3,000,000 in October of 2002. The line is secured by a pledge of approximately 89% of the Company's working and overriding royalty interests in the McElmo Dome Unit. Despite these actions and the private placement of $1,200,000 of 10% subordinated notes discussed below, working capital deteriorated $110,000 during the first nine months of 2002. The Company is focusing on replacing its Coal Segment's revenues and currently has two major projects in various stages of development, both of which are ultimately expected to mature into operating projects. In each case core holes have been drilled and sample analyses have been completed with favorable results. The projects are in two different states and involve two different parties. Negotiations are in progress with the pond owner of one of the projects concerning the installation of a preparation plant to recover clean coal. The installation of this project requires the arrangement of necessary financing. Negotiations are in progress with a third party to form a joint venture or limited liability company (the "LLC") that would provide the initial working capital and guarantee the necessary equipment financing on this project, and give the LLC the right of first refusal to participate in future recovery projects that require financing. The second project involves the transfer of a large amount of non-recoverable slurry to a new disposal area, and may ultimately result in the installation of a preparation plant. The initial phase of this project would require no financing. We now expect to start the first of these two projects in the first quarter of 2003. Although the exact timing of both projects is uncertain, they are both considered to have a high probability of activity. However, no definitive contracts have as yet been signed, and there is no assurance that the required financing will be obtained or that either or both of the projects will materialize. Development activity in the China Segment, meanwhile, has been hampered by delays. Although ABT-Beard had reached agreements and/or formed Cooperative Joint Ventures ("CJV's") with various Chinese participants which contemplated the construction of three compost manufacturing facilities in which ABT-Beard would own an interest and receive an operating fee, two of these projects (i.e., Baoding and Qihe City) are now on indefinite hold pending resolution of some of the financing terms applicable to those projects, and the third project, which contemplates the construction of a plant in the City of Handan and which had been on indefinite hold, has been reactivated but is still on hold pending finalization of the Handan CJV, working out certain required additional documents and obtaining required approvals. In addition, Beard and the other owner of ABT-Beard have been involved in ongoing discussions concerning certain misunderstandings between the two owners, and certain changes in the management and operational structure of ABT-Beard. Until those discussions have been concluded, the additional Handan CJV documentation agreed upon, and the requisite approvals obtained, the construction of the Handan project compost facility will not begin. Key to the Company's liquidity is the anticipated settlement of a lawsuit, in which the Company is a Plaintiff, which has been in progress since 1996. A Settlement Agreement was signed by the parties in September of 2001. On May 6, 2002, the federal judge issued the Final Judgment approving the Settlement and ordered that a settlement fund of $50.4 million in cash be established to settle the class action lawsuit. In companion rulings on the same date the Judge also approved the allocation of settlement funds among the class members in the lawsuit. In late May, 2002, objectors entitled to receive approximately $107,000 of the total settlement filed an appeal to the final approval of the settlement. Such parties will argue their appeal before the Tenth Circuit Court of Appeals on November 20, 2002, with a decision expected to be made by the Court in January or February 2003. Distribution of the proceeds will be delayed until all appeal periods have run. The Company anticipates its share of the proceeds will be in excess of $3.5 million. Distribution of the contemplated proceeds will have a significant impact upon the Company's liquidity. Although there is the possibility that the appeals process could delay the Settlement into late 2003 or possibly early 2004 or that the objecting parties could ultimately cause the Settlement to be overturned, the Company believes it is unlikely that the Settlement will be overturned. To further bolster working capital, the Company was successful in the private placement of $1,200,000 of 10% subordinated notes due September 30, 2003, to "bridge the gap" until the settlement funds are distributed or until the anticipated Coal and China projects achieve positive cash flow. In the event the notes have not been redeemed by the maturity date, they will be automatically extended to March 31, 2005. An investment banking firm received warrants to purchase 45,000 shares of Company common stock as part of its sales compensation in connection with the offering. The note holders have the contingent right to receive up to 240,000 additional warrants depending upon the length of time their notes are held. As of November 11, 2002, a total of 21,500 of such warrants had been issued to the note holders. Related parties purchased $320,000 of the offering, and had received a total of 10,000 warrants as of such date. In addition, the Company expects to generate cash from the disposition of the remaining assets from the discontinued ITF, BE/IM and WS Segments and from the pay down of notes receivable, and can sell certain other assets to generate cash if necessary. The Company believes that the cash generated from the private debt placement and the remaining portion of its credit lines, coupled with the cash generated from the sale of assets, will be adequate to enable the Company to continue operations until (i) the settlement funds have been received or (ii) the operations of the projects under development in the Coal and China Segments have come on stream and the Company is generating positive cash flow. (3) Discontinued Operations ----------------------- ITF Segment ----------- In 1999 the Company's Board of Directors adopted a formal plan to discontinue its interstate travel facilities ("ITF") Segment and recorded a $1,603,000 estimated loss for the discontinuance in 1998. ITF disposed of a majority of its assets in 1999, retaining two convenience stores ("C-stores"), including their equipment and inventory, and Beard became 100% owner of ITF. Beard recorded an additional $420,000 loss in 2000; $60,000 represented operating losses expected to be incurred by the discontinued ITF Segment prior to the anticipated disposal date of the remaining assets; $360,000 represented an additional reduction in the estimated realizable value of the remaining C-stores and related assets as of December 31, 2000. The discontinued ITF Segment had no revenues for the three months ended September 30, 2001 while recording revenues of $7,000 for the nine-month period ended September 30, 2001. ITF's actual operating losses for the three and nine-month periods ended September 30, 2001 were $7,000 and $44,000, respectively. Such losses were charged against the loss accrual recorded in the fourth quarter of 2000. In December 2001, Beard recorded an additional $100,000 impairment in the carrying value of the facilities and $14,000 for anticipated operating losses for the period from December 31, 2001 through the expected disposal date of the remaining assets. ITF recorded no revenues for the first nine months of 2002 and incurred $3,000 and $9,000 of losses for the three and nine-month periods ending September 30, 2002, respectively, which were charged against the loss accrual recorded in 2001. Included in the losses was a $2,000 gain on the sale of equipment. As of September 30, 2002, the significant assets related to the ITF Segment consisted primarily of the two remaining C-stores and other assets with a total recorded value of $406,000. The significant liabilities of the segment consisted of trade accounts payable and accrued expenses totaling $8,000. On November 4, 2002, the segment sold the remaining C-stores at public auction, for which it anticipates receiving net proceeds of approximately $303,000 cash by December 4, 2002. The segment recorded an additional impairment of $77,000 in the carrying values of such facilities, and anticipates no further impairment will be required. BE/IM Segment ------------- In 1999 the Management Committee of North American Brine Resources ("NABR") adopted a formal plan to discontinue the business and dispose of its assets. Beard had a 40% ownership in NABR, which was accounted for under the equity method. As a result, Beard's share of NABR's operating results has been reported as discontinued for all periods presented in the accompanying statements of operations. The joint venture was dissolved in September 2000 and the Japanese partners received their final distribution of cash in December 2000, with the Company taking over the remaining assets and liabilities. In 1999 Beard recorded a $540,000 loss, which represented its share of NABR's $1,350,000 estimated loss from the discontinuation of operations. NABR's loss included $572,000 of anticipated operating losses through April 2000 (the date operations ceased for the larger of its two plants) and costs of ceasing operations. NABR had no revenues for the smaller of the two plants for the three and nine-month periods ended September 30, 2002, respectively. The net losses for the three and nine-months ended September 30, 2002 were $17,000 and $84,000, respectively, and were not anticipated in the loss accruals recorded in 1999. The Company charged $10,000 and $17,000 for the three and nine-month periods ended September 30, 2002, respectively, against the accrual for anticipated expenses related to the shutdown of the larger of its two plants. Revenues for the three and nine-month periods ending September 30, 2001 were none and $116,000, respectively. The actual operating results for the three and nine-month periods ending September 30, 2001 were losses of $2,000 and $45,000, respectively, which were charged against the loss accrual recorded in 1999. In addition, the Company recorded losses of $22,000 and $48,000 for the three and nine-month periods ended September 30, 2001, respectively, for the operations of the smaller of the two plants distributed to Beard from NABR. These losses were not anticipated in the loss accrual of 1999. As of September 30, 2002, the significant assets related to NABR's operations consisted primarily of equipment and inventory with estimated net realizable values of $35,000 and $6,000, respectively. The significant liabilities related to NABR's operations consisted primarily of accounts payable of $4,000 and accrued expenses related to the shutdown of operations totaling $79,000. The smaller of the two plants was sold effective July 31, 2002, which will eliminate future operating losses after such date. The Company is actively pursuing opportunities to sell NABR's remaining assets and expects the disposition to be completed by June 30, 2003. WS Segment ---------- In May 2001 the fixed assets of the 50%-owned company (accounted for as an equity investment) involved in natural gas well testing operations for the Natural Gas Well Servicing ("WS") Segment were sold for $1,550,000, subject to a holdback of $150,000. The Company received $21,000 and $65,000 of the holdback in June and November, respectively, of 2001. In May, 2002, the Company received $35,000, net of attorney's fees of $29,000, representing the remainder of the holdback. As a result of the sale all debt of the 50%-owned company was retired and the Company was relieved of contingent liabilities totaling $512,000. In August 2001 the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued. In December 2001 all of the sand separators owned by the 100%-owned company in the WS Segment were sold for $100,000. The Company is now pursuing the sale of all remaining equipment owned by the segment. The segment recorded no revenues for the first nine months of 2002 and $3,000 for the same period in 2001. Beard's share of operating losses from the discontinued segment was $20,000 for the nine months ended September 30, 2002. Beard recorded income from this discontinued segment of $16,000 for the three months ended September 30, 2002 as a portion of the assets were sold for a gain of $39,000. Beard's share of operating losses from the discontinued segment was $36,000 and $451,000, respectively, for the three and nine-month periods ending September 30, 2001. For the first nine months of 2001, Beard's share of operating losses from the 50%-owned company was $327,000. The remaining $124,000 of losses incurred in the nine months ended September 30, 2001 were associated with the operations of the wholly-owned company and were not anticipated in the loss accrual. As of September 30, 2002, the significant assets of the WS Segment consisted of fixed assets with a recorded value of $146,000 and cash and accounts receivable totaling of $18,000. The significant liabilities of the entity consisted of trade accounts payable and accrued expenses totaling $62,000. It is anticipated that all liabilities of the segment will be paid prior to December 31, 2002. ER Segment ---------- In March of 2001 the Company determined that it would no longer provide financial support to ISITOP, Inc., an 80%-owned subsidiary specializing in the remediation of polycyclic aromatic hydrocarbon ("PAH") contamination. The operations of ISITOP had previously comprised the Company's environmental remediation ("ER") Segment. On May 31, 2001, ISITOP was notified by the Licensor that the segment's exclusive U.S. marketing license for the chemical used for such PAH remediation had been cancelled. ISITOP generated no revenues in 2002 or in 2001. ISITOP's operating losses for the nine months ended September 30, 2002 totaled less than $1,000 which was all incurred in the second quarter of the year. The operating losses totaled less than $1,000 and $17,000 for the three and nine-month periods ending September 30, 2001, respectively. ISITOP had no significant assets or liabilities at September 30, 2002. (4) Redeemable Preferred Stock -------------------------- The Company's preferred stock is mandatorily redeemable through December 31, 2002, from one-third of Beard's "consolidated net income" as defined. Accordingly, one-third of future "consolidated net income" will accrete directly to preferred stockholders and reduce earnings per common share. The Company's 2002 operations through September 30 were not sufficient to begin the sharing of the consolidated net income, and it is anticipated that no redemption will be required. To the extent that the preferred stock is not redeemed by December 31, 2002, the shares of preferred stock can be converted into shares of the Company's common stock. (5) Loss Per Share -------------- Basic loss per share data is computed by dividing loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per share in the statements of operations exclude potential common shares issuable upon conversion of redeemable preferred stock or exercise of stock options as a result of losses from continuing operations for all periods presented. (6) Income Taxes ------------ In accordance with the provisions of the Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the Company's net deferred tax asset is being carried at zero book value, which reflects the uncertainties of the Company's utilization of the future net deductible amounts. The Company recorded refunds of $41,000 and $19,000 for federal and state income taxes, respectively, for the nine months ended September 30, 2001. There were no provisions for income taxes for the three and nine-month periods ended September 30, 2002. At September 30, 2002, the Company estimates that it had the following income tax carryforwards available for both income tax and financial reporting purposes (in thousands): Expiration Date Amount ------------------------- Federal regular tax operating loss carryforwards 2004-2009 $ 54,789 Tax depletion carryforward Indefinite $ 5,482 (7) Commitments and Contingencies ----------------------------- In the normal course of business various actions and claims have been brought or asserted against the Company. Management does not consider them to be material to the Company's financial position, liquidity or results of operations. In connection with the sale of the fixed assets of the Mexican well testing operations the Company and its 50% partner have each, as to 50%, indemnified the purchaser from and against any claims, demands, actions, damages, cause of action, cost, liability, penalties and expense (including reasonable legal fees) that purchaser or its successors or assigns may suffer arising from the Mexican subsidiary's failure to file any applicable tax returns or pay any and all of its taxes which had accrued prior to the sale date. As of September 30, 2002, the accrued tax liabilities were estimated to be $8,000, with the Company liable for one-half of such amount. In connection with a Restructure of the Company in 1993, the Company has an indemnity obligation to its institutional preferred stockholder and one of its assignees for certain losses (i) arising out of the ownership and/or operation of Beard Oil's former oil and gas assets, including environmental liabilities; (ii) arising under any employee benefit or severance plan; or (iii) relating to any misrepresentation or inaccuracy in any representation made by the Company or Beard Oil in connection with the Restructure (collectively, the "Obligations"). Neither Beard nor Beard Oil is presently aware of any material liabilities existing as a result of such Obligations. (8) Stock Option and Deferred Compensation Plans -------------------------------------------- The Company has reserved 206,250 shares of its common stock for issuance to key management employees and directors under The Beard Company 1993 Stock Option Plan. As of September 30, 2002 and 2001, there were 40,871 options outstanding under the plan at a weighted average exercise price of $3.16. In addition, there were 93,750 additional shares available for grant under the plan. The Company also has a deferred compensation plan for certain key executives and directors which provide for payments in the form of the Company's common stock upon the death, disability or retirement of the participant. 350,000 shares have been reserved for issuance under the plan. As of September 30, 2002 and 2001, 277,286 and 201,764 of such shares, respectively, had been reserved for distribution under the plan. (9) Business Segment Information ---------------------------- The Company manages its business by products and services and by geographic location (by country). The Company evaluates its operating segments' performance based on earnings or loss from operations before income taxes. The Company had four reportable segments in the first nine months of 2002 and 2001: Coal, Carbon Dioxide, China and e-Commerce. The Coal Segment is in the business of operating coal fines reclamation and/or briquetting facilities in the U.S. and is pursuing the development of advanced fine coal preparation processes. The Carbon Dioxide Segment consists of the production of CO2 gas. The China Segment is pursuing environmental opportunities and the sale of technical services. The e-Commerce Segment is pursuing the development of a proprietary Internet-only payment system. The following is certain financial information regarding the Company's reportable segments (presented in thousands of dollars). General corporate assets and expenses are not allocated to any of the Company's operating segments; therefore, they are included as a reconciling item to consolidated total assets and loss from continuing operations before income taxes reported in the Company's accompanying financial statements.
Carbon Coal Dioxide China e-Commerce Totals ---- ------- ----- ---------- ------ Three months ended ------------------ September 30, 2002 ------------------ Revenues from external customers $ - $ 129 $ - $ - $ 129 Segment profit (loss) (140) 85 (191) (48) (294) Three months ended ------------------ September 30, 2001 ------------------ Revenues from external customers $ 23 $ 100 $ - $ - $ 123 Segment profit (loss) (144) 63 (170) (34) (285) Nine months ended ----------------- September 30, 2002 ------------------ Revenues from external customers $ 12 $ 324 $ - $ - $ 336 Segment profit (loss) (417) 213 (581) (124) (909) Segment assets 1,561 443 434 61 2,499 Nine months ended ----------------- September 30, 2001 ------------------ Revenues from external customers $ 120 $ 342 $ - $ - $ 462 Segment profit (loss) (387) 244 (525) (139) (807) Segment assets 1,647 432 6 61 2,146
Reconciliation of total reportable segment loss to consolidated loss from continuing operations before income taxes is as follows for the three and nine months ended September 30, 2002 and 2001 (in thousands):
For the Three Months For the Nine Months Ended Ended -------------------- -------------------- September September September September 30, 2002 30, 2001 30, 2002 30, 2001 -------- -------- -------- -------- Total loss for reportable segments $ (294) $ (285) $ (909) $ (807) Eliminate loss from China operations accounted for as an equity investment 191 170 581 525 Equity in loss from China operations accounted for as an equity investment (95) (85) (290) (262) Net corporate costs not allocated to segments (252) (191) (750) (522) ------- ------- ------- ------- Total consolidated loss from continuing operations before income taxes $ (450) $ (391) $(1,368) $(1,066) ======= ======= ======= =======
THE BEARD COMPANY AND SUBSIDIARIES DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS THE REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "PROJECT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY ASSUMES NO DUTY TO UPDATE OR REVISE ITS FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR EXPECTATIONS OR OTHERWISE. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion focuses on material changes in the Company's financial condition since December 31, 2001 and results of operations for the quarter ended September 30, 2002 compared to the prior year third quarter and the nine months ended September 30, 2002 compared to the prior year nine months. Such discussion should be read in conjunction with the Company's financial statements including the related footnotes. In preparing the discussion and analysis, the Company has presumed readers have read or have access to the discussion and analysis of the prior year's results of operations, liquidity and capital resources as contained in the Company's 2001 Form 10-K. The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is continuing to pursue environmental opportunities in China through a 50%-owned subsidiary ("ABT-Beard") which focuses on the installation and construction of composting facilities. The e-Commerce Segment consists of a 71%-owned subsidiary which is pursuing the development of a virtually secure payment system to be used exclusively for Internet transactions. Its current focus is to develop licensing arrangements and other fee based arrangements with companies implementing technology in conflict with its intellectual property. In 1999 the Company adopted a plan to discontinue its ITF Segment, and those operations were reflected as discontinued operations in 1998. The majority of the assets of the ITF Segment were disposed of in 1999 and the Company is pursuing the sale of the remaining assets. In 1999 the Company adopted a plan to discontinue its BE/IM Segment, and those operations have since been reflected as discontinued. The Company is now in the process of liquidating those assets. In March 2001 the Company ceased providing financial support to ISITOP, Inc. and shortly thereafter its exclusive marketing license was terminated. Accordingly, the operations of the ER Segment have been reflected as discontinued. In May 2001 the fixed assets of the 50%-owned company (accounted for as an equity investment) involved in the WS Segment were sold. In August 2001 the Company ceased pursuing opportunities in Mexico related to the sand separator assets previously operated in Mexico in the WS Segment, and the Company has since been pursuing the sale of the segment's remaining assets. As a result, the operations of the WS Segment have now been reflected as discontinued. Material changes in financial condition - September 30, 2002 as compared with December 31, 2001. The following table reflects changes in the Company's financial condition during the periods indicated:
September 30, December 31, Increase 2002 2001 (Decrease) ----------- ----------- ----------- Cash and cash equivalents $ 22,000 $ 55,000 $ (33,000) Working capital $ (460,000) $ (350,000) $ (110,000) Current ratio 0.43 to 1 0.61 to 1
During the first nine months of 2002, the Company decreased its working capital by $110,000 from $(350,000) as of December 31, 2001. The placement of the 10% Subordinated Debt infused over $900,000 in working capital in the second quarter of 2002. Net advances from affiliates of the Company totaled $300,000. In addition, a related entity of the Chairman of the Board advanced $280,000 to the Company. Proceeds from the sales of assets totaled $129,000 during the first nine months of 2002. The Company received payments on notes receivable totaling $109,000 during the nine months ended September 30, 2002. $417,000 of working capital were used to help fund the operations of the Coal Segment. There were net advances of $539,000 to the Company's joint venture involved in the pursuit of environmental opportunities in China. $124,000 was used to fund the startup activities of the e-Commerce Segment. The remainder of the working capital was utilized to fund other operations. The Company's principal business is coal reclamation, and this is where management's operating attention is primarily focused. The Coal Segment currently has two major projects in various stages of development, both of which are ultimately expected to mature into operating projects. In each case core holes have been drilled and sample analyses have been completed with favorable results. The projects are in two different states and involve two different parties. Negotiations are in progress with the pond owner of one of the projects concerning the installation of a preparation plant to recover clean coal. The installation of this project requires the arrangement of necessary financing. Negotiations are in progress with a third party to form a joint venture or limited liability company (the "LLC") that would provide the initial working capital and jointly guarantee the necessary equipment financing on this project, and give the LLC the right of first refusal to participate in future recovery projects that require financing. The second project involves the transfer of a large amount of non-recoverable slurry to a new disposal area, and may ultimately result in the installation of a preparation plant. The initial phase of this project would require no financing. We now expect to start the first of these two projects in the first quarter of 2003. Although the exact timing of both projects is uncertain, they are both considered to have a high probability of activity. However, no definitive contracts have as yet been signed, and there is no assurance that the required financing will be obtained or that either or both of the projects will materialize. Development activity in the China Segment, meanwhile, has been hampered by delays. Although ABT-Beard had reached agreements and/or formed Cooperative Joint Ventures ("CJV's") with various Chinese participants which contemplated the construction of three compost manufacturing facilities in which ABT-Beard would own an interest and receive an operating fee, two of these projects (i.e., Baoding and Qihe City) are now on indefinite hold pending resolution of some of the financing terms applicable to those projects, and the third project, which contemplates the construction of a plant in the City of Handan and which had been on indefinite hold, has been reactivated but is still on hold pending finalization of the Handan CJV, working out certain required additional documents and obtaining required approvals. In addition, Beard and the other owner of ABT-Beard have been involved in ongoing discussions concerning certain misunderstandings between the two owners, and certain changes in the management and operational structure of ABT-Beard. Until those discussions have been concluded, the additional Handan CJV documentation agreed upon, and the requisite approvals obtained, the construction of the Handan project compost facility will not begin. Key to the Company's liquidity is the anticipated settlement of a lawsuit, in which the Company is a Plaintiff, which has been in progress since 1996. A Settlement Agreement was signed by the parties in September of 2001. On May 6, 2002, the federal judge issued the Final Judgment approving the Settlement and ordered that a settlement fund of $50.4 million in cash be established to settle the class action lawsuit. In companion rulings on the same date the Judge also approved the allocation of settlement funds among the class members in the lawsuit. In late May, 2002, objectors entitled to receive approximately $107,000 of the total settlement filed an appeal to the final approval of the settlement. Such parties will argue their appeal before the Tenth Circuit Court of Appeals on November 20, 2002, with a decision expected to be made by the Court in January or February 2003. Distribution of the proceeds will be delayed until all appeal periods have run. The Company anticipates its share of the proceeds will be in excess of $3.5 million. Distribution of the contemplated proceeds will have a significant impact upon the Company's liquidity. Although there is the possibility that the appeals process could delay the Settlement into late 2003 or possibly early 2004 or that objecting parties could ultimately cause the Settlement to be overturned, the Company believes it is unlikely that the Settlement will be overturned. To further bolster working capital, the Company was successful in the private placement of $1,200,000 of 10% subordinated notes due September 30, 2003, to "bridge the gap" until the settlement funds are distributed or until the anticipated Coal and China projects achieve positive cash flow. In the event the notes have not been redeemed by the maturity date, they will be automatically extended to March 31, 2005. An investment banking firm received warrants to purchase 45,000 shares of Company common stock as part of its sales compensation in connection with the offering. The note holders have the contingent right to receive up to 240,000 additional warrants depending upon the length of time their notes are held. As of November 11, 2002, a total of 21,500 of such warrants had been issued to the note holders. Related parties purchased $320,000 of the offering, and had received a total of 10,000 warrants as of such date. In addition, the Company expects to generate cash from the disposition of the remaining assets from the discontinued ITF, BE/IM and WS Segments and from the pay down of notes receivable, and can sell certain other assets to generate cash if necessary. The Company believes that the cash generated from the private debt placement, coupled with the cash generated from the sale of assets, will be adequate to enable the Company to continue operations until (i) the settlement funds have been received or (ii) the operations of the projects under development in the Coal and China Segments have come on stream and the Company is generating positive cash flow. Material changes in results of operations - Quarter ended September 30, 2002 as compared with the Quarter ended September 30, 2001. The net loss for the quarter ended September 30, 2002 was $528,000, compared to a net loss of $449,000 for the third quarter of the prior year. Discontinued operations accounted for $78,000 of the loss in the third quarter of 2002 compared to $58,000 for the same period in 2001. The Coal Segment reported a $4,000 decrease in operating loss for the quarter. The CO2 Segment had a $21,000 increase in its operating margin due primarily to an increase in revenue from its interests in the McElmo Dome field as a result of an increase in price for CO2. The China Segment's operations are now conducted through an affiliate and as such are reflected in equity in unconsolidated affiliates, which posted a loss of $95,000 for the third quarter of 2002 compared to a loss of $85,000 for the same period in 2001. The e-Commerce Segment incurred operating losses of $48,000 for the third quarter of 2002 compared to $34,000 in the third quarter of 2001. The operating loss in Other activities for the third quarter of 2002 decreased $11,000 compared to the same period in 2001. As a result, the operating loss in the third quarter of 2002 was $22,000 smaller than in the same period of 2001. Operating results of the Company's primary operating Segments are reflected below:
2002 2001 --------------- --------------- Operating profit (loss): Coal reclamation $ (139,000) $ (143,000) Carbon dioxide 85,000 64,000 China - - e-Commerce (48,000) (34,000) --------------- --------------- Subtotal (102,000) (113,000) Other (225,000) (236,000) --------------- --------------- Total $ (327,000) $ (349,000) =============== ===============
The "Other" in the above table reflects primarily general and corporate activities, as well as other activities and investments of the Company. Coal reclamation The segment's revenues decreased $23,000 to none for the third quarter of 2002 compared to the same period in 2001. Operating costs decreased $30,000 to $105,000 for the third quarter of 2002 compared to $135,000 for the same period in 2001 due to the reduced level of activity. SG&A costs increased $1,000 for the third quarter of 2002 compared to the same period in 2001 as personnel in the segment increased their efforts to develop the market for the segment's technology. As a result, the operating loss for the third quarter of 2002 decreased $4,000 to $139,000 compared to $143,000 in the third quarter of 2001. Carbon dioxide Third quarter 2002 operations reflected an operating profit of $85,000 compared to $64,000 in the 2001 third quarter. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of the Company's two carbon dioxide producing units in Colorado and New Mexico. Operating revenues in this segment increased $29,000 or 29% to $129,000 for the third quarter of 2002 compared to $100,000 for the same period in 2001. The increase in revenue, which was primarily due to an increase in price for the paid volumes to the Company's interest for CO2 gas during the quarter, was partially offset by a $7,000 increase in lifting costs for the current quarter. China Since January 1, 2001, the operations of this segment have been conducted through an affiliate. The third quarter of 2002 resulted in a loss of $95,000 compared to a loss of $85,000 for the third quarter of 2001 which is included in equity in operations of unconsolidated affiliates discussed below. The segment had no revenues in either the third quarter of 2002 or 2001. e-Commerce The Company's startup company involved in the development of a secure Internet payment system incurred an operating loss of $48,000 in the third quarter of 2002 versus an operating loss of $34,000 in the prior year quarter as it stepped up its pursuit of strategic alliances and its contacts with potential infringers. The segment had no revenues in either the third quarter of 2002 or 2001 while pursuing the development of its technology. Other activities Other operations, consisting principally of general and corporate activities, generated a $11,000 smaller loss in the third quarter of 2002 than in the same period in 2001. This decrease was due primarily to decreased professional fees in 2002 compared to 2001. Selling, general and administrative expenses The Company's selling, general and administrative expenses ("SG&A") were $18,000 less in the third quarter of 2002 compared to the same period in 2001. The Coal Segment had an increase in SG&A expenses of $1,000 due to increased marketing expenses for the segment. The e-Commerce Segment incurred $14,000 more in SG&A expenses as the segment incurred increased patent protection costs. Other operations, primarily corporate, incurred approximately $33,000 less in SG&A for the third quarter of 2002 compared to the same period in 2001, primarily as a result of lower professional fees. Depreciation, depletion and amortization expenses The third quarter of 2002 reported an increase in DD&A expense of $17,000, reflecting increased amortization of the capitalized costs associated with the subordinated debt incurred in the second quarter of 2002. Other income and expense Other income and expenses netted to a loss of $123,000 for the third quarter of 2002, up sharply from the $42,000 of loss recorded for such items in the same period of 2001. Interest income was down $18,000 for the third quarter of 2002 compared to the same period in 2001 primarily as a result of a decrease in notes receivable. Interest expense was up $58,000 reflecting the Company's increased level of indebtedness. The Company realized a decrease of $11,000 in gain on sale of assets. The Company's equity in the operations of unconsolidated affiliates was a loss of $45,000 for the third quarter of 2002 compared to a loss of $50,000 for the same period in 2001. The Company's equity in the earnings of Cibola increased $15,000 from $35,000 for the third quarter of 2001 to $50,000 for the same period in 2002 reflecting gains on certain outside investments by Cibola. Entities involved in the China Segment have signed contracts and formed Cooperative Joint Ventures ("CJV's") or similar arrangements with various Chinese partners for the construction of two facilities and the marketing and sale of organic-chemical compound fertilizer ("OCCF") utilizing two types of organic waste materials: sewage sludge and crop-residual agri-waste. The personnel employed by the entities devote all their time and energies to the development of the business related to the technology utilized by the CJV's. The operations in China are now conducted through an affiliate and accordingly the Company's share of the losses from these operations, which totaled $95,000 for the quarter ended September 30, 2002 compared to $85,000 for the three months ended September 30, 2001, are recorded as other expense for the period involved. Income taxes The Company made no provision for income taxes in either the third quarter of 2002 or the same period in 2001. The Company has not recorded any financial benefit attributable to its various tax carryforwards due to uncertainty regarding their utilization and realization. Discontinued operations ITF Segment - ----------- In 1999 the Company's Board of Directors adopted a formal plan to discontinue its interstate travel facilities ("ITF") Segment and recorded a $1,603,000 estimated loss for the discontinuance in 1998. ITF disposed of a majority of its assets in 1999, retaining two convenience stores ("C-stores"), including their equipment and inventory, and Beard became 100% owner of ITF. Beard recorded an additional $420,000 loss in 2000; $60,000 represented operating losses expected to be incurred by the discontinued ITF Segment prior to the anticipated disposal date of the remaining assets; $360,000 represented an additional reduction in the estimated realizable value of the remaining C-stores and related assets as of December 31, 2000. The discontinued ITF Segment had no revenues for the three months ended September 30, 2001. ITF's actual operating loss for the three months ended September 30, 2001 was $7,000 which was charged against the loss accrual recorded in the fourth quarter of 2000. In December 2001, Beard recorded an additional $100,000 impairment in the carrying value of the facilities and $14,000 for anticipated operating losses for the period from December 31, 2001 through the expected disposal date of the remaining assets. ITF recorded no revenues for the third quarter of 2002 and incurred $2,000 in losses for the three months ended September 30, 2002 which were charged against the loss accrual recorded in 2001. As of September 30, 2002, the significant assets related to the ITF Segment consisted primarily of the two remaining C-stores with a total recorded value of $406,000. The significant liabilities of the segment consisted of trade accounts payable and accrued expenses totaling $8,000. On November 4, 2002, the majority of the ITF assets were sold at auction. Net proceeds totaling $303,000, after estimated expenses of $34,000, are expected to be realized from the sale. The Company recorded an impairment provision of $77,000 as of September 30, 2002 relating to this auction. Beard is actively seeking opportunities to sell the segment's remaining equipment, which has a net recorded value of $15,000, and expects it to be sold by December 31, 2002. BE/IM Segment - ------------- In 1999 the Management Committee of North American Brine Resources ("NABR") adopted a formal plan to discontinue the business and dispose of its assets. Beard had a 40% ownership in NABR, which was accounted for under the equity method. As a result, Beard's share of NABR's operating results has been reported as discontinued for all periods presented in the accompanying statements of operations. The joint venture was dissolved in September 2000 and the Japanese partners received their final distribution of cash in December 2000, with the Company taking over the remaining assets and liabilities. In 1999 Beard recorded a $540,000 loss, which represented its share of NABR's $1,350,000 estimated loss from the discontinuation of operations. NABR's loss included $572,000 of anticipated operating losses through April 2000 (the date operations ceased for the larger of its two plants) and costs of ceasing operations. NABR had no revenues for the smaller of the two plants for the three months ended September 30, 2002 and 2001, respectively. NABR's operating losses of $17,000 for the 2002 third quarter were not anticipated in the loss accruals recorded in 1999. NABR charged $18,000 for the three months ended September 30, 2002, against the accrual for anticipated expenses related to the shutdown of the larger of its two plants. NABR's actual operating losses for the 2001 third quarter were $2,000 which were charged against the loss accrual recorded in 1999. In addition, NABR recorded a loss of $22,000 for the three month period ending September 30, 2001 related to the operation of the smaller of the two plants distributed to Beard from NABR. This loss was not anticipated in the loss accrual of 1999. As of September 30, 2002, the significant assets related to NABR's operations consisted primarily of equipment and inventory with estimated net realizable values of $35,000 and $6,000 respectively. The significant liabilities related to NABR's operations consisted primarily of accounts payable of $4,000 and accrued expenses related to the shutdown of operations totaling $79,000. The Company is actively pursuing opportunities to sell NABR's remaining assets and expects the disposition to be completed by June 30, 2003. WS Segment - ---------- In May 2001 the fixed assets of the 50%-owned company (accounted for as an equity investment) involved in natural gas well testing operations for the Natural Gas Well Servicing ("WS") Segment were sold for $1,550,000, subject to a holdback of $150,000. The Company received $21,000 and $65,000 of the holdback in June and November, respectively, of 2001. In May 2002 the Company received $35,000, net of attorney's fees of $29,000, representing the remainder of the holdback. As a result of the sale all debt of the 50%-owned company was retired and the Company was relieved of contingent liabilities totaling $512,000. In August 2001 the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued. In December 2001 all of the sand separators owned by the 100%-owned company in the WS Segment were sold for $100,000. The Company is now pursuing the sale of all remaining equipment owned by the segment. The segment recorded no revenues for the third quarter of 2002 or 2001. Beard recorded income of $16,000 from this discontinued segment for the three months ended September 30, 2002 as a portion of the segment's assets were sold for a gain of $39,000 which more than offset the losses incurred during this period. Beard recorded a loss of $36,000 for the three months ended September 30, 2001. As of September 30, 2002, the significant assets of the WS Segment consisted of fixed assets with a recorded value of $146,000 and cash and accounts receivable totaling of $18,000. The significant liabilities of the segment consisted of trade accounts payable and accrued expenses totaling $62,000. It is anticipated that all liabilities of the segment will be paid prior to December 31, 2002. ER Segment - ---------- In March of 2001 the Company determined that it would no longer provide financial support to ISITOP, Inc., an 80%-owned subsidiary whose operations had previously comprised the Company's environmental remediation ("ER") Segment. In May 2001 ISITOP was notified that the segment's exclusive U.S. marketing license for the chemical used for PAH remediation had been cancelled, and the segment was discontinued. ISITOP generated no revenues in 2002 or in 2001. ISITOP's operating losses for the three months ended September 30, 2002 and 2001, totaled less than $1,000 for either quarter. ISITOP had no significant assets or liabilities at September 30, 2002. Material changes in results of operations - Nine months ended September 30, 2002 as compared with the Nine months ended September 30, 2001. The net loss for the nine months ended September 30, 2002 was $1,549,000 compared to a net loss of $1,522,000 for the first nine months of the prior year. Continuing operations posted a net loss of $1,368,000 compared to a loss from continuing operations of $1,006,000 after tax refunds of $60,000 for the same period in 2001. Discontinued operations accounted for $181,000 of the net loss for the 2002 period versus $516,000 in the 2001 period. Operating results of the Company's primary operating segments are reflected below:
2001 2000 ---------------- ---------------- Operating profit (loss): Coal reclamation $ (425,000) $ (385,000) Carbon dioxide 213,000 244,000 China - - e-Commerce (123,000) (137,000) ---------------- ---------------- Subtotal (335,000) (278,000) Other (696,000) (702,000) ---------------- ---------------- Total $ (1,031,000) $ (980,000) ================ ================
The "Other" in the above table reflects primarily general and corporate activities, as well as other activities and investments of the Company. Coal reclamation The Company's coal reclamation revenues decreased to $12,000 for the first nine months of 2002 compared to $120,000 for the same period in 2001. The segment performed more small consulting and coring jobs in the 2001 period than in the 2002 period. Operating costs decreased $57,000 to $338,000 for the first nine months of 2002 compared to $395,000 for the same period in 2001. The decrease was primarily attributable to significant reductions in labor and other overhead costs achieved in the interim period. SG&A costs also decreased, dropping $12,000 to $83,000 for the first nine months of 2002 from $95,000 in the same period of 2001. As a result, the operating loss for the first nine months of 2002 increased $40,000 to $425,000 for the first nine months of 2002 compared to $385,000 in the first nine months of 2001. Carbon dioxide Operations for the first nine months of 2002 resulted in an operating profit of $213,000 compared to a $244,000 operating profit for the first nine months of 2001. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of the Company's two carbon dioxide producing units in Colorado and New Mexico. Operating revenues in this segment decreased $18,000 to $324,000 for the first nine months of 2002 compared to $342,000 for the same period in 2001. The Company recorded $12,000 more in operating costs associated with the properties in the first nine months of 2002 compared to the same period in 2001. While production volumes for the McElmo Dome field increased slightly for the first nine months of 2002 compared to the same period in 2001, paid volumes to the Company's interest decreased even more as the Company reduced its overproduced status. The decrease in revenue for the current nine months was due primarily to higher volumes to the Company's paid interest offset by lower pricing, with the Company receiving an average of $0.37 per mcf sold in the first nine months of 2001 versus $0.28 per mcf in the year later period. Paid volumes were actually up 223,000 mcf in the current nine months versus a year ago due to overproduction. China Since January 1, 2001, the operations of this segment have been conducted through an affiliate. The results of operations for the first three quarters of 2002 were a loss of $290,000 compared to a loss of $262,000 for the prior year nine months. The segment had no revenues in either the first nine months of 2002 or 2001. e-Commerce The Company's startup company involved in the development of a secure Internet purchasing system incurred an operating loss of $123,000 for the first three quarters of 2002 versus an operating loss of $137,000 in the prior year period. The segment cut back its pursuit of strategic alliances pending the issuance of pending patent claims during the first six months of the current year before accelerating such efforts in the third quarter. The segment had no revenues in either the first nine months of 2002 or 2001 while pursuing the development of its technology. Other activities Other operations, consisting principally of general and corporate activities, generated a $6,000 smaller operating loss for the first nine months of 2002 than in the same period last year. The Company experienced minor cost reductions in numerous expense classifications. Selling, general and administrative expenses The Company's selling, general and administrative expenses ("SG&A") in the first nine months of 2002 decreased to $830,000 from $904,000 for the 2001 nine months. The Coal Segment had a decrease in SG&A expenses of $12,000 due primarily to reductions in staff and other expenses. The e-Commerce Segment incurred $14,000 less in SG&A costs as the segment scaled back its pursuit of strategic alliances. Other operations incurred approximately $48,000 less in SG&A for the nine months of 2002 compared to the same period in 2001 primarily as a result of decreased professional costs and by the reduction in other expenses discussed above. Depreciation, depletion and amortization expenses DD&A expense increased $32,000 to $100,000 from $68,000 for the nine months of 2002 compared to the same period in 2001, primarily as a result of greater amortization expense relating to the capitalized costs associated with the issuance of the subordinated debt in the second quarter of 2002. Other income and expenses The other income and expenses for the first nine months of 2002 netted to a loss of $337,000 compared to a loss of $86,000 for the same period in 2001. Interest income was down $35,000 for the first nine months of 2002 compared to the same period in 2001. Interest expense was up $132,000 as a result of the increase in debt, primarily as a result of the issuance of the 10% subordinated debt and the debt to related parties. Gains on sale of assets for the first nine months of 2002 decreased $69,000 to $10,000 compared to $79,000 in the prior year period. The Company's equity in the operations of unconsolidated affiliates reflected a loss of $165,000 for the first nine months of 2002 compared to a loss of $156,000 for the same period in 2001. The Company's equity in the earnings of Cibola increased $19,000 from $106,000 for the first nine months of 2001 to $125,000 for the same period in 2002 reflecting Cibola's slight improvement in operating results. Entities involved in the China Segment have signed contracts and formed Cooperative Joint Ventures ("CJV's") or similar arrangements with various Chinese partners for the construction of two facilities and the marketing and sale of organic-chemical compound fertilizer ("OCCF") utilizing two types of organic waste materials: sewage sludge and crop-residual agri-waste. The personnel employed by the entities devote all their time and energies to the development of the business related to the technology utilized by the CJV's. The operations in China are now conducted through an affiliate and accordingly the Company's share of the losses from these operations, which amounted to a loss of $290,000 for the first nine months of 2002 compared to a loss of $262,000 for the same period in 2001, are recorded as other expense for the period involved. Prior to January 1, 2001, such operations were conducted by a wholly-owned subsidiary and reported as operating losses. Income taxes The Company recorded refunds of $41,000 and $19,000 for federal and state income taxes, respectively, in the first nine months of 2001. The Company recorded no provision for taxes for the nine months ended September 30, 2002. The Company has not recorded any financial benefit attributable to its various tax carryforwards due to uncertainty regarding their utilization and realization. Discontinued operations ITF Segment - ----------- Complete details concerning the discontinuance of the interstate travel facilities ("ITF") Segment are contained in "Material changes in results of operations - Quarter ended September 30, 2002 as compared with the Quarter ended September 30, 2001" under the "Discontinued Operations - ITF Segment" heading. ITF's revenues and actual operating losses were none and $9,000, respectively, for the nine months ended September 30, 2002. The actual losses for the nine months ended September 30, 2002 were charged against the loss accrual recorded in the fourth quarter of 2001. On November 4, 2002, the majority of the ITF assets were sold at auction with net proceeds totaling $303,000, after estimated expenses of $34,000. The Company recorded an impairment provision of $77,000 as of September 30, 2002 relating to this auction. Beard is actively seeking opportunities to sell the remaining equipment, with a net recorded value of $15,000, and expects it to be sold by December 31, 2002. ITF's revenues and actual operating losses were $7,000 and $44,000, respectively, for the nine months ended September 30, 2001. The actual losses for the nine months ended September 30, 2001 were charged against the loss accrual recorded in the fourth quarter of 2000. BE/IM Segment - ------------- Complete details concerning the discontinuance of NABR are contained in "Material changes in results of operations - Quarter ended September 30, 2002 as compared with the Quarter ended September 30, 2001 under the "Discontinued Operations - BE/IM Segment" heading. The actual operating results for the nine-month periods ending September 30, 2002 and 2001, were losses of $25,000 and $45,000, respectively, which were charged against the loss accrual recorded in 1999. In addition, the Company recorded losses of $84,000 and $48,000 for the nine-month periods ended September 30, 2002 and 2001, respectively, for the operations of the smaller of the two plants distributed from NABR. These losses were not anticipated in the loss accrual of 1999. WS Segment - ---------- Complete details concerning the discontinuance of the Company's natural gas well servicing operations are contained in "Material changes in results of operations - Quarter ended September 30, 2002 as compared with the Quarter ended September 30, 2001" under the "Discontinued Operations - WS Segment" heading. Beard's share of operating losses from the discontinued segment was $20,000 for the nine months ended September 30, 2002. Beard's share of operating losses from the discontinued segment was $36,000 and $451,000, respectively for the three and nine-month periods ending September 30, 2001. The nine month period included a provision of $175,000 for estimated losses from the discontinuation of operations. Actual operating losses of $25,000 for the three months ending September 30, 2001 were charged against the impairment reserve established above. The remaining $10,000 of losses for the three months ending September 30, 2001 were associated with the operations of the sand separator company and were not anticipated in the loss accrual. ER Segment - ---------- Complete details concerning the discontinuance of the Company's environmental remediation ("ER") Segment are contained in "Material changes in results of operations - Quarter ended September 30, 2002 as compared with the Quarter ended September 30, 2001" under the "Discontinued Operations-ER Segment" heading. ISITOP had no revenues for either of the nine-month periods ended September 30, 2002 or 2001, respectively. The segment's operating losses were less than $1,000 and $17,000 for the nine months ended September 30, 2002 and 2001, respectively. Item 3. Quantitative and Qualitative Disclosures About Market Risk. At September 30, 2002, the Company had notes receivable of $208,000 and long-term debt of $4,017,000. The notes receivable and the long-term debt have fixed interest rates and therefore, the Company's interest income and expense and operating results would not be affected by an increase in market interest rates for these items. At September 30, 2002, a 10% increase in market interest rates would have reduced the fair value of the Company's notes receivable by $3,000 and reduced the fair value of its long-term debt by less than $47,000. The remaining $300,000 of debt bears interest at a variable rate which is one-half percent above Chase Manhattan prime rate. The Company's interest expense would be increased by less than $1,000 as a result of a 10% increase in interest rates on this variable rate debt. The Company has no other market risk sensitive instruments. PART II. OTHER INFORMATION. Item 2. Changes in Securities. The Company's preferred stock is mandatorily redeemable through December 31, 2002 from one-third of Beard's "consolidated net income" as defined in the instrument governing the rights of the preferred stockholders. Accordingly, one-third of future "consolidated net income" will accrete directly to preferred stockholders and reduce earnings per common share. As a result of these redemption requirements, the payment of any dividends to the common stockholders in the near future is very unlikely. See Note 4 to the accompanying financial statements. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed with this Form 10-Q and are identified by the numbers indicated: 2 Plan of acquisition, reorganization, arrangement, liquidation or succession: 2(a) Agreement and Plan of Reorganization by and among Registrant, Beard Oil Company ("Beard Oil") and New Beard, Inc., dated as of July 12, 1993 (see Addendum A to Part I, which is incorporated herein by reference; schedules to the Agreement have been omitted). (This Exhibit has been previously filed as Exhibit 3(b), filed on July 27, 1993 to Registrant's Registration Statement on Form S-4, File No. 33-66598, and same is incorporated herein by reference). 2(b) Agreement and Plan of Merger by and between The Beard Company and The New Beard Company, dated as of September 16, 1997. (This Exhibit has been previously filed as Exhibit B to Registrant's Proxy Statement filed on September 12, 1997, and same is incorporated herein by reference). 2(c) Certificate of Merger merging The Beard Company into The New Beard Company as filed with the Secretary of State of Oklahoma on November 26, 1997. (This Exhibit has been previously filed as Exhibit 2.1 to Registrant's Form 8-K, filed on December 8, 1997, and same is incorporated herein by reference). 3(i) Certificate of Incorporation of The New Beard Company as filed with the Secretary of State of Oklahoma on September 11, 1997. (This Exhibit has been previously filed as Exhibit C to Registrant's Proxy Statement filed on September 12, 1997, and same is incorporated herein by reference). 3(ii) Registrant's By-Laws as currently in effect. (This Exhibit has been previously filed as Exhibit 3(ii) to Registrant's Form 10-K for the period ended December 31, 1997, filed on March 31, 1998, and same is incorporated herein by reference). 4 Instruments defining the rights of security holders: 4(a) Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant. (This Exhibit has been previously filed as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to Registrant's Registration Statement on Form S-4, File No. 33-66598, and same is incorporated herein by reference). 4(b) Settlement Agreement, with Certificate of Amendment attached thereto, by and among Registrant, Beard Oil, New York Life Insurance Company, New York Life Insurance and Annuity Company, John Hancock Mutual Life Insurance Company, Memorial Drive Trust and Sensor, dated as of April 13, 1995. (This Exhibit has been previously filed as Exhibit 4(g) to Registrant's Form 10-K for the period ended December 31, 1994 and same is incorporated herein by reference). 10 Material contracts: 10(a) Amended Letter Loan Agreement by and between Registrant and The William M. Beard and Lu Beard 1988 Charitable Unitrust (the "Unitrust") dated October 3, 2002. 10(b) Renewal Promissory Note from Registrant to the Trustees of the Unitrust dated October 3, 2002. 10(c) Form of Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of May 16, 2002. 99 Additional exhibits: 99(a) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99(b) Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The Company will furnish to any shareholder a copy of any of the above exhibits upon the payment of $.25 per page. Any request should be sent to The Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112. (b) No reports on Form 8-K were filed during the period covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) THE BEARD COMPANY HERB MEE, JR. (Date) November 13, 2002 ___________________________________ Herb Mee, Jr., President and Chief Financial Officer JACK A. MARTINE (Date) November 13, 2002 ___________________________________ Jack A. Martine, Controller and Chief Accounting Officer CERTIFICATIONS FOR FORM 10-Q I, William M. Beard, Chairman of the Board and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Beard Company (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. The Beard Company Date: November 13, 2002 By: WILLIAM M. BEARD William M. Beard Chairman of the Board and Chief Executive Officer CERTIFICATIONS FOR FORM 10-Q I, Herb Mee, Jr., President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Beard Company (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. The Beard Company Date: November 12, 2002 By: HERB MEE, JR. Herb Mee, Jr. President and Chief Financial Officer EXHIBIT INDEX Exhibit No. Description Method of Filing - ------- ----------- ---------------- 2(a) Agreement and Plan of Reorganization by Incorporated herein by reference and among Registrant, Beard Oil Company ("Beard Oil") and New Beard, Inc., dated as of July 12, 1993. 2(b) Agreement and Plan of Merger by and Incorporated herein by reference between The Beard Company and The New Beard Company, dated as of September 16, 1997. 2(c) Certificate of Merger merging The Beard Incorporated herein by reference Company into The New Beard Company as filed with the Secretary of State of Oklahoma on November 26, 1997. 3(i) Certificate of Incorporation of The New Incorporated herein by reference Beard Company as filed with the Secretary of State of Oklahoma on September 11, 1997. 3(ii) Registrant's By-Laws as currently in Incorporated herein by reference effect. 4(a) Certificate of Designations, Powers, Incorporated herein by reference Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant. 4(b) Settlement Agreement, with Certificate Incorporated herein by reference of Amendment attached thereto, by and among Registrant, Beard Oil, New York Life Insurance Company, New York Life Insurance and Annuity Company, John Hancock Mutual Life Insurance Company, Memorial Drive Trust and Sensor, dated as of April 13, 1995. 10(a) Amended Letter Loan Agreement by and Filed herewith electronically between Registrant and The William M. Beard and Lu Beard 1988 Charitable Unitrust (the "Unitrust") dated October 3, 2002. 10(b) Renewal Promissory Note from Registrant Filed herewith electronically to the Trustees of the Unitrust dated October 3, 2002. 10(c) Form of Deed of Trust, Assignment of Filed herewith electronically Production, Security Agreement and Financing Statement dated as of May 16, 2002. 99(a) Chief Executive Officer Certification Filed herewith electronically pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99(b) Chief Financial Officer Certification Filed herewith electronically pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-10 3 bcexh10a3rdq.txt EXH 10A LTR LOAN AGREEMENT Exhibit 10(a) October 3, 2002 AMENDED LETTER LOAN AGREEMENT The Beard Company 5600 N. May Avenue, Suite 320 Oklahoma City, Oklahoma 73112 Gentlemen: This Amended Letter Loan Agreement supersedes the previous Amended Letter Loan Agreement between the parties hereto dated February 28, 2002. This Amended Letter Loan Agreement sets forth the terms and conditions under which we have agreed to extend a revolving loan to you in the principal amount of $3,000,000.00 (the "Loan"). 1. LENDER: The William M. Beard and Lu Beard 1988 Charitable Unitrust (the "Unitrust"). 2. BORROWER: The Beard Company. 3. AMOUNT: Such amounts as the Borrower may request from time to time up to $3,000,000.00. The Loan shall be evidenced by a promissory note in the amount of $3,000,000.00 dated as of today (the "Note"). The Borrower shall be permitted to obtain advances, make prepayments, and obtain additional advances, up to the amount of the Note. 4. INTEREST RATE: A fixed rate of 10.00%. 5. REPAYMENT: The outstanding principal balance (the "Indebtedness") plus unpaid accrued interest shall be due and payable on the earlier of (i) January 3. 2005, or (ii)within ten (10) days after receipt by Borrower of the McElmo Dome Settlement. 6. COLLATERAL: The Lender, together with certain Note Holders, have previously filed a Deed of Trust, Assignment of Production, and Financing Statement of record (a "Lien") on its working and overriding royalty interests in the McElmo Dome Unit in Montezuma and Dolores Counties of Colorado ("Interests"). The Borrower will not sell, transfer, convey or otherwise dispose of any of the Interests, whether pursuant to a single transaction or a series of transactions. 7. COVENANT: Until the Indebtedness has been paid in full, the Borrower will not sell, transfer, convey or otherwise dispose of, all or a substantial portion of its assets now owned or hereafter acquired, whether pursuant to a single transaction or a series of transactions, and the Borrower will not merge or consolidate with any person or entity or permit any such merger or consolidation with the Borrower. This paragraph specifically excludes asset sales incurred in the normal course of business. 8. EVENTS OF DEFAULT: If any of the following conditions or events ("Events of Default") shall occur and be continuing: A. Failure of the Borrower to pay when due any amounts, including principal or interest on the Note (whether at the stated maturity, upon acceleration or otherwise). B. Any Event of Default as specified in the Note C. Any default or breach in the performance of any covenant, obligation, representation, warranty or provision contained in this Letter Loan Agreement or in the Note or in any other note or obligation of Borrower to the Unitrust. D. The Borrower shall: (i) apply for or consent to the appointment of a custodian, receiver, trustee or liquidator of the Borrower or any of its properties, (ii) admit in writing the inability to pay, or generally fail to pay, its debts when they come due, (iii) make a general assignment for the benefit of creditors, (iv) commence any proceeding relating to the bankruptcy, reorganization, liquidation, receivership, conservator- ship, insolvency, readjustment of debt, dissolution or liquidation of the Borrower, or if corporate action should be taken by the Borrower for the purpose of effecting any of the foregoing, (v) suffer any such appointment or commencement of a proceeding as described in clause (i) or (iv) of this paragraph, which appointment or proceeding is not terminated or discharged within 60 days, or (vi) become insolvent. THEN upon the occurrence of any Event of Default described in the foregoing paragraphs the unpaid principal amount of and accrued interest on the Loan shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Borrower. If the foregoing terms and conditions are acceptable to you, please acknowledge your agreement by signing below and returning one copy of this Letter Loan Agreement to us. Sincerely, LENDER: THE WILLIAM M. BEARD AND LU BEARD 1988 CHARITABLE UNITRUST WILLIAM M. BEARD LU BEARD William M. Beard, Trustee Lu Beard, Trustee Accepted effective this 3rd day of October, 2002. BORROWER: THE BEARD COMPANY HERB MEE, JR. Herb Mee, Jr., President EX-10 4 bcexh10b3rdq.txt EXH 10B, PROM NOTE Exhibit 10(b) RENEWAL PROMISSORY NOTE $3,000,000.00 Oklahoma City, Oklahoma October 3, 2002 For value received, the undersigned, The Beard Company, an Oklahoma corporation (the "Maker"), agrees to all of the terms of this Promissory Note (this "Note") and promises to pay to the order of William M. Beard and Lu Beard as Trustees of the William M. Beard and Lu Beard 1988 Charitable Unitrust (individually and collectively called the "Holder"), at Enterprise Plaza, Suite 320, 5600 N. May, Oklahoma City, Oklahoma 73112, or at such other place as may be designated in writing by the Holder of this Note, the principal sum of Three Million Dollars ($3,000,000.00) or, if less than such amount, the aggregate unpaid principal amount of all advances or loans made by the Holder to the Maker, and all interest accruing thereon. This Note will be payable as follows: Prior to Default the unpaid principal balance of this Note will bear interest at the variable rate of ten percent (10%) (the "Applicable Rate"). Interest will commence to accrue on the unpaid principal balance of this Note on the date hereof and thereafter until this Note is paid in full. Interest will be computed for the actual number of days elapsed at a per diem charge based on a year consisting of three hundred sixty (360) days. All payments will be applied first to any accrued interest on this Note and the remainder to the principal balance of the Note. The outstanding principal balance plus unpaid accrued interest are due and payable on the earlier of (i) January 3, 2005, or (ii) within ten (10) days after receipt by Maker of the McElmo Dome Settlement. Except as otherwise defined herein, all terms defined in the Letter Loan Agreement of even date herewith between the Maker and the Holder (the "Loan Agreement") will have the same meanings as therein. Both principal and interest owing pursuant to the terms of this Note are payable in the lawful currency of the United States of America and in immediately available funds. The Holder may disburse the principal of this Note to the Maker in one or more advances or loans as determined by the Holder in his sole discretion. All payments made on this Note will be applied to this Note when received by the Holder hereof in collected funds. Any sum not paid when due will bear interest at the rate equal to the Applicable Rate plus five percent (5.0%) and will be paid at the time of, and as a condition precedent to, the curing of any Event of Default. During the existence of any Event of Default, the Holder of this Note may apply payments received on any amount due hereunder or under the terms of any instrument hereafter evidencing or securing said indebtedness as the Holder may determine. The Maker agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Holder's rights hereunder, the Maker will pay to the Holder all reasonable attorney's fees and all expenses incurred by the Holder in connection therewith. THIS NOTE IS GIVEN BY THE MAKER AND ACCEPTED BY THE HOLDER PURSUANT TO A LENDING TRANSACTION CONTRACTED, CONSUMMATED, AND TO BE PERFORMED IN OKLAHOMA CITY, OKLAHOMA COUNTY, OKLAHOMA, AND THIS NOTE SHALL BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF OKLAHOMA. In the event of any Event of Default, the Holder may request, and the Maker agrees to furnish to the Holder, agreeable collateral and such security agreements as the Maker may reasonably require to secure the indebtedness. This Note is issued subject to the terms of the Loan Agreement. On the breach of any provision of this Note, or any provision of the Loan Agreement at the option of the Holder, the entire unpaid indebtedness evidenced by this Note will become due, payable and collectible then or thereafter as the Holder may elect, regardless of the date of maturity of this Note. Notice of the exercise of such option is hereby expressly waived. Failure by the Holder to exercise such option will not constitute a waiver of the right to exercise the same in the event of any subsequent default. The failure of the Holder to exercise any of the remedies or options set forth in this Note, or in any instrument securing payment hereof, upon the occurrence of one or more Events of Default, shall not constitute a waiver of the right to exercise the same or any other remedy at any subsequent time in respect to the same or any other Event of Default. The acceptance by the Holder of any payment which is less than the total of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing remedies or options at that time or any subsequent time, or nullify any prior exercise of such remedy or option, without the express consent of the Holder. Time is of the essence of each obligation of the Maker hereunder. The makers, endorsers, sureties, guarantors and all other persons who may become liable for all or any part of this obligation severally waive presentment for payment, protest, demand and notice of nonpayment. Said parties consent to any extension of time (whether one or more) of payment hereof, the modification (whether one or more) of payment hereof, release or substitution of all or part of the security for the payment hereof or release of any party liable for payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. The Maker has the right to prepay this Note in whole or in part at any time and from time to time without premium or penalty, but with accrued interest to the date of the prepayment on the amount prepaid. The Maker waives presentment for payment, protest and notice of nonpayment. IN WITNESS WHEREOF, the Maker has executed this instrument effective on the date first above written. ATTEST: THE BEARD COMPANY REBECCA G. WITCHER HERB MEE, JR. Rebecca G. Witcher, Secretary Herb Mee, Jr., President EX-10 5 bcexh10c3qtr10q.txt EXH 10C, DEED OF TRUST Exhibit 10(c) DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT, AND FINANCING STATEMENT STATE OF COLORADO ) ) COUNTY OF MONTEZUMA ) DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT dated as of May 16, 2002 (the "Deed of Trust"), between THE BEARD COMPANY ("Borrower"), and the PUBLIC TRUSTEE OF MONTEZUMA COUNTY, COLORADO ("Trustee") for the benefit of MCELMO DOME NOMINEE, LLC, an Oklahoma limited liability company, Enterprise Plaza, Suite 320, 5600 N. May, Oklahoma City, Oklahoma 73112 (the "Beneficiary"). A POWER OF SALE HAS BEEN GRANTED IN THIS DEED OF TRUST. A POWER OF SALE MAY ALLOW THE TRUSTEE TO TAKE THE PROPERTIES IN TRUST AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE BORROWER UNDER THIS DEED OF TRUST. THIS INSTRUMENT CONTAINS AFTER ACQUIRED PROPERTY PROVISIONS, SECURES THE PAYMENT OF FUTURE ADVANCES, AND COVERS PROCEEDS OF COLLATERAL. R E C I T A L S A. The William M. Beard and Lu Beard 1988 Charitable Unitrust (the "Unitrust") has loaned to Borrower $2,625,000 and in connection therewith Borrower has executed and delivered that certain Promissory Note dated as of February 28, 2002 and any and all renewals, extensions or modifications thereof or substitutions therefor, or any part thereof and all other documents executed in connection therewith (the "Unitrust Promissory Note"). B. Certain parties (the "Note Holders") have purchased from the Borrower 10% Subordinated Notes due September 30, 2003, and in connection therewith Borrower has executed and delivered promissory notes to each of the Note Holders (the "2002 Offering Notes," and together with the Unitrust Promissory Note, the "Notes"). C. The Unitrust and Nominee have entered into that certain Nominee Agreement dated May 16, 2002, as it may be amended from time to time (the "Nominee Agreement") whereby the Nominee has agreed to act as Unitrust's agent and nominee with respect to any and all beneficial rights of Unitrust existing or arising under this Deed of Trust, and have provided that upon, and only upon, the occurrence of certain events described in the Nominee Agreement the Note Holders shall become parties to the Nominee Agreement and, thereby, beneficiaries of this Deed of Trust. D. In order to secure all obligations and liabilities of Borrower, absolute or contingent, due or to become due, which are now or may at any time hereafter be owing by Borrower to the Unitrust or the Note Holders, and with respect to which Beneficiary is acting as the agent or nominee pursuant to the Nominee Agreement or which are now or hereafter existing, Borrower has agreed to enter into this Deed of Trust. E. The Borrower is the owner of undivided interests in and to the oil, gas and mineral leases described on Exhibit "A" attached hereto and made a part hereof for all purposes to this Deed of Trust. G R A N T I N G C L A U S E NOW, THEREFORE, the Borrower, in order to secure the indebtedness and obligations hereinafter described, does hereby GRANT, BARGAIN, SELL, CONVEY, TRANSFER, ASSIGN, and SET OVER to Trustee in trust, and specifically grant to and confirm upon the Trustee in trust, the power to sell, the following described property: (a) Carbon Dioxide Producing Properties. All Borrower's right, title, and interest, now owned or hereafter acquired, in and to (i) the oil, gas and mineral leases set forth on Exhibit "A" (the "Leases"), and the rights derived therefrom, and any instrument executed in amendment, correction, modification, confirmation, renewal, or extension of any one or more of those leases; (ii) the carbon dioxide in and under the lands covered by the leases described on Exhibit "A;" (iii) lands spaced, pooled or unitized with the lands described at Exhibit "A;" (iv) any and all units (including, without limitation, the McElmo Dome Unit) covering, in whole or in part, the lands covered by the leases described on Exhibit "A;" and (v) all oil and gas leases in which Borrower now has or hereafter acquires an interest due to the pooling or unitization of the oil and gas leases described on Exhibit "A" or the land covered by such leases or portions of such lands or leases. It is expressly understood and agreed that (1) neither the Trustee nor the Beneficiary shall be liable in respect of the performance of any covenant or obligation of the Borrower concerning such leases, and (2) any decimal fractional interests set out on Exhibit "A" pertaining to such oil and gas leases have been appended for informational purposes only, and shall not limit in any way whatsoever the interest of the Trustee in the leases which are subject to this Deed of Trust. (b) Wells and Equipment. All interest of Borrower which is attributable to the carbon dioxide producing properties assigned under and described in subparagraph (a) immediately above in and to all carbon dioxide wells, other wells, equipment, tanks, derricks, fixtures, houses, pumps, jacks, casing, tubing, rods, cable lines, machinery, pipe lines, flow lines, and, without being limited by the particularity of the foregoing, all other and additional personal property and fixtures of every kind and character now or at any time hereafter located on any of the lands described or referred to in Exhibit "A," or which may now or hereafter be used or obtained in connection therewith. (c) Contract Rights. All interest of Borrower which is attributable to the carbon dioxide producing properties conveyed under and described in (a) above in and to all valid and subsisting operating agreements, production sales contracts, unitization and pooling agreements and orders, farmout contracts, assignments, rights-of-way, easements, surface leases, licenses, permits, and other contracts pertaining to or affecting the lands, leases, or wells described or referred to in Exhibit "A." (d) Accounts, General Intangibles. All rights now owned or hereafter acquired by Borrower in all (i) accounts and general intangibles arising in connection with the sale or other disposition of the property described in (a) through (c) above, and (ii) any and all contract rights and general intangibles arising from or in connection with the property described in (a) through (c) above. (e) Products, Proceeds. All of Borrower's interest in and to the products and proceeds of the property described in (a) through (d) above, whether presently existing or hereafter created or arising. The interests and estates described in (a) through (e) above are all hereinafter sometimes collectively referred to as the "Properties." TO HAVE AND TO HOLD all of Borrower's right, title and interest in and to the Properties unto the Trustee and his successors or substitutes and to his or their successors and assigns, IN TRUST, however, upon the terms, provisions and conditions herein set forth. ARTICLE 1 INDEBTEDNESS This Deed of Trust is given to secure and enforce the payment of the following indebtedness, to-wit: (a) All indebtedness arising pursuant to the provisions of this Deed of Trust, and any and all renewals or extensions of such indebtedness, or any part thereof; (b) All loans, principal, interest, fees, expenses, obligations, and liabilities of the Borrower arising pursuant to the Unitrust Promissory Note, together with any and all renewals, extensions or modifications thereof; (c) Upon the event of the Note Holders, or any of them, becoming parties to the Nominee Agreement pursuant to the provisions thereof, and thereafter, all loans, principal, interest, fees, expenses, obligations and liabilities of the Borrower arising pursuant to the 2002 Offering Notes, together with any and all renewals, extensions or modifications thereof; (d) The performance of all obligations of the Borrower under this Deed of Trust and the Notes, as well as all renewal, extensions, modifications and amendments of the foregoing; and (e) Any and all renewals and extensions of the indebtedness and obligations described in (a) through (d) above. The words "Indebtedness," as used herein, shall mean all the indebtedness, obligations, and liabilities described or referred to immediately above in sub-paragraphs (a) through (e), inclusive. ARTICLE 2 REPRESENTATIONS AND WARRANTIES Borrower represents, warrants, and covenants that the Notes and this Deed of Trust are the legal, valid, and binding obligations of the Borrower enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights; that Borrower is the lawful owner of undivided interests or rights in and to the Properties as set forth in Exhibit "A" and the properties assigned in Article 5 hereof and has good right and authority to grant, bargain, sell, transfer, assign, affect, pledge, and hypothecate the same; that all the Leases insofar as they cover the formation described at Exhibit "A" are valid and subsisting and are in full force, and the Properties are not subject to any burdens or charges except as reflected in Exhibit "A;" that the Properties and the properties assigned in Article 5 hereof are, to Borrower's actual knowledge, free and clear from all perfected liens, burdens, and encumbrances except the lien evidenced by this Deed of Trust and such liens as may be set forth on Exhibit "A;" that, to Borrower's actual knowledge, all producing wells in which Borrower has any right or interest located on the Properties or property unitized therewith have been drilled, operated, and produced in conformity with all applicable laws and rules, regulations, and orders of all regulatory authorities having jurisdiction and are subject to no penalties on account of past production; that, to Borrower's actual knowledge, none of such wells are deviated from the vertical more than the maximum permitted by applicable laws, rules, regulations, and orders; that such wells are in fact bottomed under and are producing from, and the well bores are wholly within, the lands covered by the Properties or properties unitized therewith. The acquisition and ownership by Borrower of the Properties and the properties assigned in Article 5, and the execution and delivery of this Deed of Trust and compliance with the provisions hereof, were and are within its corporate powers and did not and will not contravene any provision of any applicable laws, rules, regulations, or orders, or of its governing documents or constitute a default under, or result in the creation of any lien, charge, encumbrance, or security interest (other than the lien of the security interest created by this Deed of Trust) upon any of its property or assets pursuant to any indenture or other agreement or instrument to which it is a party or by which it or its property may be bound or affected. These warranties and representations shall at all times be construed to be for the benefit of the Beneficiary, and they shall remain in full force and effect, notwithstanding the assignment hereof, or the partial release of the lien hereof, or any foreclosure thereof. ARTICLE 3 COVENANTS 3.1 The Borrower, for Borrower and Borrower's successors covenants to use its commercially reasonable efforts (a) properly to operate, or cause to be operated properly, and to keep, or cause to be kept, in full force and effect, insofar as they cover the formation described at Exhibit "A" and to perform, or cause to be performed, all covenants, terms and conditions whether express or implied imposed upon the original lessee, or his assigns, whether continued in any such lease, or in any assignment thereof, and continuously to operate or cause to be operated in a good and workmanlike manner the well or wells now or hereafter located on the land covered by the interests or estates described in Exhibit "A;" (b) to comply with all applicable laws, and all rules, regulations and orders of all regulatory authorities having jurisdiction to regulate the operation of the Properties and production and sale of carbon dioxide and other minerals, produced thereupon; (c) to carry, in standard insurance companies satisfactory to the Beneficiary, in respect of all activities in which Borrower might incur personal liability for the death or injury of an employee or third person, or damage to or destruction of another's property, worker's compensation insurance, and public liability and property-damage insurance, in such amounts as may, in the Beneficiary's opinion, be adequate, and, in respect of all personal property and fixtures constituting a part of the Properties, to carry, in standard insurance companies satisfactory to the Beneficiary, insurance against loss or damage by fire, lightning, hail, tornado, explosion and such other risks as are usually insured against in similar businesses, in amounts satisfactory to the Beneficiary, and with loss payable to the Beneficiary as its interest may appear, and upon request of the Beneficiary promptly to deliver the policies to the Beneficiary; (d) to pay, or cause to be paid, before delinquent, all lawful taxes of every character in respect of all of the Properties, and all taxes in respect of the carbon dioxide and other minerals produced and to be produced from the Properties, or incident to and in connection with the operation or development thereof and the production of carbon dioxide and other minerals therefrom, as well as all Federal or State income taxes payable generally by Borrower, regardless of their relation to the Properties, and to pay, as and when due, all State and Federal Social Security taxes, payments and contributions for which Borrower may be liable; (e) at all times to maintain, preserve, and keep all said property, and all appurtenances thereto, and all buildings, improvements, machinery, equipment, pipe lines, fixtures, and other personal property of every kind and character, in respect of the Properties, in thorough repair, working order and condition, and from time to time make all necessary and proper repairs, renewals, replacements and substitutions; (f) in respect of all the Properties, promptly to pay all bills for labor and material, and never to permit to be created or to exist, in respect of any of the Properties, any other or additional lien, on a parity with or superior to the lien hereof; (g) at any time and from time to time, upon request by the Beneficiary, forthwith at Borrower's expense to execute and deliver to the Beneficiary, any and all additional instruments and further assurances as may be necessary or proper, in the Beneficiary's opinion, to effect the intent of these presents; (h) to keep accurate books and records in accordance with generally accepted accounting principles consistently applied in which full, true and correct entries shall be promptly made as to all operations on the Properties, all such books and records to be subject at all times during reasonable business hours to inspection by the Beneficiary, or its duly authorized agent or agents; (i) from time to time, upon request of the Beneficiary, promptly to furnish to the Beneficiary such financial statements and reports relating to Borrower, and Borrower's business affairs, and the operation of the Properties as the Beneficiary may reasonably request (j) to maintain Borrower's right to do business in Colorado; (k) to pay all Indebtedness in accordance with the terms thereof and hereof, or when the maturity thereof may be accelerated in accordance with the terms thereof or hereof; and (l) to notify the Beneficiary immediately if it becomes aware of the occurrence of any Event of Default or of any fact, condition or event that only with the giving of notice or passage of time or both, could become an Event of Default, or the failure of the Borrower to observe any of its undertakings hereunder; and (m) not to transfer, sell, assign, hypothecate, pledge or encumber any of the Properties. 3.2 With respect to any part of the Properties which is not a leasehold or working interest, Borrower agrees to take all such action and to exercise all rights and remedies as are available to Borrower to cause the owner or owners of the working interest in such properties to comply with the covenants and agreements contained herein. With respect to any part of the Properties which is a working interest but which is operated by a party other than Borrower, Borrower agrees to take all such action and to exercise all rights and remedies as are available to Borrower (including, but not limited to, all rights under any operating agreements) to cause the party who is the operator of such property to comply with the covenants and agreements contained herein. Borrower will immediately notify the Beneficiary of any failure of the operator of any of the Properties to perform any such obligation, and in cooperation with the Beneficiary, will take such steps as may be expedient to secure compliance therewith, or obtain appointment of a different operator. 3.3 Any and all covenants in this Deed of Trust may from time to time, by instrument in writing signed by Beneficiary and delivered to Borrower, be waived to such extent and in such manner as the Beneficiary may desire, but no such waiver shall ever affect or impair the Beneficiary's rights or liens hereunder, except to the extent so specifically stated in such written instrument. ARTICLE 4 DEFAULTS AND REMEDIES 4.1 Any of the following shall constitute Events of Default (each herein called an "Event of Default"): (a) Nonpayment. (i) The Borrower shall default in the due and punctual payment of any principal of the Indebtedness, or (ii) the Borrower shall default in the due and punctual payment of any interest of the Indebtedness or any fee or expense payable hereunder or under the Notes. (b) Covenant Default. The Borrower shall default in the due performance or observance by it of any term, covenant or agreement contained in this Deed of Trust, and such failure shall continue for thirty (30) days after the earlier of: (i) notice of such default from the Beneficiary; or (ii) the Beneficiary is notified of such default or should have been so notified pursuant to the provisions of Section 3.1(n) hereof. (c) Representations and Warranties. Any representation, warranty or statement made by the Borrower herein or otherwise in writing in connection herewith or in connection with the Notes and the agreements referred to herein or therein or in any financial statement, certificate or statement signed by any officer or employee of the Borrower and furnished pursuant to any provision hereof or of the Notes shall be breached, or shall be materially false, incorrect or incomplete when made. (d) Other Debt. The Borrower shall fail to make any payment of principal or interest on any other indebtedness of Borrower. (e) Default in Notes. Any event of default shall occur under the Notes and the default shall continue unremedied beyond any grace or cure period. (f) Judgments and Decrees. The Borrower shall suffer a final judgment for the payment of money and shall not discharge the same within a period of thirty (30) days. Any order, judgment or decree shall be entered in any proceeding against the Borrower decreeing the split up of the Borrower and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days. (g) Bankruptcy. (i) The Borrower pursuant to or within the meaning of any Bankruptcy Law (as herein defined) (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in any involuntary case, (c) consents to the appointment of a Custodian (as herein defined) of it for all or substantially all of its property, or (d) makes a general assignment for the benefit of its creditors; or (ii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that remains unstayed and in effect for thirty (30) days that (a) is for relief against the Borrower in an involuntary case, (b) appoints a Custodian of the Borrower for all or substantially all of its property, or (c) orders the liquidation of the Borrower. The term "Bankruptcy Law" means Title 11, U. S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. (h) Validity of Notes. The Notes shall cease to be a legal, valid and binding agreement enforceable against any party executing the same in accordance with the respective terms thereof, or shall in any way be terminated, or become or be declared ineffective or inoperative, or shall in any way whatsoever cease to give or provide the respective rights, remedies, powers and privileges intended to be created thereby. 4.2 Upon the occurrence of an Event of Default: (a) The Beneficiary may declare the entire balance of principal of the Indebtedness or any portion thereof, along with all accrued interest thereon, immediately due and payable, whereupon the same shall forthwith become due and payable, without notice or demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate, notice of acceleration, and all other notices, all of which the Borrower hereby expressly waives to the full extent permitted by applicable law; and (b) The Beneficiary shall have the right to declare a violation of any of the covenants herein contained and elect to advertise the Properties for sale and demand such sale, then, upon filing notice of such election and demand for sale with the Trustee, who shall upon receipt of such notice of election and demand for sale cause a copy of the same to be recorded in the office of the Clerk and Recorder of the county in which the Properties are situated, it shall and may be lawful for the Trustee to sell and dispose of the same (en masse or in separate parcels, as Beneficiary may designate), and all the right, title and interest of said Borrower, their successors or assigns therein, at public auction at the main front door of the Courthouse in the county in which the Properties are located or on the Properties or any part thereof, or such other place as may be authorized or permitted by law, as may be specified in the notice of said sale, for the highest and best price the same will bring in cash, four weeks' public notice having been previously given of the time and place of such sale, by advertisement weekly, in some newspaper of general circulation at that time published in said county, a copy of which notice shall be mailed within ten (10) days from the date of the first publication thereof to the Borrower at the address herein given and to such person or persons appearing to have acquired a subsequent record interest in the Properties at the address given in the recorded instrument evidencing such interest, and where only the county and state are given as the address, then such notice shall be mailed to the county seat, and to make and give to the purchaser or purchasers of the Properties at such sale, a certificate or certificates in writing describing such Properties purchased, and the sum or sums paid therefor, and the time when the purchaser or purchasers (or other person entitled thereto) shall be entitled to a deed or deeds therefor, unless the same shall be redeemed as is provided by law; and the Trustee shall, upon demand by the person or persons holding the said certificate or certificates of purchase, when said demand is made, or upon demand by the person entitled to a deed to and for the Properties purchased, at the time such demand is made the time for redemption having expired, make and execute to such person or persons a deed or deeds to the Properties purchased, which said deed or deeds shall be in the ordinary form of a conveyance, and shall be signed, acknowledged and delivered by the Trustee, as Borrower, and shall convey and quit claim to such person or persons entitled to such deed, as grantee, the Properties purchased as aforesaid and all the right, title, interest, benefit and equity of redemption of the Borrower its heirs, successors and assigns therein, and shall recite the sum or sums for which the Properties were sold and shall refer to the power of sale herein contained, and to the sale or sales made by virtue hereof; and in case of an assignment of such certificate or certificates of purchase, or in the case of the redemption of the Properties by a subsequent encumbrancer, such assignment or redemption shall also be referred to in such deed or deeds; but the notice of sale need not be set out in such deed or deeds and the Trustee shall, out of the proceeds or avails of such sale, after first paying and retaining all fees, charges and costs of making said sale, pay to Beneficiary the principal and interest due on the Notes according to the tenor and effect thereof, and all monies advanced by Unitrust or the Note Holders as applicable with interest thereon at the default rate set forth in the Notes, rendering the overplus, if any, unto Borrower, its legal representatives or assigns; which sale or sales and said deed or deeds so made shall be a perpetual bar, both in law and equity, against Borrower, its heirs, successors and assigns, and all other persons claiming the Properties, or any part thereof, by, from, through or under the Borrower. The holder or holders of the Notes may purchase the Properties or any part thereof; and it shall not be obligatory upon the purchaser or purchasers at any such sale to see to the application of the purchase money. Nothing herein pertaining to foreclosure proceedings or specifying particular actions to be taken by Beneficiary shall be deemed to contradict or add to the requirements and procedures (now or hereafter existing) of Colorado law and any such conflict or inconsistency shall be resolved in favor of Colorado law applicable at the time of foreclosure; and (c) The Beneficiary may, at its election, proceed by suit or suits, at law or in equity, to enforce the payment of the Indebtedness, and of the notes evidencing it. On or at any time after the filing of judicial proceedings to protect or enforce the rights of the Beneficiary, the Beneficiary, as a matter of right and without regard to the sufficiency of the security, and without any showing of insolvency, fraud, or mismanagement on the part of Borrower, shall be entitled to the appointment of a receiver or receivers of all or any portion of the Properties, and of the income, rents, issues, and profits thereof, and Borrower does hereby consent to the appointment of such receiver or receivers and agrees not to oppose any application therefor. It is agreed that the Beneficiary may be the purchaser of the Properties, or any part thereof, at any sale thereof, or upon any other foreclosure of the lien hereof or otherwise, and the Beneficiary so purchasing shall, upon any such purchase, acquire title to the Properties so purchased, free of the lien of these presents; and (d) The Beneficiary may institute suit to foreclose the lien of this Deed of Trust in any court having jurisdiction whether or not Beneficiary has begun to exercise its rights under Section 5.2(b) hereof. In any such suit the Beneficiary may, at its option, apply for and shall be entitled, as a matter of right, to the appointment of a receiver to take possession and control of, operate, maintain, and preserve the Properties or any part thereof, including the production and sale of all carbon dioxide and other minerals therefrom and to disburse the proceeds from the sale of such products for application upon the Indebtedness and other sums then due the Beneficiary hereunder until the same and all costs are fully paid. The Borrower hereby waives all notice of the filing and hearing of any such application for the appointment of a receiver and irrevocably consent to every appointment made pursuant thereof; and (e) The Beneficiary may exercise its rights under Article 6 hereof. 4.3 Borrower further agrees that in the event of any foreclosure sale, the Properties or any part thereof may be sold with or without appraisement as the Beneficiary may elect, and such election may be exercised at any time prior to the entry of the decree of foreclosure; that should Beneficiary elect to have the property sold without appraisement, then Borrower hereby expressly waive appraisement; that the Beneficiary may further elect to have said property sold together, or in separate parcels; that the proceeds from such sale, after paying therefrom the costs advanced or incurred by the Beneficiary in the foreclosure suit, including the costs of sale and any costs and expenses incurred in the operation of said property by a receiver appointed upon the application of the Beneficiary, shall be applied, FIRST, to the payment of all costs and expenses incurred by the Beneficiary in its operation of said property, if the same be so operated, and any and all sums advanced by the Beneficiary for the purpose of enforcing its rights hereunder or protecting the security, with interest on such amounts at the highest legal rate, and SECOND, to the payment of all other Indebtedness and other sums then secured hereby, including interest and attorneys' fees, in such order of application as the Beneficiary may elect. 4.4 In the event of any default upon the part of Borrower, the Beneficiary is authorized to cause to be made whatever abstracts of title and/or title opinions are deemed necessary by Beneficiary's attorneys. The cost of said abstracts shall be added to the Indebtedness. 4.5 To the full extent Borrower may do so, Borrower agrees that Borrower will not at any time insist upon, plead, claim, or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension, or redemption, and Borrower, for Borrower, Borrower's successors and assigns, and for any and all persons or entities ever claiming any interest in the Properties, to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of the Indebtedness and all rights to a marshaling of the assets of Borrower, including the Properties, or to a sale in inverse order of alienation in the event of foreclosure of the liens hereby created. Borrower shall not have or assert any right under any statute or rule of law pertaining to the marshaling of assets, sale in inverse order of alienation, the exemption of homestead, or other matters whatever to defeat, reduce, or affect the right of Beneficiary under the terms of this Deed of Trust to a sale of the Properties for the collection of the Indebtedness without any prior or different resort for collection, or the right of Beneficiary under the terms of this Deed of Trust to the payment of such indebtedness out of the proceeds of sale or the Properties in preference to every other claimant whatever. If any law referred to in this paragraph and now in force, of which Borrower or Borrower's successors and assigns might take advantage despite this paragraph, shall hereafter be repealed or cease to be in force, such law shall not thereafter be deemed to preclude the application of this paragraph. 4.6 The Beneficiary shall have the right to become the purchaser at any sale of the Properties, and the Beneficiary shall have the right to credit against the amount of the bid made therefor, the amount of Indebtedness then due and owing. The Beneficiary upon any such purchase shall acquire good title to the Properties so purchased, free from the lien of this Deed of Trust, and free of all rights of redemption in the Borrower. Recitals contained in any conveyance made to any purchaser at any sale made hereunder shall presumptively establish the truth and accuracy of the matters therein stated, including, without limiting the generality of the foregoing, non-payment of the unpaid principal sum of, and the interest accrued on, the Note after the same has become due and payable, and the conduct of the sale in the manner provided for herein; and the Borrower does hereby ratify and confirm any and all acts that the Beneficiary or its successors may lawfully do in the premises by virtue of the terms and conditions hereof to the full extent permitted by applicable law. 4.7 Any sale or sales of the Properties shall operate to divest all right, title, interest, claim, and demand whatsoever either at law or in equity, of the Borrower of, in, and to the premises and the property sold, and shall be a perpetual bar, both at law and in equity, against the Borrower, and the Borrower's successors and against any and all persons claiming or who shall thereafter claim all or any part of the properties sold from, through, or under the Borrower, or the Borrower's successors and assigns. Nevertheless, the Borrower, if requested by the Beneficiary to do so, shall join in the execution and delivery of all proper conveyances, assignments, and transfers of the properties sold. 4.8 Upon the occurrence of an Event of Default, and in addition to all other rights herein conferred upon the Beneficiary, the Beneficiary (or any person, firm, or corporation designated by the Beneficiary) shall have the right and power to the full extent permitted by applicable law, but shall not be obligated, to enter upon and take possession of any of the Properties, and to exclude the Borrower and the Borrower's agents, or servants, wholly therefrom, and to hold, use, administer, manage, and operate the same to the extent that the Borrower shall be at the time entitled and in its place and stead. The Beneficiary, or any person, firm, or corporation designated by the Beneficiary, may operate the same without any liability to the Borrower in connection with such operations, except to use ordinary care in the operation of said properties, and the Beneficiary or any person, firm, or corporation designated by it, shall have the right to collect, receive, and receipt for all carbon dioxide produced and sold from said properties, to make repairs, purchase machinery and equipment, conduct work-over operations, drill additional wells, and to execute every power, right, and privilege of the Borrower with respect to the Properties. All costs, expenses, and liabilities of every character incurred by the Beneficiary in managing, operating, maintaining, protecting, or preserving such properties, respectively, shall constitute a demand obligation owing by the Borrower to the Beneficiary and shall bear interest from the date of expenditure until paid at the same rate as is provided for in the Notes for interest on past due principal, all of which shall constitute a portion of the Indebtedness, and shall be secured by this Deed of Trust and by any other instrument securing the Indebtedness. 4.9 If any statute now applicable to the Properties shall hereafter be amended to provide a different procedure for the sale of real property under a Deed of Trust, the Trustee may, in its sole discretion, if same be permitted by applicable law, follow the procedure set forth herein or that prescribed in such statute, as amended. 4.10 The rights and remedies hereinabove expressly conferred are cumulative of all other rights and remedies herein, or by law or in equity provided, and shall not be deemed to deprive Beneficiary of any other legal or equitable rights or remedies, by judicial proceedings or otherwise, appropriate to enforce the conditions, covenants, and terms of this Deed of Trust and of the Indebtedness and the employment of any remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies. ARTICLE 5 ASSIGNMENT OF PRODUCTION 5.1 In order further to secure the payment of the Indebtedness, Borrower does hereby GRANT, BARGAIN, SELL, TRANSFER, ASSIGN, SET OVER and CONVEY unto and in favor of the Trustee, in trust, all of the interest of the Borrower in the carbon dioxide which may be produced from the Properties, or allocated thereto pursuant to pooling or unitization of the leases described in Exhibit "A" or otherwise, together with all proceeds derived from the sale of such carbon dioxide on and after the date of the execution and delivery of this Deed of Trust. 5.2 The foregoing assignment is made upon the following terms and provisions: (a) The Beneficiary shall have the right, exercisable only at any time after the occurrence of an Event of Default, to give written or telegraphic notice to all of the parties producing, purchasing, taking, possessing, or receiving any carbon dioxide produced or to be produced from or allocated to the Properties, or having in their possession any such carbon dioxide belonging to Borrower or such proceeds for which they or others are accountable to the Beneficiary by virtue of the provisions hereof, to hold and dispose of such carbon dioxide for the account of the Beneficiary and to make payment of such proceeds direct to the Beneficiary at its principal office, and the Beneficiary shall thereafter receive, collect, and retain, as part of the Properties, all such carbon dioxide, all for the benefit and further security of the Indebtedness. (b) All parties producing, purchasing, taking, possessing, processing, or receiving any such carbon dioxide, or having in their possession any such carbon dioxide or such proceeds for which they or others are accountable to the Beneficiary by virtue of the provisions hereof, are authorized and directed by the Borrower, upon receipt of notice by the Beneficiary given pursuant to the above paragraph 6.2(a) to treat and regard the Beneficiary as the assignee and transferee of the Borrower and entitled in its place and stead to receive such carbon dioxide and proceeds; and such parties and each of them shall be fully protected in so treating and regarding the Beneficiary and shall be under no obligation to see to the application by the Beneficiary of any such proceeds received by it. Without in any way limiting the effectiveness of the authorization and direction in the next preceding sentence, if the Borrower shall receive any such proceeds under which this Section 6.2(b) are receivable by the Beneficiary, Borrower will hold the same in trust and will remit such proceeds, or cause such proceeds to be remitted, immediately, to the Beneficiary. (c) Without limiting the foregoing provisions of this Assignment of Production, the Borrower stipulates that this Assignment of Production is intended to grant to the Beneficiary a security interest in Borrower's interest in the carbon dioxide to be extracted from or attributable to the Properties, and in and to the proceeds resulting from the sale thereof at the wellhead. 5.3 The Borrower covenants and agrees and undertakes hereby, after the Beneficiary shall have so requested in accordance with this Deed of Trust, to cause all pipeline companies or other purchasers of the carbon dioxide produced from the Properties to pay promptly to the Beneficiary at its principal office, the Borrower's interest in the proceeds derived from the sale thereof, in accordance with the terms of this assignment, and forthwith to execute, acknowledge, and deliver to said pipeline companies and other purchasers such further and proper division orders, transfer orders, certificates, and other documents as may be necessary or proper to effect the intent of these presents; and the Beneficiary shall not be required at any time, as a condition to its right to obtain the proceeds of such carbon dioxide, to warrant its title thereto, or to make any guaranty whatsoever. In addition, and without limitation, the Borrower covenants and agrees, and undertakes hereby, to provide to the Beneficiary the name and address of every pipeline company or other purchaser of the carbon dioxide and other minerals produced from the Properties when determined, together with a copy of the applicable sales contracts. All expenses incurred by the Beneficiary in the collection of said proceeds shall be repaid promptly by the Borrower; and prior to such repayment, such expenses shall be a part of the indebtedness secured hereby. 5.4 Without limitation upon any of the foregoing, the Borrower hereby designates and appoints the Beneficiary as the Borrower's true and lawful agent and attorney-in-fact (with full power of substitution, either generally or for such periods or purposes as the Beneficiary may from time to time prescribe), with full power and authority, for and on behalf of and in the name of the Borrower, to execute, acknowledge, and deliver all such division orders, transfer orders, certificates, and other documents of every nature, with such provisions as may from time to time, in the opinion of the Beneficiary, be necessary or proper to effect the intent and purposes of the assignment contained in this Section 5 and the Borrower shall be bound thereby as fully and effectively as if the Borrower had personally executed, acknowledged, and delivered any of the foregoing certificates or documents. The powers and authorities herein conferred on the Beneficiary may be exercised by the Beneficiary through any person who, at the time of exercise, is the president or a vice president of the Beneficiary, or who holds a similar position with Beneficiary or with Beneficiary's authorized representative. The power of attorney conferred by this paragraph is granted for valuable consideration and coupled with an interest and is irrevocable so long as the Indebtedness, or any portion thereof, shall remain unpaid. All persons dealing with the Beneficiary, or any substitute, shall be fully protected in treating the powers and authorities conferred herein as continuing in full force and effect until advised by the Beneficiary that the Indebtedness is fully and finally paid. 5.5 The Beneficiary shall never be under any obligation to enforce the collection of the funds assigned to it hereunder, nor shall it ever be liable for failure to exercise diligence in the collection of such funds, but it shall only be accountable for the sums that it shall actually receive. 5.6 Should any pipeline company or other purchaser now or hereafter purchasing said production fail to make payment promptly to Beneficiary of the proceeds derived from the sale thereof, Beneficiary shall have the right to change the connection of any such pipeline company, or other purchaser, to purchase and take such production, without liability on Beneficiary in making such selection, so long as ordinary care is used in respect thereof; and should Borrower, its heirs, personal representatives, and assigns fail to consent to such connection, Beneficiary may accelerate the maturity of the Indebtedness. 5.7 The proceeds accruing to the Properties, received by Beneficiary, shall be applied by it when so received toward payment of the Indebtedness, as the Beneficiary in its sole discretion deems appropriate. 5.8 Notwithstanding such provision for application of proceeds, it is agreed that Beneficiary shall have the right, at its election, from time to time, to apply any portion or all of said proceeds to the payment of any of the taxes levied and assessed against the Properties, insurance premiums, liens, bills for labor and material furnished for use upon the Properties, costs, and expenses, including attorneys' fees incurred by Beneficiary in the defense of any action affecting the title to the Properties, or the production therefrom, or any judgment rendered against Beneficiary upon any claim arising out of the receipt, or application in accordance herewith, of any such proceeds in the event Borrower should fail to make such payments, or any of them, promptly after demand made by Beneficiary upon Borrower so to do. Beneficiary shall have the right, at its election, to release or deliver to Borrower all or any portion of such proceeds, received by it, to the end that Borrower may receive funds with which to pay for the operating, equipping, and developing of the Properties, or any well or wells thereon. No funds so released or paid to Borrower shall, in any event, be considered to have been applied upon the Indebtedness. 5.9 The rights of the Beneficiary with respect to this assignment of production are cumulative of, and shall not limit, any other titles, rights, or remedies of the Beneficiary created by this instrument, or by law, and no action taken by the Beneficiary to enforce this assignment of production shall affect or be affected by any other action the Beneficiary may take under this instrument or pursuant to any law or judgment. ARTICLE 6 SECURITY AGREEMENT AND FINANCING STATEMENT 6.1 This Deed of Trust shall constitute a security agreement and shall also constitute and may be filed as a financing statement under applicable codifications of the Uniform Commercial Code (Colorado). In addition to all other rights and remedies available to the Beneficiary upon any default of the Borrower, the Beneficiary shall, upon any default, be entitled to exercise any one or more remedies granted to a secured party on default under the Uniform Commercial Code (Colorado). This security agreement (and financing statement, if applicable) covers and extends to all proceeds of collateral. 6.2 Borrower hereby grant to Beneficiary a security interest in all personal property and fixtures constituting a part of the Properties (whether same are now located thereon or subsequently acquired and used or obtained in connection therewith). 6.3 The fact that the proceeds from the sale of production attributable to the Properties are included as part of the collateral under this security agreement is not intended to limit, supersede, or negate, in any manner, the Assignment of Production set forth above. 6.4 Borrower represent and warrant that no financing statement covering the Properties, or any part thereof, has been filed with any filing officer, and no other security interest has attached or been perfected in the said Properties, or any part thereof. 6.5 Certain of the Properties are or are to become, fixtures on the lands and/or leases described in Exhibit "A." 6.6 The minerals and the like (including carbon dioxide) or accounts produced from the Properties will be financed at the wellhead of the wells located on the lands and/or leases described in Exhibit "A." This Deed of Trust shall be effective as a financing statement covering minerals or the like (including oil and gas) and accounts from the Properties subject to Subsection (5) of Section 9.103.1 of the Uniform Commercial Code. 6.7 This instrument may be presented to a filing officer under the Uniform Commercial Code (Colorado) to be filed of record as a non-standard financing statement covering all personal property of any kind or character defined in and subject to the Uniform Commercial Code (Colorado), including carbon dioxide and other minerals and fixtures. This instrument is to be filed of record as a financing statement in the real estate records. The Beneficiary shall have the right at any time to file a manually executed counterpart or a carbon, photographic or other reproduction of this Deed of Trust as a financing statement in either the central or the local UCC records of any jurisdiction wherein the Properties are located, but the failure of the Beneficiary to do so shall not impair (i) the effectiveness of this Deed of Trust as both a financing statement covering carbon dioxide and accounts and as a fixture filing as permitted by Section 9.402 of the Uniform Commercial Code, or (ii) the validity and enforceability of this Deed of Trust in any respect. For purposes of filing this Deed of Trust as a financing statement, the addresses for Borrower and Beneficiary (Secured Party) are as follows: Debtor (Borrower): The Beard Company Enterprise Plaza, Suite 320 5600 N. May Avenue Oklahoma City, OK 73112 Secured Party (Beneficiary): McElmo Dome Nominee, LLC Enterprise Plaza, Suite 320 5600 N. May Avenue Oklahoma City, OK 73112 ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 In the event that any one or more of the provisions contained in this instrument shall be invalid, illegal, or unenforceable in any respect under any law, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 7.2 This instrument shall be governed by and construed in accordance with the laws of the State of Colorado. 7.3 This Deed of Trust is executed in multiple original counterparts, all of which are identical and constitute but one and the same instrument. 7.4 All terms, conditions, covenants, warranties and agreements contained herein shall be binding upon and inure to the benefit of the successors and assigns of Borrower, and shall be deemed and construed to be covenants running with the estate or interest in the land, and all said provisions shall likewise inure to the benefit of and be binding upon Beneficiary, its successors and assigns. 7.5 No failure of the Beneficiary to declare any default or to exercise any right or remedy herein provided in any one or more instances or for any period of time, and no acquiescence in or acceptance by the Beneficiary of any later defective notice or performance hereunder, shall be deemed a waiver or agreement to modify any provision hereof. The Beneficiary shall at all times have the right, notwithstanding any such prior acquiescence or forbearance, without any prior notice or demand, to require strict performance of each and every term and provision hereof. At any time when any Event of Default is continuing hereafter, the Beneficiary may, without any prior notice to the Borrower except such notice as may be herein otherwise required, exercise any right or remedy of the Beneficiary arising by reason of such default, notwithstanding the length of time such Event of Default has been continuing, or the occurrence in the past of similar events, or other Events of Default for which no remedy has been invoked. 7.6 The liens provided for herein shall not affect or be affected by any other security or guaranty now or hereafter existing with respect to the Indebtedness, nor shall they be affected by the release of any such other security or guaranty. 7.7 Each and every covenant herein contained shall be performed and kept by the Borrower solely at the Borrower's expense. If the Borrower shall fail to perform or keep any of the covenants of whatsoever kind or nature contained in this instrument, the Beneficiary or any receiver appointed hereunder may, but shall not be obligated to, make advances to perform the same on the Borrower's behalf, and the Borrower hereby agree to repay such sum upon demand plus interest at the rate of interest set forth in the Notes or, in the event any other Notes evidencing such indebtedness exists, at the interest rate set forth therein. No such advance shall be deemed to relieve the Borrower from any default hereunder. 7.8 Renewals, extensions, modifications, and amendments of the Indebtedness may be given at any time, and amendments may be made to agreements relating to any part of such Indebtedness or the Properties, and the Beneficiary may take or may now hold other security for the Indebtedness without notice to or consent of the Borrower. 7.9 This instrument shall be deemed to be and may be enforced from time to time as an assignment, real estate deed of trust, security agreement, or financing statement, and from time to time as any one or more thereof. 7.10 In the event of a conflict between the terms and provisions of this instrument and the terms and provisions of the Notes, the terms of the Notes shall control. IN WITNESS WHEREOF, the Borrower and the Beneficiary have executed this Deed of Trust as of the day and year first above written. BORROWER: THE BEARD COMPANY, an Oklahoma corporation ATTEST: By: REBECCA G. WITCHER By: HERB MEE, JR. Rebecca G. Witcher, Secretary Herb Mee, Jr., President BENEFICIARY: MCELMO DOME NOMINEE, LLC, an Oklahoma limited liability company By: WILLIAM BEARD William Beard, Member By: JAMES W. WALLIS James W. Wallis, Member STATE OF OKLAHOMA ) ) COUNTY OF OKLAHOMA ) BEFORE ME, a notary public in and for said county and state on this 16th day of May, 2002, personally appeared Herb Mee, Jr., known to me to be the identical person who subscribed his name to the foregoing instrument as President of The Beard Company, and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I have hereunto set my official signature and affixed my notary seal the day and year first above written. My Commission Expires: LINDA ABRAM Notary Public, State of Oklahoma October 30, 2002 Commission No.: 98017941 (Seal) STATE OF OKLAHOMA ) ) COUNTY OF OKLAHOMA ) BEFORE ME, a notary public in and for said county and state on this 16th day of May, 2002, personally appeared William Beard, known to me to be the identical person who subscribed his name to the foregoing instrument as a Member of McElmo Dome Nominee LLC, an Oklahoma limited liability company, and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation for the uses and purposes therein set forth. IN WITNESS WHEREOF, I have hereunto set my official signature and affixed my notary seal the day and year first above written. My Commission Expires: LINDA ABRAM Notary Public, State of Oklahoma October 30, 2002 Commission No. 98017941 (Seal) STATE OF OKLAHOMA ) ) COUNTY OF OKLAHOMA ) BEFORE ME, a notary public in and for said county and state on this 16th day of May, 2002, personally appeared James W. Wallis, known to me to be the identical person who subscribed his name to the foregoing instrument as a Member of McElmo Dome Nominee LLC, an Oklahoma limited liability company, and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation for the uses and purposes therein set forth. IN WITNESS WHEREOF, I have hereunto set my official signature and affixed my notary seal the day and year first above written. My Commission Expires: LINDA ABRAM Notary Public, State of Oklahoma October 30, 2002 Commission No.98017941 (Seal) EXHIBIT A The Beard Company County: Montezuma 1. Lease: 019347-COO Date: 11/01/73 Lessor: BLM ---- C-19347 Lessee: SHELL OIL COMPANY Recorded: Volume: , Page: Legal Description T36N, R18W SEC. 08: ALL SEC. 09: W/2 SEC. 20: NW/4, SE/4 SEC. 29: NW/4, W/2SE/4, NE/4SE/4 SEC. 08: ALL (LESS MISSISSIPPI FORMATION) SEC. 09: W/2 (LESS MISSISSIPPI FORMATION) SEC. 20: NW/4, SE/4 (LESS MISSISSIPPI FORMATION) SEC. 29: NW/4, W/2SE/4, NE/4SE/4 (LESS MISSISSIPPI FORMATION) INSOFAR AND ONLY INSOFAR AS LEASE COVERS CARBON DIOXIDE CONTAINED IN THE MISSISSIPPI-LEADVILLE FORMATION AS DESCRIBED IN MCELMO DOME UNIT. 2. Lease: 021445-COC Date: 08/01/74 Lessor: BLM ---- COC-21445 Lessee: BEARD OIL COMPANY Recorded: Volume: , Page: Legal Description T37N, R20W SEC. 34: L 1-4, E/2E/2 SEC. 34: L 1-4, E/2E/2 (MISSISSIPPI FORMATION ONLY) INSOFAR AND ONLY INSOFAR AS LEASE COVERS CARBON DIOXIDE CONTAINED IN THE MISSISSIPPI-LEADVILLE FORMATION AS DESCRIBED IN MCELMO DOME UNIT. 3. Lease: 022446-COO Date: 02/01/76 Lessor: BLM ---- C-22446 Lessee: BEARD OIL COMPANY Recorded: Volume: , Page: Legal Description T36N, R18W SEC. 15: E/2SW/4 SEC. 15: E/2SW/4 (MISSISSIPPI FORMATION ONLY) INSOFAR AND ONLY INSOFAR AS LEASE COVERS CARBON DIOXIDE CONTAINED IN THE MISSISSIPPI-LEADVILLE FORMATION AS DESCRIBED IN MCELMO DOME UNIT. County: Dolores Prospect: 0500 McELMO DOME PROSPECT 1. Lease: 018415-COC Date: 09/01/73 Lessor: BLM ---- C-18415 Lessee: BEARD OIL COMPANY Recorded: Volume: , Page: Volume: , Page: Legal Description T39N, R18W SEC. 18: L 5-9, 16-18, SE/4 SEC. 29: N/2NE/4 (EXCEPT MISSISSIPPI FORMATION) SEC. 18: L-5-9, 16-18, SE/4 (MISSISSIPPI FORMATION ONLY) SEC. 29: N/2NE/4 (MISSISSIPPI FORMATION ONLY) INSOFAR AND ONLY INSOFAR AS LEASE COVERS CARBON DIOXIDE CONTAINED IN THE MISSISSIPPI-LEADVILLE FORMATION AS DESCRIBED IN MCELMO DOME UNIT. EX-99 6 bcexh99a10q3rdqt.txt EXH 99A, 906CEO Exhibit 99(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with The Beard Company's (the "Company") Quarterly Report on Form 10-Q for the period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William M. Beard, Chairman of the Board and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d)of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: 11-13-2002 By: WILLIAM M. BEARD William M. Beard Chairman of the Board and Chief Executive Officer EX-99 7 bcexh99b10q3rdqt.txt EXH 99B, 906CFO Exhibit 99(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with The Beard Company's (the "Company") Quarterly Report on Form 10-Q for the period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Herb Mee, Jr., President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d)of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: 11-12-2002 By: HERB MEE, JR. Herb Mee, Jr. President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----