-----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, PO37M4MhNpj15xxEW/5u3Ycyz5xkrnd53V0LM8WmzaKHabXeQzMYezQ6U4W0DkoR f7u8xviCTUdVvFT8LS2N+Q== 0000909334-04-000219.txt : 20040816 0000909334-04-000219.hdr.sgml : 20040816 20040816171707 ACCESSION NUMBER: 0000909334-04-000219 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04979854 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 bcform10q-081604.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 June 30, 2004 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 by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the registrant's classes of common stock as of August 9, 2004. Common Stock $.0006665 par value - 4,657,690 THE BEARD COMPANY INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements............................................3 Balance Sheets - June 30, 2004 (Unaudited) and December 31, 2003..................................................3 Statements of Operations - Three Months and Six Months ended June 30, 2004 and 2003 (Unaudited)...........................4 Statements of Shareholders' Equity (Deficiency) - Year ended December 31, 2003 and Six Months ended June 30, 2004 (Unaudited)...5 Statements of Cash Flows - Six Months ended June 30, 2004 and 2003 (Unaudited).................................6 Notes to Financial Statements (Unaudited).............................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....22 Item 4. Controls and Procedures........................................22 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................23 Item 2. Changes in Securities and Use of Proceeds......................23 Item 3. Defaults Upon Senior Securities................................23 Item 4. Submission of Matters to a Vote of Security Holders............24 Item 5. Other Information..............................................25 Item 6. Exhibits and Reports on Form 8-K...............................25 Signatures...............................................................26 PART 1. FINANCIAL INFORMATION. Item 1. Financial Statements THE BEARD COMPANY AND SUBSIDIARIES Balance Sheets June 30, 2004 (Unaudited) and December 31, 2003
June 30, December 31, Assets 2004 2003 --------------------- --------------------- Current assets: Cash and cash equivalents $ 431,000 $ 216,000 Accounts receivable, less allowance for doubtful receivables of $97,000 in 2004 and 2003 102,000 89,000 Prepaid expenses and other assets 277,000 34,000 Assets of discontinued operations held for sale 40,000 55,000 --------------------- --------------------- Total current assets 850,000 394,000 --------------------- --------------------- Investments and other assets 103,000 81,000 Property, plant and equipment, at cost 1,865,000 1,843,000 Less accumulated depreciation, depletion and amortization 1,418,000 1,392,000 --------------------- --------------------- Net property, plant and equipment 447,000 451,000 --------------------- --------------------- Intangible assets, at cost 131,000 183,000 Less accumulated amortization 92,000 168,000 --------------------- --------------------- Net intangible assets 39,000 15,000 --------------------- --------------------- $ 1,439,000 $ 941,000 ===================== ===================== Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Trade accounts payable $ 73,000 $ 133,000 Accrued expenses 340,000 325,000 Short-term debt 1,000 32,000 Short-term debt - related entities - 661,000 Current maturities of long-term debt 121,000 5,000 Current maturities of long-term debt - related entities 162,000 - Liabilities of discontinued operations held for sale 99,000 92,000 --------------------- --------------------- Total current liabilities 796,000 1,248,000 --------------------- --------------------- Long-term debt less current maturities 385,000 1,215,000 Long-term debt - related entities 3,347,000 3,668,000 Other long-term liabilities 140,000 143,000 Shareholders' equity (deficiency): Convertible preferred stock of $100 stated value; 5,000,000 shares authorized; 27,838 shares, issued and outstanding 889,000 889,000 Common stock of $.0006665 par value per share; 15,000,000 shares authorized; 4,657,690 shares issued and outstanding 3,000 3,000 Capital in excess of par value 38,045,000 37,941,000 Accumulated deficit (42,151,000) (44,151,000) Accumulated other comprehensive loss (15,000) (15,000) --------------------- --------------------- Total shareholders' equity (deficiency) (3,229,000) (5,333,000) --------------------- --------------------- Commitments and contingencies (note 7) $ 1,439,000 $ 941,000 ===================== =====================
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Operations (Unaudited)
For Three Months Ended For Six Months Ended ------------------------------- ------------------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 -------------- --------------- -------------- --------------- Revenues: Coal reclamation $ 18,000 $ - $ 18,000 $ 42,000 Carbon dioxide 163,000 116,000 326,000 243,000 China - - - - e-Commerce 4,000 - 29,000 25,000 Other - 1,000 - 1,000 -------------- --------------- -------------- --------------- 185,000 117,000 373,000 311,000 -------------- --------------- -------------- --------------- Expenses: Coal reclamation 138,000 139,000 274,000 270,000 Carbon dioxide 45,000 31,000 76,000 64,000 China 143,000 167,000 277,000 337,000 e-Commerce 30,000 27,000 58,000 59,000 Other 2,000 3,000 12,000 18,000 Selling, general and administrative 231,000 239,000 430,000 448,000 Depreciation, depletion & amortization 15,000 52,000 38,000 98,000 -------------- --------------- -------------- --------------- 604,000 658,000 1,165,000 1,294,000 -------------- --------------- -------------- --------------- Operating profit (loss): Coal reclamation (121,000) (139,000) (256,000) (228,000) Carbon dioxide 108,000 76,000 230,000 160,000 China (144,000) (167,000) (278,000) (338,000) e-Commerce (27,000) (29,000) (32,000) (37,000) Other, primarily corporate (235,000) (282,000) (456,000) (540,000) -------------- --------------- -------------- --------------- (419,000) (541,000) (792,000) (983,000) Other income (expense): Interest income - 1,000 1,000 1,000 Interest expense (138,000) (135,000) (259,000) (263,000) Equity in operations of unconsolidated affiliates 70,000 57,000 138,000 109,000 Gain on settlement 117,000 - 2,943,000 - Gain on sale of assets 73,000 1,000 76,000 1,000 Other 2,000 (5,000) (5,000) (5,000) -------------- --------------- -------------- --------------- Earnings (loss) from continuing operations before income tax benefit (expense) (295,000) (622,000) 2,102,000 (1,140,000) Income tax benefit (expense) (12,000) - (109,000) - -------------- --------------- -------------- --------------- Earnings (loss) from continuing operations (307,000) (622,000) 1,993,000 (1,140,000) Earnings (loss) from discontinued operations 4,000 (15,000) 7,000 5,000 -------------- --------------- -------------- --------------- Net earnings (loss) $ (303,000) $ (637,000) $ 2,000,000 $ (1,135,000) ============== =============== ============== =============== Net earnings (loss) per average common share outstanding: Basic: Earnings (loss) from continuing operations $ (0.06) $ (0.14) $ 0.38 $ (0.26) Loss from discontinued operations 0.00 (0.00) 0.00 0.00 -------------- --------------- -------------- --------------- Net earnings (loss) $ (0.06) $ (0.14) $ 0.38 $ (0.26) ============== =============== ============== =============== Net earnings (loss) per average common share outstanding: Diluted: Earnings (loss) from continuing operations $ (0.06) $ (0.14) $ 0.33 $ (0.26) Loss from discontinued operations 0.00 (0.00) 0.00 0.00 -------------- --------------- -------------- --------------- Net earnings (loss) $ (0.06) $ (0.14) $ 0.33 $ (0.26) ============== =============== ============== =============== Weighted average common shares outstanding: Basic 5,239,000 4,545,000 5,239,000 4,429,000 ============== =============== ============== =============== Diluted 5,239,000 4,545,000 6,137,000 4,429,000 ============== =============== ============== =============== Adjusted to reflect 2-for-1 stock split effective August 6, 2004.
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Shareholders' Equity (Deficiency)
Total Accumulated Common Capital in Other Shareholders' Preferred Common Excess of Accumulated Comprehensive Treasury Equity Stock Stock Par Value Deficit Income Stock (Deficiency) ---------- ---------- ------------ ------------- ------------- ---------- ------------- Balance, December 31, 2002 $ - $ 3,000 $ 38,207,000 $(41,182,000) $( 15,000) $(1,846,000) $(4,833,000) Net loss - - - (1,611,000) - - (1,611,000) Comprehensive income: Foreign currency translation adjustment - - - - - - - ------------ Comprehensive loss - - - - - - (1,611,000) ------------ Expiration of mandatory redemption option for preferred stock 889,000 - - - - - 889,000 Issuance of stock warrants - - 24,000 - - - 24,000 Reservation of shares pursuant to deferred compensation plan - - 198,000 - - - 198,000 Issuance of shares pursuant to termination of deferred stock compensation plan - - (488,000) (1,358,000) - 1,846,000 - ---------- ---------- ------------ ------------- ----------- ------------ ------------ Balance, December 31, 2003 889,000 3,000 37,941,000 (44,151,000) ( 15,000) - (5,333,000) Net earnings, six months ended June 30, 2004 (unaudited) - - - 2,000,000 - - 2,000,000 Comprehensive income: Foreign currency translation adjustment (unaudited) - - - - - - - ------------ Comprehensive loss (unaudited) - - - - - - 2,000,000 ------------ Issuance of stock warrants (unaudited) - - 5,000 - - - 5,000 Reservation of shares pursuant to deferred compensation plan (unaudited) - - 99,000 - - - 99,000 ---------- ---------- ------------ ------------- ----------- ------------ ------------ Balance, June 30, 2004 (unaudited) $ 889,000 $ 3,000 $ 38,045,000 $(42,151,000) $( 15,000) $ - $(3,229,000) ========== ========== ============ ============= =========== ============ ============
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Cash Flows (Unaudited)
For the Six Months Ended ---------------------------------------- June 30, 2004 June 30, 2003 ---------------------------------------- Operating activities: Cash received from customers $ 359,000 $ 283,000 Gain on settlement 2,943,000 - Cash paid to suppliers and employees (1,383,000) (1,144,000) Interest received 1,000 1,000 Interest paid (606,000) (72,000) Operating cash flows of discontinued operations 14,000 (22,000) ------------------ ------------------ Net cash provided by (used in) operating activities 1,328,000 (954,000) ------------------ ------------------ Investing activities: Acquisition of property, plant and equipment (20,000) (18,000) Proceeds from sale of assets 126,000 1,000 Proceeds from sale of assets of discontinued operations 49,000 216,000 Investment in and advances to fifty percent-owned subsidiary in Mexico - (1,000) Investment in and advances to fifty percent-owned subsidiary in China - (35,000) Advances for notes receivable - (2,000) Payments on notes receivable - 2,000 Other (132,000) 99,000 ------------------ ------------------ Net cash provided by investing activities 23,000 262,000 ------------------ ------------------ Financing activities: Proceeds from term notes 650,000 874,000 Payments on line of credit and term notes (1,393,000) (303,000) Proceeds from related party debt 715,000 376,000 Payments on related party debt (1,073,000) (192,000) Capitalized costs associated with issuance of debt (36,000) (66,000) Other 1,000 - ------------------ ------------------ Net cash provided by (used in) financing activities (1,136,000) 689,000 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 215,000 (3,000) Cash and cash equivalents at beginning of period 216,000 79,000 ------------------ ------------------ Cash and cash equivalents at end of period $ 431,000 $ 76,000 ================== ================== Continued THE BEARD COMPANY AND SUBSIDIARIES Statements of Cash Flows (Unaudited) Reconciliation of Net earnings (loss) to Net Cash Provided by (Used in) Operating Activities: For the Six Months Ended ---------------------------------------- June 30, 2004 June 30, 2003 ---------------------------------------- Net earnings (loss) $ 2,000,000 $ (1,135,000) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 38,000 98,000 Gain on sale of assets (76,000) (1,000) Gain on sale of assets of discontinued operations (21,000) (51,000) Equity in operations of unconsolidated affiliates (138,000) (109,000) Noncash compensation expense 104,000 80,000 Net cash used by discontinued operations offsetting accrued impairment loss (3,000) (7,000) Other 9,000 1,000 (Increase) decrease in accounts receivable, prepaid expenses and other current assets (56,000) 16,000 Increase (decrease) in accounts payable, accrued expenses and other liabilities (529,000) 154,000 ------------------ ------------------ Net cash provided by (used in) operating activities $ 1,328,000 $ (954,000) ================== ==================
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) (1) Summary of Significant Accounting Policies Basis of Presentation --------------------- The accompanying financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally prepared in accordance with accounting principles generally accepted in the United States have been omitted. The accompanying financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in The Beard Company's 2003 annual report on Form 10-K. The accompanying financial statements include the accounts of The Beard Company and its wholly and majority-owned subsidiaries in which The Beard Company has a controlling financial interest ("Beard" or the "Company"). Subsidiaries and investees in which Beard does not exercise control are accounted for using the equity method. All significant intercompany transactions have been eliminated in the accompanying financial statements. The financial information included herein is unaudited; however, such information reflects solely normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and six-month periods ended June 30, 2004, are not necessarily indicative of the results to be expected for the full year. The Company's current significant operations are within the following segments: (1) the Coal Reclamation ("Coal") Segment, (2) the Carbon Dioxide ("CO2") Segment, (3) the China ("China") Segment, and (4) the e-Commerce ("e-Commerce") Segment. The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is continuing to pursue environmental opportunities in China focusing on the installation and construction of facilities which utilize the proprietary composting technology of Real Earth United States Enterprises, Inc. The e-Commerce Segment consists of a 71%-owned subsidiary whose activities are aimed at developing business opportunities to leverage starpay.com, l.l.c.'s intellectual property portfolio of Internet payment methods and security technologies. All share, per share and exercise price figures referred to have been adjusted to reflect the 2-for-1 stock split effective August 6, 2004. Reclassifications ----------------- Certain 2003 balances have been reclassified to conform to the 2004 presentation. (2) Ability to Fund Operations and Continue as a Going Concern Overview -------- The accompanying financial statements have been prepared based upon the Company's belief that it will continue as a going concern. Despite the fact that the Company's revenues from continuing operations had declined in each of the four preceding years, they increased in 2004. The Company has incurred operating losses and negative cash flows from operations during each of the last six years. Meanwhile, the Coal Segment is currently pursuing a number of different projects, which are in various stages of negotiation. Due to the significant improvement in market conditions in the coal industry in recent months the Company now expects to commence at least two, and possibly three, of these projects by year-end. If such projects materialize as expected it will enable the segment to achieve profitability for the first time since 1998 and we expect that this will enable the segment to remain profitable for a number of years. The exact timing of the projects is uncertain but, subject to finalizing the definitive agreements, all three projects are considered to have a high probability of activity. (See "Additional Details" below). Moreover, the long-awaited Settlement in the McElmo Dome litigation has now been received. A total of $1,162,000 was received on July 31, 2003, $2,826,000 was received on March 26, 2004, and $117,000 was received on May 12, 2004. Receipt of the Settlement substantially increases the likelihood that 2004 will be a profitable year while at the same time enhancing the Company's liquidity and bolstering its balance sheet ratios. The Company is continuing to pursue financing for fertilizer projects in China. Such efforts have not been successful to date; accordingly, the Company has broadened its efforts to include the pursuit of funding for a mini-plant to serve as a demonstration plant for our licensed technology. In addition, the Company finalized its first licensing arrangement in its e-Commerce Segment in March of 2003. Although the e-Commerce licensing arrangement will not make the segment profitable in 2004, the Company believes the arrangement has the potential to make the segment profitable in 2005 and subsequent years. Beginning in January 2002 and continuing through June 30, 2004, the Company took a number of steps to reduce its negative cash flow. The Company's Chairman and President each deferred a major portion of their base salary into the Company's deferred stock compensation plans (the "DSC Plans"), and the Company's outside directors deferred all of their directors' fees into such plans. The Chairman of Beard Technologies has deferred a portion of his salary until the first coal project is generating positive cash flow. The Company has suspended its 100% matching contribution (up to a cap of 5% of gross salary) under its 401(k) Plan. In addition, four private debt placements raised gross proceeds of $3,029,000 during such period. The fourth debt placement totaling $1,200,000, was completed in June of 2004. The offering raised a net of $1,163,000 of working capital, after reductions for expenses, for the Company. The notes were accompanied by warrants to purchase a total of 480,000 shares of Beard Company stock at exercise prices ranging from $0.135 to $0.23 per share. The notes bear interest at an annual rate equal to the Wall Street Journal Prime Rate plus 4%, with a floor of 10%. The Company will pay interest only until November 30, 2004 and will then amortize the notes with equal payments of principal and interest over the ensuing eight quarters. The note holders will also collectively receive at maturity a bonus/production payment equivalent to approximately $1 per ton for the coal recovered during the term of the notes from one of the reclamation projects which the Company expects to commence prior to year-end. The total amount for the bonus/production payment is expected to equal $568,000. As a result of the estimated bonus/production payment, these notes have an effective interest rate of 29%. These borrowings were supplemented in November of 2003 by a loan of $200,000 from a related party, in December of 2003 by a loan of $103,000 from an unconsolidated subsidiary, and in February and March of 2004 by a $125,000 loan from a local bank. All three of these loans were repaid in the 2004 second quarter. These measures enabled the Company to continue operating until the Settlement was finalized. As a result there has been a substantial amount of dilution to the Company's common equity. During such period 1,158,000 warrants were issued in connection with the private debt placements, and 1,130,000 Stock Units were accrued in the participants' accounts as a result of deferrals of salary into the DSC Plans. Additional dilution also occurred due to an adjustment to the Preferred Stock conversion ratio resulting from the issuance of the warrants and the salary deferrals. Termination of two of the DSC Plans resulted in the issuance of 1,000,000 common shares in 2003, leaving 581,000 Stock Units accrued in the remaining plan at June 30, 2004. The Company is preparing to commence another private debt placement which is targeted to raise a total of $1,800,000 to $2,700,000 if fully subscribed. This offering, if successfully concluded, will provide the equity needed to secure USDA financing for one of the coal projects which the Company expects to commence during the fourth quarter of 2004. The securities offered in the upcoming private debt placement will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Additional Details ------------------ Following receipt of the second installment of the McElmo Dome Settlement, the Company paid down $2,620,000 of its indebtedness which totaled $5,581,000 at year-end 2003. Cash and cash equivalents increased from $216,000 at December 31, 2003, to $431,000 at June 30, 2004. The Company's principal business is coal slurry pond reclamation, and this is where management's operating attention is primarily focused. The Coal Segment is currently pursuing a number of different projects. In mid-July the Company announced that Beard Technologies had signed an agreement with a subsidiary of DTE Energy Company, a New York Stock Exchange listed company based in Detroit, Michigan. Beard Technologies will provide the expertise, labor, materials and certain necessary equipment to provide dredging services for the other party during the intial two-year agreement term. The term is extendible at the other party's option for an additional term of up to four years. Work on this project has already started and is currently generating profits and positive cash flow. The Company expects to finalize the definitive agreement on another project shortly, and to commence work on this project immediately thereafter. The Company anticipates financing this project through a loan from the U.S. Department of Agriculture with funds from the new debt placement providing the equity needed to secure the loan. In addition, several other projects are in various stages of negotiation. However, except for the first project, no definitive contracts have as yet been signed on any of the projects. There is no assurance that the required financing will be obtained or that any of these additional projects will materialize. The China Segment has obtained exclusive license agreements for two composting technologies and has been pursuing financing for fertilizer projects in several different areas. The Company is of the opinion that there is an adequate market for a number of such projects in each of the areas involved. During the last 90 days the segment has spent considerable time designing a mini-plant which will (i) cost approximately $1,600,000, and (ii) serve as the show case for the segment's technology. The Company will be seeking financing for this plant during the fourth quarter of 2004. To date no financing commitments have been received, and there is no assurance that such financing efforts will be successful. In addition, in April of 2004, the Company received cash of approximately $122,000 from the sale of a portion of the property in a real estate limited partnership. The Company also generated cash of $50,000 from the sale of assets from two of its discontinued segments during the first six months of 2004, and expects to generate at least $65,000 more from the disposition of the remaining assets by year-end. It also has certain other assets it can sell to generate cash if necessary. The Company believes that if the current financing efforts are successful, they will provide sufficient working capital to sustain the Company's activities until the operations of the projects under development in the Coal Segment have come on stream and the Company is generating positive cash flow from operations. If such efforts are not successful or are only partially successful, then a major restructuring of the Company's operations will become necessary in the near term in order that the Company can continue as a going concern. (3) Discontinued Operations ITF Segment ----------- In 1999 the Company's Board of Directors adopted a formal plan to discontinue its interstate travel facilities ("ITF") Segment. ITF recorded no revenues or losses for the first half of 2004. The segment also recorded no revenues for the first six months of 2003 and incurred $3,000 of income and $5,000 of losses for the three and six-month periods, respectively. The 2003 losses were charged to operations. As of June 30, 2004, the ITF Segment had no significant assets or liabilities. BE/IM Segment ------------- In 1999 the Management Committee of a joint venture 40%-owned by the Company adopted a formal plan to discontinue the business and dispose of its assets. As a result, Beard's share of the venture's operating results has been reported as discontinued for all periods presented in the accompanying statements of operations. The joint venture was dissolved in 2000 and the Company took over the remaining assets and liabilities. The Company recorded no revenues for either of the three or six-month periods ended June 30, 2004 or 2003. The Company recorded $6,000 and $21,000 in earnings for the three and six-month periods ending June 30, 2004 primarily as a result of the sale of equipment, and charged operating losses of $1,000 and $4,000 against an accrual for anticipated expenses related to the shutdown of one of its plants during the 2004 three and six-month periods, respectively. The net losses for the three and six-month periods ended June 30, 2003 were $4,000 and $7,000, respectively, and were charged against the loss accrual. As of June 30, 2004, the significant assets related to the operations consisted primarily of equipment with no estimated net realizable value. The significant liabilities related to remaining operations consisted primarily of accrued expenses totaling $58,000 related to the shutdown of operations. The Company is actively pursuing opportunities to sell the remaining assets and expects the disposition to be completed by December 31, 2004. WS Segment ---------- In August 2001 the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued. In December 2001 all of the sand separators owned by the 100%-owned company in the WS Segment were sold for $100,000. The Company is now pursuing the sale of all remaining equipment owned by the segment. The segment recorded no revenues for either the first half of 2004 or 2003. Beard's share of operating results from the discontinued segment were losses of $1,000 and $13,000 for the three and six-month periods ended June 30, 2004, respectively. Beard recorded a loss of $17,000 and income of $11,000 for the three and six-month periods ended June 30, 2003, respectively. Included in these results was a $45,000 gain on the sale of equipment recorded in the first quarter of 2003. As of June 30, 2004, the significant assets of the WS Segment consisted of fixed assets with a recorded value of $39,000. The significant liabilities of the entity consisted of trade accounts payable and accrued expenses totaling $41,000. It is anticipated that all liabilities of the segment will be paid prior to December 31, 2004. (4) Convertible Preferred Stock Effective January 1, 2003, the Company's preferred stock became convertible into Beard common stock. Each share of Beard preferred stock was convertible into 10.35093926 shares on August 9, 2004 (total of 288,149 shares). The conversion ratio will be adjusted as additional warrants are issued or as additional shares of stock are credited to the accounts of the Company's Chairman or President in the Company's Deferred Stock Compensation Plan. Fractional shares will not be issued, and cash will be paid in redemption thereof. (5) Loss Per Share Basic earnings (loss) per share data is computed by dividing earnings (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if the Company's outstanding stock options and warrants were exercised (calculated using the treasury stock method) and if the Company's preferred stock were converted to common stock. Diluted loss per share from continuing operations in the statements of operations for the three and six-month periods ended June 30, 2003 and the three month period ended June 30, 2004 exclude potential common shares issuable upon conversion of convertible preferred stock as the effect would be anti-dilutive. Diluted earnings (loss) per share for the same periods exclude potential common shares issuable upon exercise of stock options and warrants, as the effect would be anti-dilutive. The table below contains the components of the common share and common equivalent share amounts (adjusted to reflect the 2-for-1 stock split effected on August 6, 2004) used in the calculation of earnings (loss) per share in the Company's statements of operations:
For the Three Months Ended For the Six Months Ended ------------------------------------- ---------------------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 ------------------------------------- ---------------------------------- Basic EPS: Weighted average common shares outstanding 4,657,690 4,358,086 4,657,690 4,242,064 Shares in deferred stock compensation plan treated as common stock equivalents 580,904 187,160 580,904 187,160 ------------------------------------- ---------------------------------- 5,238,594 4,,545,246 5,238,594 4,429,224 ===================================== ================================== Diluted EPS: Weighted average common shares outstanding 4,657,690 4,358,086 4,657,690 4,242,064 Shares in deferred stock compensation plan treated as common stock equivalents 580,904 187,160 580,904 187,160 Convertible Preferred Shares considered to be common stock equivalents - - 288,149 - Warrants issued in connection with debt offerings treated as common stock equivalents - - 610,000 - ------------------------------------- ---------------------------------- 5,238,594 4,545,246 6,136,743 4,429,224 ===================================== ==================================
(6) Income Taxes In accordance with the provisions of the Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the Company's net deferred tax asset is being carried at zero book value, which reflects the uncertainties of the Company's utilization of the future net deductible amounts. The Company recorded a provision of $12,000 and $97,000 for federal alternative minimum taxes for the three and six-month periods ended June 30, 2004, respectively. The Company recorded no provision for taxes for the three or six-month periods ended June 30, 2003. At June 30, 2004, the Company estimates that it had the following income tax carryforwards available for both income tax and financial reporting purposes (in thousands):
Expiration Date Amount ---- ------ Federal regular tax operating loss carryforwards 2004-2008 $ 52,700 Tax depletion carryforward Indefinite $ 3,400
(7) Commitments and Contingencies In the normal course of business various actions and claims have been brought or asserted against the Company. Management does not consider them to be material to the Company's financial position, liquidity or results of operations. The Company has an indemnity obligation to its institutional preferred stockholder and one of its assignees for certain losses (i) arising out of the ownership and/or operation of Beard Oil's former oil and gas assets, including environmental liabilities; (ii) arising under any employee benefit or severance plan; or (iii) relating to any misrepresentation or inaccuracy in any representation made by the Company or Beard Oil in connection with a restructure effected in 1993. The Company has no liability under the indemnity obligation unless the accumulated damage or loss incurred by the Buyer or its assignees in connection with such Claims exceeds $250,000 in the aggregate. The maximum amount of future payments that could be required under the indemnity has no limitation. The principal exposure under the obligation would have been for any environmental problems which existed, at the time of the sale, on the oil and gas properties sold. If any Claims were to be made at this point they would presumably need to be made first against any and all of the subsequent owners of the properties involved; if any liability was then determined to exist it would presumably be assigned first to such subsequent owners. In the event the Company should be required to pay an amount under this obligation, it does not believe any of such amount could be recovered from third parties. However, during the over 10 years since the date of the Restructure there have been no Claims, and the Company has no reason to believe that there will be any. For these reasons, no reserve has ever been established for the liability, because no liability is believed to exist. (8) Business Segment Information The Company manages its business by products and services and by geographic location (by country). The Company evaluates its operating segments' performance based on earnings or loss from operations before income taxes. The Company had four reportable segments in the first six months of 2004 and 2003: Coal, Carbon Dioxide, China and e-Commerce. The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is pursuing environmental opportunities in China focusing on the installation and construction of facilities which utilize the proprietary composting technology of Real Earth United States Enterprises, Inc. The e-Commerce Segment consists of a 71%-owned subsidiary whose activities are aimed at developing business opportunities to leverage starpay.com, l.l.c.'s intellectual property portfolio of Internet payment methods and security technologies. The following is certain financial information regarding the Company's reportable segments (presented in thousands of dollars). General corporate assets and expenses are not allocated to any of the Company's operating segments; therefore, they are included as a reconciling item to consolidated total assets and loss from continuing operations before income taxes reported in the Company's accompanying financial statements.
Carbon Coal Dioxide China e-Commerce Totals ---- ------- ----- ---------- ------ Three months ended ------------------ June 30, 2004 ------------- Revenues from external customers $ 18 $ 163 $ - $ 4 $ 185 Segment profit (loss) (121) 108 (144) (27) (184) Three months ended ------------------ June 30, 2003 ------------- Revenues from external customers $ - $ 116 $ - $ - $ 116 Segment profit (loss) (139) 76 (167) (29) (259) Six months ended ---------------- June 30, 2004 ------------- Revenues from external customers $ 18 $ 326 $ - $ 29 $ 373 Segment profit (loss) (256) 230 (278) (32) (336) Segment assets 38 467 49 8 562 Six months ended ---------------- June 30, 2003 ------------- Revenues from external customers $ 42 $ 243 $ - $ 25 $ 310 Segment profit (loss) (228) 160 (338) (38) (444) Segment assets 27 479 57 13 576
Reconciliation of total reportable segment loss to consolidated earnings (loss) from continuing operations before income taxes is as follows for the three and six months ended June 30, 2004 and 2003 (in thousands):
For the Three Months For the Six Months Ended Ended ----------------------------- ----------------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 -------------- ----------- ------------ ------------- Total loss for reportable segments $ (184) $ (259) $ (336) $ (444) Net corporate income (expenses) not allocated to segments (111) (363) 2,438 (696) ----------------------------------------------------------- Total consolidated earnings (loss) for continuing operations $ (295) $ (622) $ 2,102 $ (1,140) ===========================================================
THE BEARD COMPANY AND SUBSIDIARIES DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "PROJECT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY ASSUMES NO DUTY TO UPDATE OR REVISE ITS FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR EXPECTATIONS OR OTHERWISE. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion focuses on material changes in the Company's financial condition since December 31, 2003 and results of operations for the quarter ended June 30, 2004, compared to the prior year second quarter and the six months ended June 30, 2004 compared to the prior year six months. Such discussion should be read in conjunction with the Company's financial statements including the related footnotes. In preparing the discussion and analysis, the Company has presumed readers have read or have access to the discussion and analysis of the prior year's results of operations, liquidity and capital resources as contained in the Company's 2003 Form 10-K. The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is pursuing environmental opportunities in China focusing on the installation and construction of facilities which utilize proprietary composting technology licensed from third parties. The e-Commerce Segment consists of a 71%-owned subsidiary which is engaged in a strategy to develop licensing agreements and other fee based arrangements with companies implementing technology in conflict with our intellectual property. Material changes in financial condition - June 30, 2004 as compared with December 31, 2003. The following table reflects changes in the Company's financial condition during the periods indicated:
June 30, December 31, Increase 2004 2003 (Decrease) ---- ---- ---------- Cash and cash equivalents $ 431,000 $ 216,000 $ 215,000 Working capital $ 54,000 $ (854,000) $ 908,000 Current ratio 1.07 to 1 0.32 to 1
During the first six months of 2004, the Company increased its working capital by $908,000 from $(854,000) as of December 31, 2003. The Company received a total of $2,943,000 from the second and third installments of the McElmo Dome Settlement. The Company used $2,620,000 to repay debt and accrued interest, including $1,348,000 to related parties. The Company placed it's 10% Participating Notes, which infused over $1,163,000 in working capital in the first half of 2004. Related entities purchased $700,000 of the 10% Participating Notes. Proceeds from the sale of assets totaled $175,000 during the first half of 2004. Net revenue from the Company's interest in its CO2 producing properties provided $230,000 of working capital for the first half of 2004. $256,000 of working capital were used to help fund the operations of the Coal Segment. The China Segment utilized over $278,000 of working capital. $32,000 were used to fund the startup activities of the e-Commerce Segment. The Company received distributions of $68,000 from other investments, including Cibola. The remainder of the working capital was utilized to fund other operations. In 2002 the Company supplemented its $300,000 credit line with a commercial bank by arranging for an increase in its credit line from an affiliate of the Company's chairman. The long-term line of credit from the related party was increased from $2,250,000 in September of 2001 to $3,000,000 in October of 2002 to provide additional working capital, and was supplemented by a $150,000 short-term line of credit from the same party in November of 2002, which was increased to $375,000 in November of 2003. These lines were supplemented by (i) four private placements of notes and warrants totaling $3,029,000 which were completed in 2002, in February and July of 2003 and June of 2004, and (ii) loans totaling $303,000 from a related party and an unconsolidated subsidiary in November and December of 2003 and (iii) borrowings on a line of credit from a bank totaling $125,000 in February and March of 2004. Such funds were needed to provide additional working capital, improve liquidity and to bridge the gap until the distribution of the McElmo Dome settlement had been completed. In addition, the Company has been disposing of the remaining assets from its discontinued segments as opportunities have become available and is continuing to pursue the sale of the few remaining assets. Receipt of the settlement from the McElmo Dome litigation has significantly improved the Company's balance sheet, income statement, and debt ratios. The Company received $1,162,000 of the settlement on July 31, 2003, $2,826,000 on March 26, 2004, and $117,000 on May 12, 2004. Upon receipt of the second installment of the settlement, the Company was able to eliminate $2,620,000 of its total indebtedness and accrued interest. The Company's principal business is coal slurry pond reclamation, and this is where management's operating attention is primarily focused. The Coal Segment is currently pursuing a number of different projects. In mid-July the Company announced that Beard Technologies had signed an agreement with a subsidiary of DTE Energy Company, a New York Stock Exchange listed company based in Detroit, Michigan. Beard Technologies will provide the expertise, labor, materials and certain necessary equipment to provide dredging services for the other party during the intial two-year agreement term. The term is extendible at the other party's option for an additional term of up to four years. Work on this project has already started and is currently generating profits and positive cash flow. The Company expects to finalize the definitive agreement on another project shortly, and to commence work on this project immediately thereafter. The Company anticipates financing this project through a loan from the U.S. Department of Agriculture with funds from the new debt placement providing the equity needed to secure the loan. The securities offered in this new debt placement will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. In addition, several other projects are in various stages of negotiation. However, except for the first project, no definitive contracts have as yet been signed on any of the projects. There is no assurance that the required financing will be obtained or that any of these additional projects will materialize. The China Segment has obtained exclusive license agreements for two composting technologies and has been pursuing financing for fertilizer projects in several different areas. The Company is of the opinion that there is an adequate market for a number of such projects in each of the areas involved. During the last 90 days the segment has spent considerable time designing a mini-plant which will (i) cost approximately $1,600,000, (ii) be expected to generate a high return on investment and (iii) serve as the show case for the segment's technology. The Company will be seeking financing for this plant during the fourth quarter of 2004. To date no financing commitments have been received, and there is no assurance that such financing efforts will be successful. The Company is preparing to commence another private debt placement which is targeted to raise a total of $1,800,000 to $2,700,000 if fully subscribed. This offering, if successfully concluded, will provide the equity needed to secure USDA financing for one of the coal projects which the Company expects to commence during the fourth quarter of 2004. The securities offered in the upcoming private debt placement will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. The Company believes that if the current financing efforts are successful, they will provide sufficient working capital to sustain the Company's activities until the operations of the projects under development in the Coal Segment have come on stream and the Company is generating positive cash flow from operations. If such efforts are not successful or are only partially successful, then a major restructuring of the Company's operations will become necessary in the near term in order that the Company can continue as a going concern. Material changes in results of operations - Quarter ended June 30, 2004 as compared with the Quarter ended June 30, 2003. The net loss for the second quarter of 2004 was $303,000 compared to $637,000 for the 2003 second quarter. Continuing operations posted a net loss of $307,000 compared to a loss from continuing operations of $622,000 for the same period in 2003. In addition, the Company's discontinued operations had income of $4,000 for the second quarter of 2004 compared to a loss of $15,000 for the second quarter of 2003. The Coal Segment's revenues of $18,000 accounted for the decrease in the segment's operating loss to $121,000 for the second quarter of 2004 compared to $139,000 for the second quarter of 2003. The operating profit in the CO2 Segment increased $32,000. The China Segment's loss for the second quarter of 2004 totaled $144,000 compared to $167,000 for the same period in 2003. The e-Commerce Segment incurred operating losses of $27,000 for the second quarter of 2004 compared to $29,000 in the second quarter of 2003. The operating loss in Other activities for the second quarter of 2004 decreased $47,000 compared to the same period in 2003. As a result, the operating loss for the current quarter decreased $122,000 to $419,000 versus $541,000 in the corresponding quarter of the prior year. Operating results of the Company's primary operating Segments are reflected below:
2004 2003 ---- ---- Operating profit (loss): Coal reclamation $(121,000) $(139,000) Carbon dioxide 108,000 76,000 China (144,000) (167,000) e-Commerce (27,000) (29,000) --------------- -------------- Subtotal (184,000) (259,000) Other (235,000) (282,000) --------------- -------------- $(419,000) $(541,000) =============== ==============
The "Other" in the above table reflects primarily general and corporate activities, as well as other activities of the Company. Coal reclamation The segment recorded revenues of $18,000 for the second quarter of 2004 compared to none for the same period in 2003 as a result of performing several consulting and coring jobs in the year 2004. Operating costs decreased $1,000 to $138,000 for the second quarter of 2004 compared to $139,000 for the same period in 2003. Carbon dioxide Second quarter 2004 operations reflected an operating profit of $108,000 compared to $76,000 for the 2003 second quarter. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of the Company's two carbon dioxide producing units in Colorado and New Mexico. Operating revenues in this segment increased $47,000 to $163,000 for the second quarter of 2004 compared to $116,000 for the same period in 2003. The increase in revenue for the current quarter was primarily due to increased pricing, with the Company receiving an average of $0.42 per mcf sold in the 2004 quarter versus $0.33 per mcf in the year earlier quarter. China The China Segment incurred an operating loss of $144,000 for the second quarter of 2004 compared to $167,000 for the same period in 2003. The $23,000 smaller loss for the second quarter of 2004 compared to the same period in 2003 is attributable to lower costs in 2004 associated with the termination of the relationship with a former partner in China partially offset by increased expenses relating to the development of projects to utilize the proprietary composting technology of REUSE. e-Commerce The e-Commerce Segment incurred an operating loss of $27,000 for the second quarter of 2004 versus an operating loss of $29,000 in the prior year quarter. The segment received $4,000 in revenue for the second quarter of 2004 compared to none for the same period in 2003. This was partially offset by a $2,000 increase in operating expenses as the segment continues its efforts to develop business opportunities to leverage its intellectual property portfolio of Internet payment methods and security technologies. Other corporate activities Other corporate activities include general and corporate operations, as well as assets unrelated to the Company's operating segments or held for investment. These activities generated operating losses of $235,000 for the second quarter of 2004 as compared to $282,000 for the same period of 2003. This decrease in operating losses was due primarily to decreased amortization expense associated with the costs of issuing the 10% subordinated debt capitalized in 2002 and 2003. Selling, general and administrative expenses The Company's selling, general and administrative expenses ("SG&A") in the current quarter decreased slightly from $239,000 in the second quarter of 2003 to $231,000 for the same period in 2004. Depreciation, depletion and amortization expenses DD&A expense decreased $37,000 from $52,000 in the second quarter of 2003 to $15,000 in the same period of 2004. The decrease was due primarily to decreased amortization expense associated with the capitalized costs of issuing the 10% subordinated debt in 2002 and 2003. The majority of these costs were fully amortized by the third quarter of 2003. Other income and expenses The other income and expenses for the second quarter of 2004 netted to income of $124,000 for the second quarter of 2004 compared to a loss of $81,000 for the same period in 2003. Interest income was down $1,000 for the second quarter of 2004 compared to the same period in 2003. Interest expense was $3,000 higher as a result of the increase in debt, primarily to related parties and the issuance of the subordinated and participating debt. The Company's equity in operations of unconsolidated affiliates reflected income of $70,000 for the second quarter of 2004 compared to $57,000 for the same period in 2003. Improved operating results for Cibola Corporation accounted for the increase. Income taxes The Company recorded a provision for federal alternative minimum taxes of $12,000 in the second quarter of 2004 compared to none for the same period in 2003. The Company has not recorded any financial benefit attributable to its various tax carryforwards due to uncertainty regarding their utilization and realization. Discontinued operations ITF Segment - ----------- In 1999 the Company's Board of Directors adopted a formal plan to discontinue its interstate travel facilities ("ITF") Segment. ITF recorded no revenues or losses for the second quarter of 2004 or 2003. The segment recorded income in the amount of none and $3,000 for the three month periods ending June 30, 2004 and 2003, respectively. Included in this loss was a gain of $5,000 on the sale of the last C-store and associated equipment. The ITF Segment had no significant assets or liabilities as of June 30, 2004. BE/IM Segment - ------------- In 1999 the Management Committee of a joint venture 40%-owned by the Company adopted a formal plan to discontinue the business and dispose of its assets. As a result, Beard's share of the venture's operating results has been reported as discontinued for all periods presented in the accompanying statements of operations. The joint venture was dissolved in 2000 and the Company took over the remaining assets and liabilities. The Company recorded no revenues for either of the three-month periods ended June 30, 2004 or 2003. The Company recorded $6,000 in earnings for the second quarter of 2004; primarily as a result of the sale of equipment, and charged operating losses of $1,000 against an accrual for anticipated expenses related to the shutdown of one of its plants during the three months ended June 30, 2004. The net losses for the three-month period ended June 30, 2003 were $4,000, and were charged against the loss accrual. As of June 30, 2004, the significant assets related to NABR's operations consisted primarily of equipment with no estimated net realizable value. The significant liabilities related to NABR's operations consisted primarily of accrued expenses related to the shutdown of operations totaling $58,000. The Company is actively pursuing opportunities to sell NABR's assets and expects the disposition to be completed by December 31, 2004. WS Segment - ---------- In August 2001 the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued. In December 2001 all of the sand separators owned by the 100%-owned company in the WS Segment were sold for $100,000. The Company is now pursuing the sale of all remaining equipment owned by the segment. The segment recorded no revenues for either the second quarter of 2004 or 2003. Beard's share of operating results from the discontinued segment was a loss of $1,000 for the three-month period ended June 30, 2004. Beard recorded a loss of $17,000 for the three months ended June 30, 2003. As of June 30, 2004, the significant assets of the WS Segment consisted of fixed assets with a recorded value of $39,000. The significant liabilities of the segment consisted of trade accounts payable and accrued expenses totaling $57,000. It is anticipated that all liabilities of the segment will be paid prior to December 31, 2004. Material changes in results of operations - Six months ended June 30, 2004 as compared with the Six months ended June 30, 2003. The Company recorded $2,000,000 in net income for the first six months of 2004 compared to a net loss of $1,135,000 the first six months of the prior year. Continuing operations posted earnings of $1,993,000 compared to losses of $1,140,000 for the same period in 2003. In addition, the Company had income of $7,000 and $5,000 from discontinued operations for the first half of 2004 and 2003, respectively. Operating results of the Company's primary operating segments are reflected below:
2004 2003 ---------------- ---------------- Operating profit (loss): Coal reclamation $ (256,000) $ (228,000) Carbon dioxide 230,000 160,000 China (278,000) (338,000) e-Commerce (32,000) (37,000) ---------------- ---------------- Subtotal (336,000) (443,000) Other (456,000) (540,000) ---------------- ---------------- Total $ (792,000) $ (983,000) ================ ================
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 $24,000 to $18,000 for the first six months of 2004 compared to $42,000 for the same period in 2003 as the result of fewer small consulting and coring jobs in the year 2004. Operating costs increased $4,000 to $274,000 for the first six months of 2004 compared to $270,000 for the same period in 2004 as a result of increased advertising, travel and other costs. As a result, the operating loss for the first six months of 2004 increased $28,000 to $256,000 compared to $228,000 in the first six months of 2003. Carbon dioxide Operations for the first six months of 2004 resulted in an operating profit of $230,000 compared to a $160,000 operating profit for the 2003 first half. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of the Company's two carbon dioxide producing units in Colorado and New Mexico. Operating revenues in this segment increased $83,000 or 34% to $326,000 for the first six months of 2004 compared to $243,000 for the same period in 2003. The Company recorded $12,000 more in operating costs associated with the properties in the first half of 2004 compared to the same period in 2003. Production volumes for the McElmo Dome field increased for the first six months of 2004 compared to the same period in 2003. The increase in revenue for the current six months was due to higher volumes to the Company's interest accompanied by a small increase in pricing, with the Company receiving an average of $0.36 per mcf sold in the first six months of 2004 versus $0.35 per mcf in the year earlier period. Paid volumes were up 75,000 mcf in the current six months versus a year ago. China The China Segment incurred an operating loss of $278,000 for the first half months of 2004 compared to $338,000 for the same period in 2003. The losses are attributable to SG&A expenses as the Company seeks projects to utilize the proprietary composting technology of REUSE. e-Commerce The e-Commerce Segment incurred an operating loss of $32,000 for the first half of 2004 versus an operating loss of $37,000 in the prior year period. A $4,000 increase in revenues accounted for the majority of the change; a $1,000 reduction in operating expenses accounted for the balance. Other corporate activities Other corporate activities include general and corporate operations, as well as assets unrelated to the Company's operating segments or held for investment. These activities generated operating losses of $456,000 for the first half of 2004 as compared to $540,000 in the same period of 2003. The Company charged $51,000 less in DD&A costs for the six-month period in 2004 compared to the same period in 2003 as the capitalized costs associated with the issuance of the subordinated debt in 2002 and 2003 were fully amortized by the fourth quarter of 2003. The Company also realized smaller reductions in numerous other expense accounts. Selling, general and administrative expenses The Company's selling, general and administrative expenses ("SG&A") in the first half of 2004 decreased $18,000 to $430,000 from $448,000 for the 2003 six months. The Company realized reductions in numerous SG&A expense accounts, notably $13,000 less in costs related to the issuance of warrants associated with the subordinated debt issued in 2002 and 2003. Depreciation, depletion and amortization expenses DD&A expense decreased $60,000 from $98,000 for the six months ended June 30, 2003 to $38,000 for the same period in 2004. The decrease was due primarily to decreased amortization expense associated with the capitalized costs of issuing the 10% subordinated debt in 2002 and 2003. These costs were fully amortized in the fourth quarter of 2003. Other income and expense The other income and expenses for the first six months of 2004 netted to income of $2,894,000 compared to a loss of $157,000 for the same period in 2003. The Company received $2,826,000 of the McElmo Dome Settlement in March of 2004 and another $117,000 in May of 2004 with no comparable receipts in the first six months of 2003. The Company used $2,620,000 to pay down its debt and associated interest. Interest expense was down $4,000 as a result of the decreased debt. The Company realized gains on sale of assets for the first six months of 2004 totaling $76,000 versus $1,000 in the prior year period. The Company's equity in the operations of unconsolidated affiliates netted to income of $138,000 for the first six months of 2004 compared to $109,000 for the same period in 2003. These amounts reflect the improved operating results of Cibola Corporation. Income taxes The Company recorded a provision of $12,000 and $97,000 for federal alternative minimum taxes for the three and six-month periods ended June 30, 2004, respectively. The Company recorded no provision for taxes for the three or six-month periods ended June 30, 2003. Discontinued operations ITF Segment ----------- Complete details concerning the discontinuance of the interstate travel facilities ("ITF") Segment are contained in "Material changes in results of operations - Quarter ended June 30, 2004 as compared with the Quarter ended June 30, 2003" under the "Discontinued Operations - ITF Segment" heading. ITF recorded no revenues or losses for the six-month period ended June 30, 2004. ITF's revenues and actual operating losses were none and $5,000, respectively, for the six months ended June 30, 2003. The actual losses for the six months ended June 30, 2003 were charged to operations. BE/IM Segment ------------- Complete details concerning the discontinuance of NABR are contained in "Material changes in results of operations - Quarter ended June 30, 2004 as compared with the Quarter ended June 30, 2003" under the "Discontinued Operations - BE/IM Segment" heading. The Company recorded $21,000 in earnings for the six-month periods ending June 30, 2004 primarily as a result of the sale of equipment, and charged operating losses $4,000 against an accrual for anticipated expenses related to the shutdown of one of its plants during the six months ended June 30, 2004. The revenues and actual loss for the six months ended June 30, 2003 were none and $7,000, respectively. These losses were charged against the loss accrual recorded in 1999. WS Segment ---------- Complete details concerning the discontinuance of the Company's natural gas well testing operations in Mexico are contained in "Material changes in results of operations - Quarter ended June 30, 2004 as compared with the Quarter ended June 30, 2003" under the "Discontinued Operations - WS Segment" heading. The segment recorded no revenues for the first six months of 2004 or 2003. Beard recorded income of $11,000 for the first six months of 2003 compared to operating losses of $13,000 for the six-month period ended June 30, 2004. The income for 2003 included $45,000 from the sale of assets. Item 3. Quantitative and Qualitative Disclosures About Market Risk. At June 30, 2004, the Company had long-term debt of $4,015,000, including accrued interest to related entities of $24,000. Debt in the amount of $2,785,000 has fixed interest rates; therefore, the Company's interest expense and operating results would not be affected by an increase in market interest rates for this amount. The Company's $1,200,000 of 10% Participating Notes bear interest at an annual rate equal to the Wall Street Journal Prime Rate plus 4% with a floor of 10%. The Notes will require payment of interest only until November 30, 2004 and the Company will then amortize the Notes with equal payments of principal and interest over the remaining eight quarters. A 10% increase in market interest rates would have increased the Company's interest expense by approximately $1,000. At June 30, 2004, a 10% increase in market interest rates would have reduced the fair value of the Company's long-term debt by $47,000. The Company has no other market risk sensitive instruments. Item 4. Controls and Procedures. Our principal executive officer and principal financial officer have participated in and supervised the evaluation of The Beard Company's disclosure controls and procedures that are designed to ensure that information required to be disclosed by the issuer in the reports it files is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the information required to be disclosed in the reports that it files is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer to allow timely decisions regarding required disclosure. Based on their evaluation of those controls and procedures as of a date within 90 days of the date of this filing, our CEO and CFO determined that the controls and procedures are adequate and effective. The evaluation resulted in no significant changes in those controls or in other factors that could significantly affect the controls, and no corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION. Item 1. Legal Proceedings. McElmo Dome Litigation - ---------------------- On December 24, 2002, the Tenth Circuit Court of Appeals issued an Opinion affirming the May 2002 decision of the Colorado District Court which approved the Settlement. In March of 2003, objectors to the Settlement filed a Petition for Certiorari asking the U.S. Supreme Court for review. In early June the U.S. Supreme Court denied the Petition and the Settlement became final in July of 2003. The Defendants paid funds to the Settlement Administrator and the Company received its $1,151,000 share of the first installment of the Settlement on July 31, 2003. The second installment, totaling approximately $2,826,000 was received on March 26, 2004 and the third installment of $117,000 was received on May 12, 2004. The Company has expensed its entire share, totaling $450,000, of the costs of the litigation. The Settlement proceeds have resulted in net income of $3,997,000, after alternative minimum taxes presently estimated at $97,000. In a separate suit, in which the Company is not a defendant, the parties who objected to the Settlement have sued the managers of the Coalition alleging various claims which defendants have denied. The Coalition has held back approximately $800,000 as a litigation reserve until this matter is resolved to pay for defense of the case and winding up costs of the Coalition. The Company expects that this matter will be resolved in favor of the defendants, and that the Company will ultimately receive an additional $100,000 to $125,000 from the holdback in addition to the three installments described above. Visa Litigation - --------------- In May of 2003 the Company's 71%-owned subsidiary, starpay.com, l.l.c., joined with VIMachine, Inc. in filing a suit in the U. S. District Court for the Northern District of Texas, Dallas Division against Visa International Service Association and Visa USA, Inc., both d/b/a Visa (Case No. CIV:3-03-CV0976-L). VIMachine is the holder of a U.S. Patent (the "VIMachine Patent") that covers, among other things, an improved method of authenticating the cardholder involved in an Internet payment transaction. On July 25, 2003, the Plaintiffs filed, with the express written consent of the Defendants, an Amended Complaint. The suit as amended seeks damages and injunctive relief (i) related to Visa's infringement of the VIMachine Patent; (ii) related to Visa's breach of certain confidentiality agreements express or implied; (iii) for alleged fraud on the Patent Office based on Visa's pending patent application; and (iv) under California's common law and statutory doctrines of unfair trade practices, misappropriation and/or theft of starpay's intellectual property and/or trade secrets. In addition, Plaintiffs are seeking attorney fees and costs related to the foregoing claims. In August of 2003 the Defendants filed a motion to dismiss the second, third and fourth claims. Despite objections to such motion by the Plaintiffs, the Judge on February 11, 2004, granted Defendants' motion to dismiss the second and third causes of action, and denied the motion insofar as it sought to dismiss the fourth cause of action. Accordingly, Plaintiffs' fourth claim (misappropriation and/or theft of intellectual property and/or trade secrets) will continue to move forward. On February 23, 2004, Defendants filed an Answer to Plaintiffs' Amended Complaint. In such filing Visa denied each allegation relevant to claim four. Visa asked that the VIMachine Patent be declared invalid, and, even if it is found valid, Visa asked that they be found not to infringe the VIMachine Patent. Visa asked for other related relief based on these two allegations. Item 2. Changes in Securities. Effective January 1, 2003, each share of Beard preferred stock became convertible into Beard common stock. Each share of Beard preferred was convertible into 10.35093926 shares on August 9, 2004 (total of 288,149 shares). The conversion ratio will be adjusted as additional warrants are issued or as additional shares of stock are credited to the accounts of the Company's Chairman or President in the Company's 2003-2 Deferred Stock Compensation Plan. Fractional shares will not be issued, and cash will be paid in redemption thereof. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Commencing on April 29, 2004, proxies were solicited on behalf of the Board of Directors of the Company in connection with the Annual Meeting of Stockholders. (a) The annual meeting was held on June 15, 2004. (b) The business of the meeting included the election of Harlon Martin, Jr. and Herb Mee, Jr. to serve as directors for three-year terms or until their successors have been elected and qualified. In addition, the following persons continue to serve as directors for terms expiring on the dates indicated or until their successors have been elected and qualified: Allan R. Hallock (2006) Ford C. Price (2006) W. M. Beard (2005) To date the preferred stockholder has not elected to fill the vacancy created by the resignation of Michael E. Carr who resigned effective February 1, 2002. The table below sets forth the voting for election of directors:
Votes Votes Votes Broker Name of Nominee For Against Withheld Abstentions Non-Votes --------------- --- ------- -------- ----------- --------- Harlon E. Martin, Jr. 2,330,633 -0- 309 -0- -0- Herb Mee, Jr. 2,330,627 -0- 315 -0- -0-
(c) At the meeting the stockholders also voted to approve the adoption of The Beard Company 2003-2 Deferred Stock Compensation Plan. The table below sets forth the voting for such proposal: Votes Votes Broker For Against Abstentions Non-Votes --- ------- ----------- --------- 1,614,151 7,506 2,911 706,374 (d) At the meeting the stockholders also voted to approve an amendment to the Certificate of Incorporation of the The Beard Company to increase the authorized common stock. The table below sets forth the voting for such proposal: Votes Votes Broker For Against Abstentions Non-Votes --- ------- ----------- --------- 2,277,856 2,799 50,287 -0- (e) At the meeting the stockholders also voted to approve an amendment to the Certificate of Incorporation of the The Beard Company to reduce the par value of the authorized common stock by one-half and to effect a two-for-one split of the common stock. The table below sets forth the voting for such proposal: Votes Votes Broker For Against Abstentions Non-Votes --- ------- ----------- --------- 2,279,856 50,036 1,050 -0- Item 5. Other Information. Not applicable. 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: 3.1 Certificate of Incorporation of The New Beard Company as filed with the Secretary of State of Oklahoma on September 20, 2000. (This Exhibit has been previously filed as Exhibit 3(ii) to Registrant's Form 10-Q for the period ended September 30, 2000, filed on November 20, 2000, and same is incorporated herein by reference). 3.2 Registrant's By-Laws as currently in effect. (This Exhibit has been previously filed as Exhibit 3(ii) to Registrant's Form 10-K for the period ended December 31, 1997, filed on March 31, 1998, and same is incorporated herein by reference). 4 Instruments defining the rights of security holders: 4.1 Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant. (This Exhibit has been previously filed as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to Registrant's Registration Statement on Form S-4, File No. 33-66598, and same is incorporated herein by reference). 4.2 Settlement Agreement, with Certificate of Amendment attached thereto, by and among Registrant, Beard Oil, New York Life Insurance Company, New York Life Insurance and Annuity Company, John Hancock Mutual Life Insurance Company, Memorial Drive Trust and Sensor Oil & Gas, Inc., dated as of April 13, 1995. (This Exhibit has been previously filed as Exhibit 4(g) to Registrant's Form 10-K for the period ended December 31, 1994 and same is incorporated herein by reference). 10 Material Contracts 10.1 Form of 10% Participating Note due November 30, 2006. 10.2 Form of 2004 Warrant. 10.3 Form of 2004 Production Payment. 31 Rule 13a-14(a)/15d-14(a) Certifications: 31.1 Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a). 31.2 Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a). 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) Five reports on Form 8-K were filed by the Company during the quarter for which this report is filed. An 8-K filed on May 18, 2004 included a news release announcing the first quarter financial results and the commencement of a $1,200,000 note and warrant offering. An 8-K filed on June 9, 2004 included a news release announcing the placement of $1,200,000 of Participating Notes with Warrants. An 8-K filed on June 17, 2004 reported on the items adopted and information disseminated at the Annual Stockholders Meeting held on June 15, 2004. An 8-K filed on July 16, 2004 included a news release concerning the execution of a services agreement with a major Michigan energy company. An 8-K was filed on July 20, 2004 announcing a 2-for-1 stock split effective August 6, 2004. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) THE BEARD COMPANY /s/HERB MEE, JR. (Date) August 13, 2004 ___________________________________ Herb Mee, Jr., President and Chief Financial Officer /s/JACK A. MARTINE (Date) August 13, 2004 ___________________________________ Jack A. Martine, Controller and Chief Accounting Officer EXHIBIT INDEX Exhibit No. Description Method of Filing --- ----------- ---------------- 3.1 Certificate of Incorporation of The New Incorporated herein by reference Beard Company as filed with the Secretary of State of Oklahoma on September 20, 2000. 3.2 Registrant's By-Laws as currently in Incorporated herein by reference effect. 4.1 Certificate of Designations, Powers, Incorporated herein by reference Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant. 4.2 Settlement Agreement, with Certificate of Incorporated herein by reference Amendment attached thereto, by and among Registrant, Beard Oil, New York Life Insurance Company, New York Life Insurance and Annuity Company, John Hancock Mutual Life Insurance Company, Memorial Drive Trust and Sensor Oil & Gas, Inc., dated as of April 13, 1995. 10.1 Form of 10% Participating Note due Filed herewith electronically November 30, 2006. 10.2 Form of 2004 Warrant. Filed herewith electronically 10.3 Form of 2004 Production Payment. Filed herewith electronically 31.1 Chief Executive Officer Certification Filed herewith electronically required by Rule 13a-14(a) or Rule 15d-14(a). 31.2 Chief Financial Officer Certification Filed herewith electronically required by Rule 13a-14(a) or Rule 15d-14(a). EX-10.1 2 bcexh10-1.txt Exhibit 10.1 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER ANY FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS AND UNTIL THE HOLDER HEREOF PROVIDES (i) INFORMATION REASONABLY NECESSARY TO CONFIRM THAT SUCH REGISTRATION IS NOT REQUIRED OR (ii) AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. PROMISSORY NOTE $___,000.00 May ___, 2004 FOR VALUE RECEIVED, the undersigned, THE BEARD COMPANY, an Oklahoma corporation (the "Borrower"), promises to pay to the order of ___________________ _____________ (the payee, his successors and assigns are hereinafter called the "Lender"), at Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112, or at such other place as may be designated in writing by the Lender, the principal sum of ___________ THOUSAND DOLLARS ($___,000.00), together with interest thereon at the rate hereinafter stated: Prior to Default the unpaid principal balance of this Note will bear interest at the per annum rate equal to the Wall Street Journal Prime Rate (the "Index") plus four percent (4%), with a Floor of ten percent (10%). Accrued interest will be due and payable on November 30, 2004. Commencing February 28, 2005, and continuing on the last day of each May, August, November and February thereafter, until this Note is paid in full, this Note shall be paid in seven equal payments of ______________________________________ ($__,___.__) each. All unpaid principal and interest shall be due and payable on November 30, 2006. All interest will be computed for the actual number of days elapsed at a per diem charge based on a 360-day year consisting of twelve (12) months of thirty (30) days. The entire unpaid principal balance of this Note plus all accrued and unpaid interest thereon will be due and payable on the Maturity Date. 1. Allocation of Payments. All payments on this Note will be applied first to the payment of accrued interest and the balance will be applied in reduction of the principal balance hereof provided that no payment will be applied to this Note until received by the Lender in collected funds. 2. Payments. If any payment under this Note becomes due and payable on a day other than a business day, the maturity thereof will be extended to the next succeeding business day and such extension of time will in such case be included in the computation of payments of interest. 3. Prepayment. The Borrower will have the right to prepay this Note in whole or in part at any time and from time to time without premium or penalty. 4. Expenses. The Borrower 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 Lender's rights hereunder or under any instrument securing payment of this Note, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. 5. Default Interest. Any sum not paid when due, by acceleration or otherwise, will bear interest at the per annum rate equal to thirteen percent (13%) and such interest which has accrued will be paid at the time of and as a condition precedent to curing any Default hereunder. 6. Governing Law. This Note is to be construed according to the internal laws of the State of Oklahoma. 7. Default. On the breach of any provision of this Note, at the option of the Lender, the entire indebtedness evidenced by this Note will become immediately due, payable and collectible then or thereafter as the Lender might elect, regardless of the stated date of maturity hereof. Failure by the Lender to exercise such option will not constitute a waiver of the right to exercise the same in the event of any subsequent default. 8. Other Parties. 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 and notice of nonpayment. Said parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the security for the payment hereof or release of any party liable for the 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. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. THE BEARD COMPANY, an Oklahoma corporation By: Herb Mee, Jr., President (the "Borrower") EX-10.2 3 exh10-2.txt Exhibit 10.2 THE WARRANTS AND THE ORDINARY SHARES TO BE ISSUED PURSUANT TO THIS WARRANT HAVE NOT BEEN REGISTERED UNDER ANY FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS AND UNTIL THE HOLDER HEREOF PROVIDES (i) INFORMATION REASONABLY NECESSARY TO CONFIRM THAT SUCH REGISTRATION IS NOT REQUIRED OR (ii) AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT NO. 2004-_____ June ___, 2004 For the Purchase of _______ shares of Common Stock of The Beard Company FOR VALUE RECEIVED, THE BEARD COMPANY, an Oklahoma corporation (the "Corporation"), hereby grants to the ____________________________________, or its registered assigns (collectively the "Holder"), the right (the "Warrants") to purchase at any time before the Expiration Date (as hereafter defined) _________________________ (_________) duly authorized, validly issued, fully paid and non-assessable shares (the "Warrant Shares") of the Corporation's Common Stock, $.001333 par value (the "Common Stock"), at the Exercise Price (as hereafter defined) and on the terms and conditions herein set forth. The number of Warrant Shares and the Exercise Price will be subject to adjustment as provided in this Warrant. The Warrants are being issued pursuant to the terms of the 10% Participating Notes due November 30, 2006 of the Corporation (the "Notes"). This Warrant is issued subject to the following terms and conditions: 1. Exercise of Warrant. The Warrants are exercisable at the option of the Holder in whole or in part at any time prior to the Expiration Date by the delivery to the Corporation of written notice of the exercise of the Warrants specifying the number of Warrant Shares to be acquired, surrender of this Warrant to the Corporation and satisfaction of the Exercise Price for the Warrant Shares to be acquired through such exercise. The Warrants will be deemed exercised immediately prior to the close of business on the day that all of the foregoing requirements for the exercise of the Warrants are completed and the person entitled to receive the Warrant Shares will be treated for all purposes as the holder of record of such Warrant Shares at such time including, without implied limitation, the right to vote, receive dividends and to receive distributions for which the record date falls on or after such date. As promptly as possible after such date (in any event within five (5) business days) the Corporation will deliver to the Holder a stock certificate evidencing the Warrant Shares covered by the exercise. In the case of an exercise for less than all the Warrant Shares the Corporation will cancel this Warrant on the surrender hereof and will execute and deliver a new Warrant of like tenor for the balance of the unexercised Warrant Shares within such five (5) day period. If an exercise of all or part of the Warrants is to be made in connection with a registered public offering or a transaction described in paragraph 10 of this Warrant, the exercise of the Warrants may, at the election of the Holder, be conditioned on the consummation of the public offering or other transaction under paragraph 10 of this Warrant. In that case the exercise will not be deemed to be effective until the consummation of the specified condition. 2. Term. The Warrants may be exercised in full or in part at any time on or before 11:59 p.m. Oklahoma City, Oklahoma, time on June ___, 2008 (the "Expiration Date"). To the extent not exercised prior to the Expiration Date, the Warrants and all of the rights of the Holder hereunder will expire and terminate on such date without any action or notice by the Corporation. 3. Exercise Price. On the exercise of the Warrants, the Holder agrees to pay to the Corporation for the Warrant Shares purchased by the Holder pursuant to the terms of this Warrant an amount (the "Exercise Price") multiplied by the number of Warrant Shares at the time of determination. The Exercise Price is $0.45 per Warrant Share (as hereafter defined). The Exercise Price is subject to adjustment pursuant to the terms of this Warrant. The Exercise Price shall be paid in lawful money of the United States of America. 4. Representations, Warranties and Covenants. The Corporation represents to and warrants, covenants and agrees with the Holder as follows: 4.1 Reservation of Shares. At all times while the Warrants are outstanding the Corporation will reserve out of the Corporation's authorized but unissued shares of Common Stock, free from preemptive rights and solely for the purpose of effecting the exercise of the Warrants, a sufficient number of shares of Common Stock to provide for the exercise of the Warrants and all other options, warrants and convertible securities of the Corporation. The Corporation will take all such actions necessary to assure that all such Warrant Shares may be issued without violation of any applicable law, governmental regulation or requirements of any domestic securities exchange or automated quotation system on which the shares of Common Stock are listed or quoted (except for official notice of issuance, which will be immediately delivered by the Corporation upon each such issuance). The Corporation will take all necessary actions to assure that all of the Warrant Shares are authorized, approved for and listed on any national securities exchange or quotation system on which the Corporation's shares of Common Stock are listed or quoted. The Corporation will not take any action that would cause the number of authorized but unissued shares of Common Stock to be less than the number of shares of Common Stock required to be reserved for issuance on exercise of the Warrants. 4.2 Valid Issuance. All Warrant Shares that may be issued on exercise of the Warrants will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, charges and encumbrances on issuance by the Corporation. The Corporation will not take any action or fail to take any action that will cause a contrary result (including, without limitation, any action that would cause the Exercise Price then in effect to be less than the par value of the Common Stock). 4.3 Cooperation. The Corporation will: (a) not close its books against the transfer of the Warrants or of any Warrant Shares in any manner which interferes with the timely exercise of the Warrants; (b) assist and cooperate with the Holder should the Holder be required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of the Warrants (including, without limitation, making any filings required to be made by the Corporation). 4.4 Authority. The Corporation has taken all necessary action to authorize the execution and delivery of this Warrant and the issuance of the Warrant Shares on the exercise of the Warrants. This Warrant is a valid, binding and enforceable obligation of the Corporation subject to applicable bankruptcy, insolvency, fraudulent conveyance, moratorium and similar laws now or hereafter in effect relating to creditors' rights and remedies generally. The execution, delivery and performance of this Warrant will not violate: (a) any provision of the organizational documents or charter of the Corporation; (b) any order, writ, injunction or decree of any court, administrative agency or governmental body applicable to the Corporation or the Common Stock; or (c) any contract, lease, note, bond, mortgage or other agreement to which the Corporation is a party, by which the Corporation is bound or to which any of the Corporation's assets are subject. 4.5 Capitalization. As of the date of this Warrant: the Corporation's authorized capital stock consists of seven million five hundred thousand (7,500,000) shares of Common Stock, par value $0.001333 per share, and five million (5,000,000) shares of preferred stock, par value $1.00 per share. As of the date of this Warrant the only shares of capital stock issued and outstanding are ___________ fully paid and non-assessable shares of Common Stock and _________ shares of Preferred Stock. 4.6 Office. The Corporation will maintain an office for the purposes specified in this Warrant (the "Warrant Office"). The Warrant Office will initially be the Corporation's offices at Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112 and may subsequently be any other office of the Corporation or any transfer agent for the Common Stock in the continental United States as to which written notice has previously been given to the Holder. The Corporation will maintain at the Warrant Office a register for the Warrants in which the Corporation will record the name and address of the person in whose name this Warrant has been issued. The Holder will be able to take any action permitted in this Warrant including, without implied limitation, the exercise or transfer of the Warrants. 5. Restrictive Legend. The Warrants are being acquired and any Warrant Shares to be acquired by the Holder pursuant to this Warrant (collectively, "Securities") will be acquired for investment for the Holder's own account and not with a view to, or for resale in connection with, any distribution of such Securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). The Securities will not be sold, transferred or otherwise disposed of without registration under the Securities Act and state securities laws or qualification for exemptions therefrom. The Holder agrees that each certificate evidencing the Warrant Shares may be inscribed with a legend to the foregoing effect, which legend will be as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL SUCH SHARES ARE FIRST REGISTERED UNDER THE SECURITIES ACT OF 1933, ALL APPLICABLE STATE SECURITIES LAWS AND ALL RULES AND REGULATIONS PROMULGATED THEREUNDER OR UNLESS AND UNTIL THE HOLDER HEREOF PROVIDES (i) INFORMATION REASONABLY NECESSARY TO CONFIRM THAT SUCH REGISTRATION IS NOT REQUIRED OR (ii) AN OPINION OF COUNSEL TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. The Holder agrees that the Corporation may place a stop transfer order with the Corporation's transfer agent, if any, with respect to any noncomplying transfer of the certificates representing any Warrant Shares, which stop transfer order will be removed by the Corporation on compliance with the foregoing. 6. Registration Rights. The Holder and any other holder of Warrant Shares will have the registration rights provided for in Exhibit A hereto. 7. Anti-Dilution Adjustments. In order to prevent dilution of the rights granted with respect to the Warrants, the Exercise Price and the number of Warrant Shares obtainable on the exercise of a Warrant are subject to adjustment from time to time as follows: 7.1 Issuance of Common Stock. If and whenever on or after the date of this Warrant the Corporation issues or sells, or in accordance with paragraph 7.2 of this Warrant is deemed to have issued or sold, any shares of Common Stock for a consideration per share less than the Exercise Price in effect immediately prior to such time, then immediately on such issuance or sale the Exercise Price will be reduced to the new Exercise Price determined by dividing: 7.1.1 the sum of (a) the product derived by multiplying the Exercise Price in effect immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding (as hereafter defined) immediately prior to such issue or sale, plus (b) the consideration, if any, received by the Corporation on such issuance or sale, divided by 7.1.2 the number of shares of Common Stock Deemed Outstanding immediately after such issuance or sale. 7.2 Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under paragraph 7.1 of this Warrant, the following will be applicable: 7.2.1 Issuance of Rights or Options. If the Corporation in any manner grants, issues or sells any Options (as hereafter defined), other than the Corporation's employee or director benefit plans, and the price per share for which shares of Common Stock are issuable on the exercise of such Options (or on the conversion or exchange of any Convertible Securities (as hereafter defined) issuable on the exercise of such Options) is less than the Exercise Price in effect immediately prior to the time of the grant, issuance or sale of such Options, then the total maximum number of shares of Common Stock issuable on the exercise of such Options (or on the conversion or exchange of the total maximum amount of such Convertible Securities issuable on the exercise of such Options) will be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting or sale of such Options for such price per share. For purposes of this paragraph, the "price per share for which shares of Common Stock are issuable on exercise of such Options or on the conversion or exchange of any Convertible Securities" is determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation on the exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation on the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable on exercise of such Options or on the conversion or exchange of all such Convertible Securities issuable on the exercise of such Options. No further adjustment of the Exercise Price will be made on the actual issuance of such shares of Common Stock or of such Convertible Securities on the exercise of such Options or on the actual issuance of shares of Common Stock as a result of the conversion or exchange of such Convertible Securities. 7.2.2 Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which shares of Common Stock are issuable on conversion or exchange thereof is less than the Exercise Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable on conversion or exchange of such Convertible Securities will be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issue or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which shares of Common Stock are issuable on conversion or exchange thereof" is determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation on the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable on the conversion or exchange of all such Convertible Securities. No further adjustment of the Exercise Price will be made on the actual issue of such shares of Common Stock on conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made on exercise of any Options for which adjustments of the Exercise Price had been or are to be made pursuant to other provisions of this paragraph 7.2, no further adjustment of the Exercise Price will be made by reason of such issue or sale. 7.2.3 Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable on the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for shares of Common Stock changes at any time, the Exercise Price in effect at the time of such change will be adjusted immediately to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of shares of Common Stock issuable hereunder will be correspondingly adjusted. For purposes of this paragraph 7.2, if the terms of any Option or Convertible Security which was outstanding as of the date of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the shares of Common Stock deemed issuable on exercise, conversion or exchange thereof will be deemed to have been issued as of the date of such change. Notwithstanding the foregoing no such change will at any time cause the Exercise Price hereunder to be increased. 7.2.4 Expired Options and Securities. On the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities without the exercise of such Option or right, the Exercise Price then in effect and the number of shares of Common Stock acquirable hereunder will be adjusted immediately to the Exercise Price and the number of shares which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. For purposes of this paragraph 7.2, the expiration or termination of any Option or Convertible Security which was outstanding on or before the date of execution of this Warrant will not cause the Exercise Price hereunder to be adjusted unless, and only to the extent that, a change in the terms of such Option or Convertible Security caused it to be deemed to have been issued after the date of this Warrant. 7.2.5 Calculation of Consideration Received. If any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the amount received by the Corporation therefor. In case any shares of Common Stock, Options or Convertible Securities are issued or sold for consideration other than cash, the amount of the consideration other than cash received by the Corporation will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation will be the Current Market Price thereof as of the date of receipt. In case any shares of Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving entity the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such shares of Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined at the reasonable discretion of the board of directors of the Corporation consistent with the value assigned for generally accepted accounting principles for purposes of financial reporting. Notice of such determination will be given to the Holder. 7.2.6 Integrated Transactions. In case any Option or Convertible Security is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Options or Convertible Security by the parties thereto, the Options or Convertible Security will be deemed to have been issued for consideration determined at the reasonable discretion of the board of directors of the Corporation consistent with the value assigned for purposes of generally accepted accounting principles. Notice of such determination will be given to the Holder. 7.2.7 Treasury Shares. The number of shares of Common Stock outstanding at any given time will not include shares of Common Stock owned or held by or for the account of the Corporation or any subsidiary, and any issuance or disposition of any shares of Common Stock so owned or held will be considered an issuance or sale of shares of Common Stock. 7.2.8 Record Date. If the Corporation takes a record of the holders of shares of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in shares of Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase shares of Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold on the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 7.3 Stock Splits and Reverse Splits. In the event that the Corporation at any time after the date of this Warrant subdivides its outstanding shares of Common Stock into a greater number of shares (by stock split, stock dividend, recapitalization or otherwise), the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares purchasable on the exercise of the Warrants immediately prior to such subdivision will be proportionately increased. Conversely, in the event that the outstanding shares of Common Stock at any time are combined into a smaller number of shares (by reverse stock split or otherwise), the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares purchasable on the exercise of the Warrants immediately prior to such combination will be proportionately reduced. 7.4 Certain Events. If any event occurs of the type contemplated by the provisions of this paragraph 7 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features, other than the Corporation's employee or director benefit plans), then the Corporation's board of directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock obtainable on exercise the Warrants so as to protect the rights of the holders of the Warrants. Notwithstanding anything herein to the contrary, no such adjustment will increase the Exercise Price or decrease the number of shares of Common Stock as otherwise determined pursuant to this paragraph 7. 7.5 Notice of Adjustment. Whenever the Exercise Price or the number of Warrant Shares issuable on the exercise of the Warrants will be adjusted as herein provided, or the rights of the Holder hereof will change by reason of other events specified herein, the Corporation will compute the adjusted Exercise Price and the adjusted number of Warrant Shares in accordance with the provisions hereof and will prepare an Officer's Certificate setting forth the adjusted Exercise Price and the adjusted number of Warrant Shares issuable on the exercise of the Warrants or specifying the other shares of stock, securities or assets receivable as a result of such change in rights, and showing in reasonable detail the facts and calculations on which such adjustments or other changes are based. The Corporation will promptly cause to be mailed to the Holder copies of such Officer's Certificate together with a notice stating that the Exercise Price and the number of Warrant Shares purchasable on exercise of the Warrants have been adjusted and setting forth the adjusted Exercise Price and the adjusted number of Warrant Shares purchasable on the exercise of the Warrants. 7.6 Exceptions to Anti-Dilution Adjustment. Notwithstanding anything to the contrary contained in this Warrant, there will be no adjustment in the Exercise Price or the number of Warrant Shares obtainable on exercise of the Warrants as a consequence of the issuance by the Corporation of: (a) any option, warrant, convertible security or other right to acquire shares of Common Stock outstanding or in effect as of the date of this Warrant and not amended after the date of this Warrant; (b) any options, stock purchase rights or other rights to acquire shares of Common Stock of the Corporation on exercise of options granted or that may be granted under the Corporation's compensatory stock option plans at an exercise price no less than the Current Market Price on the date of issuance; or (c) the issuance of shares of Common Stock as a result of the exercise of any of the foregoing. 7.7 Definitions. For purposes of this Warrant the following terms will have the designated meanings: (a) "shares of Common Stock Deemed Outstanding" means at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to paragraph 7 hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time; (b) "Convertible Securities" means any stock or securities (directly or indirectly) convertible into or exchangeable for shares of Common Stock; and (c) "Options" means any rights or options to subscribe for or purchase shares of Common Stock or Convertible Securities. 7.8 Current Market Price. For purposes of this Warrant the "Current Market Price" means: (a) with respect to a security which is traded on an organized national exchange or market the average of the last bid and asked prices as quoted on the applicable exchange or market for the immediately preceding twenty (20) trading days; and (b) if the security is not traded on such an organized exchange or market, the price per share of the security as determined in good faith by the Corporation's board of directors and set forth in a notice of such valuation to the Holder. 8. Reorganizations and Asset Sales. If any recapitalization, reorganization or reclassification of the capital stock of the Corporation, or any consolidation, merger or share exchange of the Corporation with another person, or the sale, transfer or other disposition of all or substantially all of its assets to another person will be effected in such a way that a holder of shares of Common Stock of the Corporation will be entitled to receive capital stock, securities or assets with respect to or in exchange for shares of Common Stock, then the following provisions will apply: 8.1 Replacement Instrument. As a condition of such recapitalization, reorganization, reclassification, consolidation, merger, share exchange, sale, transfer or other disposition (except as otherwise provided below in paragraph 8.2) lawful and adequate provisions in form and substance reasonably satisfactory to the holders of a majority of the Warrants will be made whereby the holders of Warrants will thereafter have the right to purchase and receive on the terms and conditions specified in this Warrant and in lieu of or addition to (as the case may be) the Warrant Shares immediately theretofore receivable on the exercise of the rights represented hereby, such shares of capital stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such shares of Common Stock equal to the number of Warrant Shares immediately theretofore so receivable had such recapitalization, reorganization, reclassification, consolidation, merger, share exchange or sale not taken place. In any such case appropriate provision (in form and substance reasonably satisfactory to the holders of majority of the Warrants) will be made with respect to the rights and interests of the holders of the Warrants to the end that the provisions hereof (including, without limitation, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Exercise Price to the value for the shares of Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Common Stock acquirable and receivable on exercise of the Warrants, if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation, merger or sale) will thereafter be applicable, as nearly as possible, in relation to any shares of capital stock, securities or assets thereafter deliverable on the exercise of the Warrants. 8.2 Assumption. The Corporation will not effect any such consolidation, merger, share exchange, sale, transfer or other disposition unless prior to or simultaneously with the consummation thereof the successor person (if other than the Corporation) resulting from such consolidation, share exchange or merger or the person purchasing or otherwise acquiring such assets will have assumed by written instrument executed and mailed or delivered to the Holder hereof at the last address of the Holder appearing on the books of the Corporation, (a) the obligation to deliver to the Holder such shares of capital stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to receive, and (b) all other liabilities and obligations of the Corporation hereunder. The foregoing will be performed by issuing a new warrant identical to the terms of this Warrant revised to reflect the new parties thereto, a provision indicating the replacement nature of the new warrant and any modifications in Exercise Price and number of shares of stock or equity interests obtainable on the exercise of the new warrant as provided herein. 9. Notices to Holder. If at any time the Corporation proposes to: 9.1 declare any dividend on its shares of Common Stock payable in capital stock or make any dividend or other distribution (including cash dividends) to the holders of the shares of Common Stock; 9.2 offer for subscription pro rata to all of the holders of the shares of Common Stock any additional shares of capital stock of any class or other rights other than the Series A Notes or Series A Warrants; 9.3 effect any capital reorganization, or reclassification of the capital stock of the Corporation, or consolidation, merger or share exchange of the Corporation with another person, or sale, transfer or other disposition of all or substantially all of its assets; or 9.4 effect a voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then, as a condition to taking any one or more of the foregoing actions and in addition to any other obligation under this Warrant, the Corporation will give the Holder: (a) at least thirty (30) days (but not more than 90 days) prior written notice of the date on which the books of the Corporation will close or a record will be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of such issuance, recapitalization, reorganization, reclassification, consolidation, merger, share exchange, sale, transfer, disposition, dissolution, liquidation or winding up, and (b) in the case of any such issuance, recapitalization, reorganization, reclassification, consolidation, merger, share exchange, sale, transfer, disposition, dissolution, liquidation or winding up, at least thirty (30) days (but not more than 90 days) prior written notice of the date when the same will take place. Any notice under foregoing clause (a) will specify the date on which the holders of shares of Common Stock will be entitled to any such dividend, distribution or subscription rights, and any notice under foregoing clause (b) will specify the date on which the holders of shares of Common Stock will be entitled to exchange their shares of Common Stock, as the case may be, for securities or other property deliverable on such reorganization, reclassification, consolidation, merger, share exchange, sale, transfer, disposition, dissolution, liquidation or winding up. 10. Fractional Shares. Fractional shares will not be issued on the exercise of the Warrants. If the Holder would be entitled to receive a fractional share, the Corporation will pay to the Holder an amount equal to the fractional share multiplied by the Current Market Price for one share of shares of Common Stock less the Exercise Price. 11. Fully Paid Stock; Taxes. The Corporation covenants and agrees that the shares of stock represented by each and every certificate for its shares of Common Stock to be delivered on the exercise of the Warrants will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free from all taxes, liens, charges and encumbrances. The Corporation agrees to pay when due and payable any and all federal and state taxes (including, without limitation, all documentary, stamp, transfer or other transactional taxes but excluding income taxes) which may be payable in respect of the Warrants, any Warrant Shares or certificates therefor on the exercise of the Warrants. 12. Notices. Any notice, demand or communication required or permitted to be given by any provision of this Warrant will be in writing and will be deemed to have been given and received when delivered personally or by telefacsimile to the party designated to receive such notice, or on the date following the day sent by overnight courier, or on the third (3rd) business day after the same is sent by certified mail, postage and charges prepaid, directed to the following addresses or to such other or additional addresses in the continental United States of America as any party might designate by written notice to the other parties: To the Corporation: Mr. Herb Mee, Jr. President The Beard Company Suite 320 5600 North May Avenue Oklahoma City, Oklahoma 73112 Phone: (405) 842-2333 Fax: (405) 842-9901 To the Holder: 13. Assignment. Subject to conditions set forth herein, this Warrant and all rights hereunder are transferable, in whole or in part, on the books of the Corporation to be maintained for such purpose, on surrender of this Warrant at the office of the Corporation maintained for such purpose, together with a written assignment of this Warrant duly executed by the Holder and payment of funds sufficient to pay any stock transfer taxes payable on the making of such transfer. On such surrender and payment, the Corporation will, subject to conditions set forth herein, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and this Warrant will promptly be canceled. The conditions to transferability specified in this Warrant are intended to ensure compliance with the provisions of the Securities Act and applicable state securities laws in respect of the transfer of any Warrant or any Warrant Shares and are to be strictly construed. 14. Governing Law. This Warrant is being delivered and is intended to be performed in Oklahoma and will be construed and enforced in accordance with, and the rights of the parties will be governed by, the law of such state. 15. Headings. The headings of the paragraphs of this Warrant are inserted for convenience only and will not be deemed to constitute a part of this Warrant. 16. Lost, Stolen, Destroyed or Mutilated Warrant. In case this Warrant is mutilated, lost, stolen or destroyed, the Corporation agrees to issue a new Warrant of like date, tenor and denomination and deliver the same in exchange and substitution for and on surrender and cancellation of this mutilated Warrant, or in lieu of this Warrant being lost, stolen or destroyed, on receipt of evidence reasonably satisfactory to the Corporation of the loss, theft or destruction of this Warrant and on receipt of indemnity satisfactory to the Corporation. 17. Consent to Amendments; Waivers. The provisions of this Warrant may be amended or waived at any time only by the written agreement of the Corporation and the Holder. Any waiver, permit, consent or approval of any kind or character on the part of the Holder of any provisions or conditions of this Warrant must be made in writing and will be effective only to the extent specifically set forth in such writing. No course of dealing between the Corporation and the Holder and no delay in exercising any right, remedy, or power conferred hereby or now or hereafter existing at law or under equity, by statute or otherwise, will operate as a waiver of or otherwise prejudice any such right, power or remedy. 18. Warrant Holder Not Shareholder. This Warrant does not confer on the Holder hereof any right to vote or to consent as a shareholder of the Corporation, as such, in respect of any matters whatsoever, or any other rights or liabilities as a shareholder, prior to the exercise hereof as hereinbefore provided. 19. Severability. Should any part of this Warrant for any reason be declared invalid, such decision will not affect the validity of any remaining portion, which remaining portion will remain in full force and effect as if this Warrant had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed and accepted the remaining portion of this Warrant without including therein any such part, parts or portion which may, for any reason, be hereafter declared invalid. IN WITNESS WHEREOF, this Warrant has been executed effective the ____ day of June, 2004. (the "Corporation") THE BEARD COMPANY, an Oklahoma corporation By______________________________________ Herb Mee, Jr., President (the "Holder") By______________________________________ EX-10.3 4 bcexh10-3.txt Exhibit 10.3 Production Payment Amount: $___,___.__ No. 2004-__ PRODUCTION PAYMENT May ___, 2004 FOR VALUE RECEIVED, the undersigned, THE BEARD COMPANY, an Oklahoma corporation (the "Company"), promises to pay to the order of ____________________________________ (the "Payee"), at Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112, or at such other place as may be designated in writing by the Payee, a bonus or Production Payment in the sum of ____________________________________________ DOLLARS ($___,___.__). Such amount shall be paid, without interest, at the Maturity on November 30, 2006, of that certain Promissory Note, in the amount of $___,000.00, of concurrent date held by the Payee. Such Production Payment shall represent a bonus for Payee's participation in the Offering as more fully described in the Company's $1,200,000 Private Placement Memorandum dated May 13, 2004. IN WITNESS WHEREOF, the Company has executed this instrument effective the date first above written. THE BEARD COMPANY, an Oklahoma corporation By: Herb Mee, Jr., President (the "Company") EX-31 5 bcex311form10q-081604.txt Exhibit 31.1 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision; 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. THE BEARD COMPANY /s/ WILLIAM M. BEARD (Date) August 13, 2004 _______________________________________ William M. Beard, Chairman of the Board and Chief Executive Officer EX-31 6 bcex312form10q-081604.txt Exhibit 31.2 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision; 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. THE BEARD COMPANY /s/ HERB MEE, JR. (Date) August 13, 2004 ___________________________________ Herb Mee, Jr., President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----