-----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, ESPb8ki5U68CTNEAKVvVcyDKFDxJ0BvPv8k5icWgTH335k8IVlggZmgeoYpJwVjq nfqoJU08V41pbOm8ZMOFeQ== 0000909334-06-000129.txt : 20060417 0000909334-06-000129.hdr.sgml : 20060417 20060417170557 ACCESSION NUMBER: 0000909334-06-000129 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20060417 DATE AS OF CHANGE: 20060417 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12396 FILM NUMBER: 06762919 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/A 1 bcform10q-051605.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q/A (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2005 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-12396 THE BEARD COMPANY ----------------- (Exact name of registrant as specified in its charter) Oklahoma 73-0970298 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Enterprise Plaza, Suite 320 5600 North May Avenue Oklahoma City, Oklahoma 73112 ----------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (405) 842-2333 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the registrant's classes of common stock as of May 15, 2005. Common Stock $.0006665 par value - 5,255,315 THE BEARD COMPANY INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements............................................. Balance Sheets - March 31, 2005 (Unaudited) and December 31, 2004................................................... Statements of Operations - Three Months ended March 31, 2005 and 2004 (Unaudited)................................................ Statements of Shareholders' Equity (Deficiency) - Year ended December 31, 2004 and Three Months ended March 31, 2005 (Unaudited). Statements of Cash Flows - Three Months ended March 31, 2005 and 2004 (Unaudited)................................. Notes to Financial Statements (Unaudited).............................. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... Item 3. Quantitative and Qualitative Disclosures About Market Risk....... Item 4. Controls and Procedures.......................................... PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................ Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... Item 3. Defaults Upon Senior Securities.................................. Item 4. Submission of Matters to a Vote of Security Holders.............. Item 5. Other Information................................................ Item 6. Exhibits......................................................... Signatures................................................................. PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE BEARD COMPANY AND SUBSIDIARIES Balance Sheets March 31, 2005 (Unaudited) and December 31, 2004
March 31, December 31, Assets 2005 2004 ------ ------------------- ------------------- (Restated - See Note 1) (Restated - See Note 1) Current assets: Cash and cash equivalents $ 965,000 $ 127,000 Accounts receivable, less allowance for doubtful receivables of $97,000 in 2005 and 2004 180,000 167,000 Prepaid expenses and other assets 24,000 32,000 Current maturities of notes receivable 6,000 - Assets of discontinued operations held for resale 103,000 40,000 ------------------- ------------------- Total current assets 1,278,000 366,000 ------------------- ------------------- Note receivable, less allowance for doubtful receivable of $30,000 in 2005 and 2004 19,000 - Restricted certificate of deposit 50,000 50,000 Investments and other assets, net of impairment of $17,945,000 in 2005 and $17,064,000 in 2004 1,563,000 1,560,000 Property, plant and equipment, at cost 2,192,000 2,090,000 Less accumulated depreciation, depletion and amortization 1,447,000 1,457,000 ------------------- ------------------- Net property, plant and equipment 745,000 633,000 ------------------- ------------------- Intangible assets, at cost 445,000 292,000 Less accumulated amortization 200,000 189,000 ------------------- ------------------- Net intangible assets 245,000 103,000 ------------------- ------------------- $ 3,900,000 $ 2,712,000 =================== =================== Liabilities and Shareholders' Equity (Deficiency) ------------------------------------------------- Current liabilities: Trade accounts payable $ 126,000 $ 177,000 Accrued expenses 259,000 314,000 Short-term debt - related entities 92,000 200,000 Current maturities of long-term debt 109,000 241,000 Current maturities of long-term debt - related entities 284,000 333,000 Liabilities of discontinued operations held for resale 84,000 95,000 ------------------- ------------------- Total current liabilities 954,000 1,360,000 ------------------- ------------------- Long-term debt less current maturities 415,000 367,000 Long-term debt - related entities 6,553,000 4,879,000 Other long-term liabilities 305,000 250,000 Minority interest in consolidated subsidiary 20,000 - Common shareholders' equity (deficiency): Convertible preferred stock of $100 stated value; 5,000,000 shares authorized; 27,838 shares issued and outstanding 889,000 889,000 Common stock of $.0006665 par value per share; 15,000,000 shares authorized; 5,255,315 and 4,839,565 shares issued and outstanding in 2005 and 2004, respectively 4,000 3,000 Capital in excess of par value 38,364,000 38,193,000 Accumulated deficit (43,589,000) (43,214,000) Accumulated other comprehensive loss (15,000) (15,000) ------------------- ------------------- Total common shareholders' equity (deficiency) (4,347,000) (4,144,000) ------------------- ------------------- Commitments and contingencies (note 7) $ 3,900,000 $ 2,712,000 =================== ===================
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Operations (Unaudited)
For the Three Months Ended --------------------------------------- March 31, March 31, 2005 2004 ------------------ ------------------ (Restated) (Restated) (See Note 1) (See Note 1) Revenues: Coal reclamation $ - $ - Carbon dioxide 218,000 163,000 China - - e-Commerce 25,000 25,000 Other - - ------------------ ------------------ 243,000 188,000 ------------------ ------------------ Expenses: Coal reclamation 176,000 136,000 Carbon dioxide 47,000 31,000 China 124,000 134,000 e-Commerce 37,000 28,000 Selling, general and administrative 207,000 199,000 Depreciation, depletion and amortization 27,000 23,000 Other 5,000 10,000 ------------------ ------------------ 623,000 561,000 ------------------ ------------------ Operating profit (loss): Coal reclamation (178,000) (135,000) Carbon dioxide 161,000 122,000 China (124,000) (134,000) e-Commerce (13,000) (5,000) Other, primarily corporate (226,000) (221,000) ------------------ ------------------ (380,000) (373,000) Other income (expense): Interest income 5,000 1,000 Interest expense (233,000) (151,000) Equity in net earnings of unconsolidated affiliates 995,000 857,000 Impairment of investment in unconsolidated affiliate (881,000) (759,000) Gain on settlement - 2,826,000 Gain on sale of assets 21,000 3,000 Other (1,000) (7,000) Minority interest in operations of consolidated subsidiary 30,000 - ------------------ ------------------ Earnings (loss) from continuing operations before income taxes (444,000) 2,397,000 Income tax benefit (expense) (note 6) (19,000) (97,000) ------------------ ------------------ Earnings (loss) from continuing operations (463,000) 2,300,000 Earnings from discontinued operations (note 3) 88,000 3,000 ------------------ ------------------ Net earnings (loss) $ (375,000) $ 2,303,000 ================== ================== Net earnings (loss) per average common share outstanding: Basic Earnings (loss) from continuing operations $ (0.08) $ 0.47 Earnings from discontinued operations 0.01 0.00 ------------------ ------------------ Net earnings (loss) $ (0.07) $ 0.47 ================== ================== Net earnings (loss) per average common share outstanding: Diluted Earnings (loss) from continuing operations $ (0.08) $ 0.40 Earnings from discontinued operations 0.01 0.00 ------------------ ------------------ Net earnings (loss) $ (0.07) $ 0.40 ================== ================== Weighted average common shares outstanding: Basic 5,685,000 4,924,000 ================== ================== Diluted 5,685,000 5,687,000 ================== ==================
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Shareholders' Equity (Deficiency)
Total Accumulated Common Capital in Other Shareholders' Preferred Common Excess of Accumulated Comprehensive Equity Shares Stock Shares Stock Par Value Deficit Loss (Deficiency) ----------------- ------------------ ----------- ----------- ------------- --------------- Balance, December 31, 2003 27,838 $ 889,000 4,657,690 $ 3,000 $37,941,000 $(44,151,000) $(15,000) $(5,333,000) Net earnings - - - - - 937,000 - 937,000 Comprehensive income: Foreign currency translation adjustment - - - - - - - - ----------------- Comprehensive earnings - - - - - - - 937,000 ----------------- Issuance of stock for warrants exercised - - 181,875 - 50,000 - - 50,000 Reservation of shares pursuant to deferred compensation plan - - - - 202,000 - - 202,000 ----------------- ------------------ ------------ ------------ ------------- --------------- Balance, December 31, 2004 27,838 889,000 4,839,565 3,000 38,193,000 (43,214,000) (15,000) (4,144,000) Net loss (unaudited) - - - - - (375,000) - (375,000) Comprehensive loss (unaudited): Foreign currency translation adjustment (unaudited) - - - - - - - - ----------------- Comprehensive loss (unaudited) - - - - - - - (375,000) ----------------- Issuance of stock for warrants exercised (unaudited) - - 415,750 1,000 122,000 - - 123,000 Reservation of shares pursuant to deferred compensation plan (unaudited) - - - - 49,000 - - 49,000 ----------------- ------------------ ------------ ------------ ------------- --------------- Balance, March 31, 2005 (unaudited) 27,838 $ 889,000 5,255,315 $ 4,000 $38,364,000 $(43,589,000) $(15,000) $(4,347,000) ================= ================== ============ ============ ============= ===============
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Statements of Cash Flows (Unaudited)
For the Three Months Ended ----------------------------------------- March 31, 2005 March 31, 2004 ----------------------------------------- (Restated - see Note 1) (Restated - see Note 1) Operating activities: Cash received from customers $ 155,000 $ 159,000 Gain on settlement - 2,826,000 Cash paid to suppliers and employees (512,000) (539,000) Interest received 4,000 1,000 Interest paid (199,000) (559,000) Taxes paid (119,000) - Operating cash flows of discontinued operations (16,000) (38,000) ------------------ ------------------- Net cash provided by (used in) operating activities (687,000) 1,850,000 ------------------ ------------------- Investing activities: Acquisition of property, plant and equipment (130,000) (8,000) Acquisition of intangibles (149,000) - Proceeds from sale of assets 30,000 - Proceeds from sale of assets of discontinued operations 70,000 43,000 Other 219,000 30,000 ------------------ ------------------- Net cash provided by investing activities 40,000 65,000 ------------------ ------------------- Financing activities: Proceeds from term notes 90,000 125,000 Payments on line of credit and term notes (203,000) (1,242,000) Proceeds from related party debt 1,868,000 15,000 Payments on related party debt (248,000) (873,000) Proceeds from exercise of warrants 123,000 - Loan to buyer (30,000) - Capitalized costs associated with issuance of subordinated debt (114,000) - Other (1,000) - ------------------ ------------------- Net cash provided by (used in) financing activities 1,485,000 (1,975,000) ------------------ ------------------- Net increase (decrease) in cash and cash equivalents 838,000 (60,000) Cash and cash equivalents at beginning of period 127,000 216,000 ------------------ ------------------- Cash and cash equivalents at end of period $ 965,000 $ 156,000 ================== ===================
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 Three Months Ended ----------------------------------------- March 31, 2005 March 31, 2004 ----------------------------------------- (Restated - see Note 1) (Restated - see Note 1) Net earnings (loss) $ (375,000) $ 2,303,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 27,000 24,000 Gain on sale of assets (9,000) - Gain on sale of assets of discontinued operations (91,000) - Equity in operations of unconsolidated affiliates (995,000) (857,000) Impairment of investment in unconsolidated affiliate 881,000 759,000 Increase in impairment reserve - 12,000 Non cash compensation expense 16,000 50,000 Net cash used by discontinued operations offsetting accrued impairment loss (12,000) (2,000) Minority interest in consolidated subsidiary (30,000) - Increase in accounts receivable, prepaid expenses other current assets (32,000) (12,000) Decrease in accounts payable, accrued expenses and other liabilities (67,000) (427,000) ------------------ ------------------- Net cash provided by (used in) operating activities $ (687,000) $ 1,850,000 ================== ===================
See accompanying notes to financial statements. THE BEARD COMPANY AND SUBSIDIARIES Notes to Financial Statements March 31, 2005 and 2004 (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 of America 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 2004 annual report on Form 10-K/A. 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 (the "Company"). Subsidiaries and investees in which the Company does not exercise control are accounted for using the equity method. All significant intercompany transactions have been eliminated in the accompanying financial statements. 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-month period ended March 31, 2005, 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 pursuing environmental opportunities in China, focusing on the financing, construction and operation of organic chemical compound fertilizer ("OCCF") plants. The e-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage starpay's(TM) intellectual property portfolio of Internet payment methods and security technologies. All share, per share and exercise price figures referred to have been adjusted to reflect the 2-for-1 stock split effected as of the close of business on August 6, 2004. Reclassifications ----------------- Certain 2004 balances have been reclassified to conform to the 2005 presentation. Restatement of Previously Issued Financial Statements ----------------------------------------------------- This Form 10-Q/A is a restatement of the previously issued Form 10-Q for the three-month periods ended March 31, 2005 and 2004. It is prepared to present the results of the Company's investment in Cibola on a "gross" rather than "net" basis. While the Company owns 80% of the common stock of Cibola Corporation, it does not have financial or operating control of this gas marketing subsidiary. According to the terms of an agreement with the minority common and preferred shareholders of Cibola, the net worth of Cibola would have to reach $50,000,000 before Beard could begin to receive its 80% share of any excess. Beard has issued a $1,439,000 note payable bearing interest at 8.25% for its common stock of Cibola. The interest charges amounted to approximately $30,000 per quarter and were previously netted against against the distributions from Cibola but are now included in interest expense. The note is due on June 30, 2006. The stock is subject to a call option at the sole discretion of the minority common and preferred shareholders of Cibola. The Company had previously recorded as earnings from unconsolidated affiliates the net cash distributions received from Cibola which amounted to $84,000 and $68,000 for the three-month periods ended March 31, 2005 and 2004, respectively. In recording the Company's share of Cibola earnings according to the Agreement, these amounts are increased to $995,000 and $857,000 for the three-month periods ended March 31, 2005 and 2004, respectively. Since Beard management felt it was unlikely that the net worth of Cibola would reach the requisite amount, the Company also recorded impairments totaling $881,000 and $759,000 for the three-month periods ended March 31, 2005 and 2004, respectively. These impairments and the interest charges on the note payable to Cibola reduce the net earnings to the Company from its investment in Cibola to the actual cash distributions received and previously presented as earnings from unconsolidated affiliates. The effect of these changes on the Balance Sheets is to increase both investments and other assets and long-term debt - related entities by $1,439,000 as of March 31, 2005 and December 31, 2004. There is no change to either net income (loss) or net earnings (loss) per share for any of the periods presented as a result of these restatements. The impact of these changes on the Statements of Cash Flows is to decrease net cash provided by (used in) operating activities and to increase net cash provided by (used in) investing activities by the $30,000 interest charges for each of the quarters ended March 31, 2005 and 2004. (2) Ability to Fund Operations and Continue as a Going Concern - --- ---------------------------------------------------------- Overview The accompanying financial statements have been prepared based upon the Company's belief that it will continue as a going concern. The Company's revenues from continuing operations are on an uptrend; they increased in 2003 and 2004. Although the Company incurred operating losses and negative cash flows from operations during each of the last six years, it anticipates commencing a project in both its Coal and China Segments in 2005. During the 2005 first quarter the Company successfully arranged the financing for its initial fertilizer manufacturing facility in China. Additionally, the Coal Segment is currently pursuing eight different projects, and anticipates commencing at least one of these projects prior to year end. (See "Additional Details" below). The Company received the second installment of the McElmo Dome Settlement (the "Settlement"), totaling $2,826,000, in March of 2004, enabling 2004 to become a profitable year while at the same time enhancing the Company's liquidity. The Settlement has also resulted in better pricing and higher profit margins for the CO2 Segment. During the 15 month period ended March 31, 2005, the Company continued efforts, commenced in the prior two years, to reduce its negative cash flow. The Company's Chairman and President continued to defer a portion of their base salary into the Company's 2003-2 Deferred Stock Compensation Plan (the "DSC Plan") and its outside directors continued to defer their directors' fees into the DSC Plan. The Chairman of Beard Technologies continued to defer a portion of his salary during such period. The Company also continued to suspend its 100% matching contribution (up to a cap of 5% of gross salary) under its 401(k) Plan. The Company also completed three private debt placements, raising gross proceeds of $3,300,000, during such period; of which $1,845,000 was raised during the 2005 first quarter. The Company also borrowed $200,000 from an unconsolidated subsidiary during the fourth quarter of 2004. The negative result of the debt placements has been a substantial amount of dilution to the Company's common equity. During the 15 month period the Company issued 602,240 warrants (as adjusted for the 2-for-1 stock split effected in August of 2004) in connection with the private debt placements, accrued 578,000 Stock Units in the participants' accounts as a result of deferrals of salary into the DSC Plan, and issued 50,000 options to a financial consultant. An aggregate of $2,100,000 of convertible notes were also issued in connection with the private debt placement that are convertible into 2,100,000 shares of common stock. Additional dilution also occurred due to an adjustment to the Preferred Stock conversion ratio resulting from the issuance of the warrants, the options, the convertible notes and the salary deferrals. Additional Details As a result of the private debt placement completed during the first quarter of 2005 the Company obtained net additional working capital totaling approximately $1,721,000, and working capital increased from $(944,000) at December 31, 2004 to $374,000 at March 31, 2005. Most of the net proceeds were used to fund operations; however, part was used to repay a portion of the Company's debt. In February of 2005, the Company announced that it had arranged the financing for its initial fertilizer manufacturing facility in China, where it expects to commence production during the last four months of 2005. The Company and an investor will each have 50% ownership and equity in the plant, which is initially targeted to produce about 32,000 metric tons per year of OCCF with estimated revenues of more than US$5,000,000 annually. The Company's principal business is coal reclamation, and this is where management's operating attention is primarily focused. The Coal Segment has a signed contract to construct and operate a pond fines recovery project in West Virginia (the "Pinnacle Project") which it expects to commence in the third quarter of 2005 if it can successfully arrange the financing therefor. The segment is actively pursuing seven other projects and has a number of other projects in the pipeline for follow up once these eight projects have come to a resolution. The timing of the coal projects the Company is actively pursuing is uncertain but, subject to obtaining the necessary financing, they are considered to have a high probability of activity. With the exception of the Pinnacle Project, no definitive contracts have as yet been signed, and there is no assurance that the required financing will be obtained or that any of the projects will materialize. In addition, proceeds to the Company from the sales of assets during the first quarter of 2005 totaled $134,500. Total proceeds from April 1 through May 16 of 2005 from the sale of assets totaled $68,500. The Company expects to generate cash of approximately $35,000 from the disposition of the remaining assets of two of its discontinued segments, and can sell certain other assets to generate cash if necessary. The Company believes that if the current efforts to finance the coal projects are successful, they will provide sufficient working capital to sustain the Company's activities until the operations of the projects under development in the Coal and China Segments have commenced operations and the Company is generating positive cash flow from operations. If such efforts are not successful or are only partially successful, then the Company will need to pursue additional outside financing, which would likely involve further dilution to shareholders. (3) Discontinued Operations - --- ----------------------- BE/IM Segment In 1999 the Management Committee of a joint venture 40%-owned by the Company adopted a formal plan to discontinue the business and dispose of its assets. The joint venture was dissolved in 2000 and the Company took over certain remaining assets and liabilities. The Company recorded no revenues for either of the three-month periods ended March 31, 2005 or 2004. The Company recorded $48,000 and $15,000 in earnings as a result of the sale of equipment and charged operating losses of $39,000 and $3,000 against an accrual for anticipated expenses related to the shutdown of one of its plants during the 2005 and 2004 first quarters, respectively. As of March 31, 2005, the significant assets related to the segment's operations consisted primarily of equipment with no estimated net realizable value and accounts receivable of $48,000. The significant liabilities related to remaining operations consisted primarily of accrued expenses totaling $14,000 related to the shutdown of operations. The Company is actively pursuing opportunities to sell the segment's remaining assets and expects the disposition to be completed by December 31, 2005. WS Segment In 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 quarter of 2005 or 2004. The Company recorded earnings of $40,000 as its share of operating results for the discontinued segment for the first quarter of 2005, which included gains on the sale of equipment totaling $43,000. The Company's share of operating results from the discontinued segment for the first quarter of 2004 was a loss of $12,000. As of March 31, 2005, the significant assets of the WS Segment were fixed assets and accounts receivable totaling $55,000. The significant liabilities of the entity consisted of trade accounts payable and accrued expenses totaling $78,000. It is anticipated that all liabilities of the segment will be paid prior to December 31, 2005. (4) Convertible Preferred Stock - --- --------------------------- Effective January 1, 2003, the Company's preferred stock became convertible into common stock. On May 15, 2005, each share of the Company's preferred stock was convertible into 10.31114354 (287,041) shares of common stock. The conversion ratio is adjusted periodically (i) for stock splits, (ii) as additional warrants/options or convertible notes are issued, and (iii) as additional shares of stock are credited to the accounts of the Company's Chairman or President in the Company's 2003-2 Deferred Stock Compensation Plan (the "DSC Plan"), in each case at a value of less than $1.29165 per share. Fractional shares will not be issued, and cash will be paid in redemption thereof. (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. Included in the weighted average number of common shares outstanding are the shares issuable according to the terms of the DSC Plan. These shares are considered common stock equivalents because the covered individuals may resign their positions at will which would also terminate their participation in the DSC Plan resulting in the issuance of the shares. Diluted earnings per share reflect the potential dilution that could occur if the Company's outstanding options and warrants were exercised (calculated using the treasury stock method) and if the Company's preferred stock and convertible notes were converted to common stock. Diluted earnings (loss) per share from continuing operations in the statements of operations for the three month period ended March 31, 2005 exclude all potential common shares issuable upon conversion of convertible preferred stock, convertible notes, or exercise of options and warrants as the effect would be anti-dilutive due to the Company's losses from continuing operations. Weighted average shares of 5,687,000 for the diluted earnings per share calculation for the three months ended March 31, 2004 are composed of basic common shares of 4,924,198; 27,838 shares of preferred stock converted to 266,892 common shares; and 495,750 warrants assumed exercised and converted to common shares. (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 provisions of $19,000 and $97,000 for federal alternative minimum taxes for the three months ended March 31, 2005 and 2004, respectively. At March 31, 2005, 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 2006-2008 $46,000 Tax depletion carryforward Indefinite $ 3,000
(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 more than 11 years subsequent to the date of the Restructure there have been no Claims, and the Company has no reason to believe that there will be any. For these reasons, no reserve has ever been established for the liability, because none is believed to exist. (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 quarter of 2005 and 2004: Coal, Carbon Dioxide, China and e-Commerce. The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is pursuing environmental opportunities in China focusing on the financing, construction and operation of organic chemical compound fertilizer plants. The e-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage the subsidiary'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 ------------------ March 31, 2005 -------------- Revenues from external customers $ - $ 218 $ - $ 25 $ 243 Segment profit (loss) (178) 161 (124) (13) (154) Segment assets 331 467 203 28 1,029 Three months ended ------------------ March 31, 2004 -------------- Revenues from external customers $ - $ 163 $ - $ 25 $ 188 Segment profit (loss) (135) 122 (134) (5) (152) Segment assets 36 460 57 9 562
Reconciliation of total reportable segment loss to consolidated loss from continuing operations before income taxes is as follows for the three months ended March 31, 2005 and 2004 (in thousands):
2005 2004 -------------- -------------- Total loss for reportable segments $ (154) $ (152) Net corporate income (costs) not allocated to segments (290) 2,549 -------------- -------------- Total consolidated earnings (loss) from continuing operations $ (444) $ 2,397 ============== ==============
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 OUR 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 WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR 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 US, OR PERSONS ACTING ON OUR BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. WE ASSUME NO DUTY TO UPDATE OR REVISE OUR 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 our financial condition since December 31, 2004 and results of operations for the quarter ended March 31, 2005, compared to the prior year first quarter. Such discussion should be read in conjunction with our financial statements including the related footnotes. In preparing the discussion and analysis, we have 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 our 2004 Form 10-K/A. Overview - -------- The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is pursuing environmental opportunities in China focusing on the installation, construction and operation of plants that manufacture environmentally friendly organic chemical compound fertilizer. The e-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage the subsidiary's intellectual property portfolio of Internet payment methods and security technologies. Our revenues from continuing operations are on an uptrend; they increased in 2003 and 2004, and are expected to increase again in 2005. We anticipate higher revenues in the CO2 Segment due to better pricing resulting from implementation of the McElmo Dome Settlement Agreement (the "Settlement"). Six new gas wells are expected to come on stream in Colorado beginning in June, resulting in our first oil and gas revenues in many years. We expect the first production from our initial fertilizer manufacturing plant in China to occur during the last four months of 2005. Although we incurred operating losses and negative cash flows from operations during each of the last six years, we expect to commence a project in both our Coal and China Segments in 2005, and believe that we will reverse this trend in late 2005 or early 2006. Beginning in 1999 we started discontinuing the operations of those segments that were not meeting their targeted profit objectives and which did not appear to have significant growth potential. This ultimately led to the discontinuance of four of our unprofitable segments. We are now in the final stage of disposing of the segments' remaining assets. Such dispositions resulted in income of $88,000 and $3,000 for the three months ended 2005 and 2004, respectively, as a result of the sale of equipment. Material changes in financial condition - March 31, 2005 as compared with December 31, 2004. - ------------------------------------------------------------------------- The following table reflects changes in our financial condition during the periods indicated:
March 31, December 31, Increase 2005 2004 (Decrease) ---- ---- ---------- Cash and cash equivalents $ 965,000 $ 127,000 $ 838,000 Working capital $ 324,000 $ (994,000) $ 1,318,000 Current ratio 1.34 to 1 0.27 to 1
During the first quarter of 2005, our working capital increased by $1,318,000 from $(994,000) as of December 31, 2004. In January 2005 we completed the private placement of $2,100,000 of convertible subordinated notes, $255,000 of which were exchanged for notes issued in a prior offering. Net proceeds from the offering amounted to approximately $1,700,000. Our CO2 Segment provided cash of $171,000. We used $538,000 to repay debt and accrued interest, including $328,000 to related parties. We used $178,000 of working capital to help fund the operations of the Coal Segment. We utilized a total of $124,000 in the pursuit of environmental opportunities in China. Also, we used $30,000 to fund the activities of the e-Commerce Segment. We utilized the remainder of the working capital to fund other operations. In March of 2004, following receipt of the second installment of the Settlement, our long-term line of credit from an affiliate of the Chairman was paid down to $2,785,000 and ceased to be a revolving credit line. We also terminated our $375,000 short-term line of credit from the same party. The remaining loan from the related party was supplemented by three private placements completed in 2004 and January of 2005 which raised proceeds of $3,300,000, and additional borrowings of $200,000 in November of 2004 from an unconsolidated subsidiary. Such funds were needed to provide additional working capital, improve liquidity and to "bridge the gap" until we receive the funds necessary to proceed with a coal project. In addition, we have been disposing of the remaining assets from our discontinued segments as opportunities have become available and are continuing to pursue the sale of the few remaining assets. Receipt of the settlement from the McElmo Dome litigation improved our balance sheet and income statement. We received $1,162,000 of the settlement in July of 2003, and $2,826,000 and $117,000 in March and May of 2004, respectively. Upon receipt of the second installment of the settlement, we were able to eliminate $2,635,000 of our total indebtedness. Our principal business is coal reclamation, and this is where management's operating attention is primarily focused. The Coal Segment has a signed contract on the Pinnacle Project on which we are currently pursuing financing, and is actively pursuing seven other projects. We have a number of other projects in the pipeline once these projects have come to a resolution. The timing of the projects we are actively pursuing is uncertain but, subject to obtaining the necessary financing, they are considered to have a high probability of activity. With the exception of the Pinnacle Project, no definitive contracts have as yet been signed, and there is no assurance that the required financing will be obtained or that any of the projects will materialize. We are diligently pursuing both debt and equity financing through several different sources. We have retained three different firms who are currently seeking financing for our coal projects: (i) a New York City-based firm which specializes in energy financing that is pursuing both debt and equity financing for the projects; (ii) a Maryland-based firm that has already obtained a terms sheet from a bank for the USDA-guaranteed portion of the financing needed for the Pinnacle Project; and (iii) a third firm that specializes in USDA-guaranteed financing. Accordingly, we believe that we will be successful in arranging financing for at least one or two coal projects during the third quarter of 2005. We achieved a major breakthrough in February of 2005 with the announcement that a private investor had agreed to finance the cost of the China Segment's initial fertilizer manufacturing facility in China. We and the investor have each contributed US$50,000 to the LLC that has been formed to own and operate the enterprise. We and the investor each own 50% of the LLC, and the investor, as of April 15, 2005, has already loaned the agreed US$850,000 to the LLC to fund the additional capital costs and pre-operating costs of the facility. A building has been leased, equipment is in the process of being ordered, and production is expected to commence in the fourth quarter of 2005. The plant is initially targeted to produce estimated revenues of more than US$5,000,000 annually. We completed a private debt placement of $2,100,000 of convertible notes in January of 2005. $255,000 of the notes were exchanged for notes we had previously issued. The notes are convertible into 2,100,000 shares of our common stock. Net proceeds of approximately $1,700,000 are being used to provide the working capital necessary to fund our operations until the financing for the Pinnacle Project has been obtained. We believe that if the current financing efforts are successful, they will provide sufficient working capital to sustain our activities until the operations of the projects under development in the Coal Segment have been established and we are generating positive cash flow from operations. If such efforts are not successful or are only partially successful, then a major restructuring of our operations will become necessary in the near term in order that we can continue as a going concern. Material changes in results of operations - Quarter ended March 31, 2005 as compared with the Quarter ended March 31, 2004. - --------------------------------------------------------------------------- The Company recorded a $375,000 loss for the first quarter of 2005 compared to the $2,303,000 of income reported for the first quarter of 2004. The operating loss in the Coal Segment increased by $43,000. The China Segment incurred an operating loss of $124,000 for the first quarter of 2005 compared to $134,000 for the same period in 2004. The operating profit in the CO2 Segment increased $39,000. The e-Commerce Segment incurred operating losses of $13,000 for the first quarter of 2005 compared to $5,000 in the first quarter of 2004. The operating loss in Other activities for the first quarter of 2005 increased $5,000 compared to the same period in 2004. As a result, the operating loss for the current quarter increased $7,000 to $380,000 versus $373,000 in the corresponding quarter of the prior year. Operating results of the Company's primary operating Segments are reflected below:
2005 2004 ---- ---- Operating profit (loss): Coal reclamation $ (178,000) $ (135,000) Carbon dioxide 161,000 122,000 China (124,000) (134,000) e-Commerce (13,000) (5,000) --------------- ------------- Subtotal (154,000) (152,000) Other (226,000) (221,000) --------------- -------------- $ (380,000) $ (373,000) =============== ==============
The "Other" in the above table reflects primarily general and corporate activities, as well as our other activities. Coal reclamation The segment recorded no revenues in either the first quarter of 2005 or 2004. Operating costs increased $40,000 to $176,000 for the first quarter of 2005 compared to $136,000 for the same period in 2004, as the segment expanded its marketing efforts in view of the dramatic increase in coal prices. The net result was a corresponding increase in the segment's operating loss. Carbon dioxide First quarter 2005 operations reflected an operating profit of $161,000 compared to $122,000 for the 2004 first quarter. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of our carbon dioxide producing unit in Colorado. Operating revenues in this segment increased $55,000 or 34% to $218,000 for the first three months of 2005 compared to $163,000 for the same period in 2004. The increase in revenue, which was primarily due to an increase in pricing, was partially offset by a slight decrease in paid volumes to our interest for CO2 gas during the quarter, and by a $16,000 increase in lifting costs for the current quarter. China The China Segment incurred an operating loss of $124,000 for the first three months of 2005 compared to $134,000 for the same period in 2004. The segment had higher SG&A expenses in 2005 compared to 2004, as it geared up for the installation and construction of its initial fertilizer manufacturing plant. The higher SG&A was partially offset by the fact that one-half, or $30,000 thru March 31, 2005, of the operating expenses of our new LLC that will manufacture OCCF were passed through to our investor. See "Other income and expenses' below. e-Commerce The e-Commerce Segment incurred an operating loss of $13,000 for the first quarter of 2005 versus an operating loss of $5,000 in the prior year quarter. The segment recorded revenues of $25,000 of patent license fees in both the prior and current year quarter. The segment incurred $8,000 more in SG&A costs in the 2005 first quarter than it did in the comparable 2004 quarter. The increased loss primarily reflects an increase in legal expenses related to starpay's current litigation against Visa. Other activities Other operations, consisting primarily of general and corporate activities, generated a $5,000 larger operating loss for the first quarter of 2005 as compared to the same period last year. The increased loss for the first quarter of 2005 compared to the same period in 2004 was the cumulative result of numerous minor increases and decreases in selling, general and administrative ("SG&A"). Selling, general and administrative expenses Our selling, general and administrative expenses ("SG&A") in the current quarter increased to $207,000 from $199,000 in the 2004 first quarter. Other activities incurred a total of $8,000 more in SG&A costs, which was the sum of many minor increases and decreases in numerous SG&A accounts. Insurance and benefit costs, for instance, increased a total of $5,000. Rent, on the other hand, decreased $2,000 for the first quarter of 2005 compared to the same period in 2004. Depreciation, depletion and amortization expenses Depreciation, depletion and amortization expenses ("DD&A") increased $4,000 for the first quarter of 2005 compared to the same period of 2004. The capitalized costs associated with the three debt issues completed in 2002 and 2003 were almost completely amortized prior to the start of the first quarter of 2004. The increase was primarily due to the amortization of capitalized costs associated with the three debt issues completed in 2004 and 2005 and depreciation on additional equipment purchased for the anticipated Coal Segment projects. Other income and expenses The other income and expenses for the first quarter of 2005 netted to a loss of $64,000 compared to earnings of $2,770,000 for the same period in 2004. We received the second installment of the McElmo Dome settlement totaling $2,826,000 in March of 2004 with no comparable receipt in the first quarter of 2005. Interest income was $5,000 for the first quarter of 2005 compared to $1,000 for the same period in 2004. Interest expense was $82,000 higher in the first quarter of 2005 compared to the first quarter of 2004 reflecting the three debt offerings completed in 2004 and 2005. Our equity in earnings of unconsolidated affiliates reflected net income of $114,000 for the first quarter of 2005 compared to $98,000 for the same period in 2004. The Company recorded $995,0000 as its share of earnings from its investment in Cibola Corporation compared to $857,000 for the prior year quarter. While the Company owns 80% of the common stock of Cibola, it does not have financial or operating control of this gas marketing subsidiary. According to the terms of an agreement with the minority common and preferred shareholders of Cibola, the net worth of Cibola would have to reach $50,000,000 before Beard could begin to receive its 80% share of any excess. Since Beard management felt this was unlikely, the Company also recorded impairments of $881,000 and $759,000 for the three months ended March 31, 2005 and 2004, respectively. The interest expense totals include $30,000 to Cibola for each of the three months ended March 31, 2005 and 2004, respectively. These impairments and the interest charges reduce the net earnings to the Company from its investment in Cibola to the actual cash distributions received of $84,000 and $68,000 for the first quarter of 2005 and 2004, respectively. We realized gains on sale of assets for the three months ended March 31, 2005 totaling $21,000 compared to $3,000 for the same period in 2004. We realized a $30,000 reduction in expenses attributable to our operations in China as a result of the 50% minority interest held by our investor in the start-up LLC included as a consolidated subsidiary in these financial statements. Income taxes We recorded a provision of $19,000 for federal alternative minimum taxes for the first quarter of 2005 compared to $97,000 for the same period in 2004. The Company has not recorded any financial benefit attributable to its various tax carryforwards due to uncertainty regarding their utilization and realization. Discontinued operations As mentioned in the Overview above, our financial results for the three months ended 2005 and 2004 benefited from earnings of $88,000 and $3,000, respectively, as a result of the discontinuance of four of our segments. The first quarter of 2005 benefited from the disposition of assets which generated gains of $91,000 compared to $15,000 for the same period in 2004, offset by expenses of $3,000 and $12,000 respectively. As of March 31, 2005, assets of discontinued operations held for resale totaled $103,000 and liabilities of discontinued operations totaled $84,000. We believe that all of the assets of the discontinued segments have been written down to their realizable value. We are actively pursuing opportunities to sell the remaining assets and expect the dispositions to be completed by December 31, 2005. Item 3. Quantitative and Qualitative Disclosures About Market Risk. At March 31, 2005, we had total debt of $7,655,000 which included $92,000 of short-term debt to a related party and $35,000 of accrued interest to a related party which was treated as a long-term obligation. Included in the remaining $7,327,000 of debt was $6,464,000 of long-term debt which had fixed interest rates rates; therefore, our interest expense and operating results would not be affected by an increase in market interest rates for this portion of the debt. At March 31, 2005, a 10% increase in market interest rates would have reduced the fair value of our debt by $86,000. 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 our disclosure controls and procedures that are designed to ensure that information required to be disclosed by the issuer in the reports it files is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the information required to be disclosed in the reports that it files is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer to allow timely decisions regarding required disclosure. Based on their evaluation of those controls and procedures as of a date within 90 days of the date of this filing, our CEO and CFO determined that the controls and procedures are adequate and effective. The evaluation resulted in no significant changes in those controls or in other factors that could significantly affect the controls, and no corrective actions with regard to significant deficiencies and material weaknesses PART II. OTHER INFORMATION Item 1. Legal Proceedings McElmo Dome Litigation - ---------------------- The McElmo Dome Settlement became final in July of 2003. We received our $1,151,000 share of the first installment of the Settlement in July of 2003, a second installment totaling $2,826,000 in March of 2004 and a third installment of $117,000 in May of 2004. We have expensed our entire share, totaling $450,000, of the costs of the litigation. The Settlement proceeds resulted in net income of $3,976,000, after alternative minimum taxes of $118,000. Subsequent to the Settlement several issues have arisen concerning implementation of the Settlement Agreement that are currently in dispute which may result in additional money being owed to the Plaintiffs in the McElmo Dome litigation. A mediation held in Denver on March 31, 2005, was unsuccessful. However, the Plaintiffs and the defendants have agreed to submit letter briefs to the party who served as the court-appointed fairness expert during the proceedings concerning the Settlement Agreement who will render an advisory opinion consisting of a decision on the merits relating to the current disputes on or about July 29, 2005. The parties have agreed that if his decision fails to resolve the matter the parties will proceed to arbitration. We estimate that, in the event all three of the matters in dispute should be resolved in the Plaintiffs favor, we could receive as much as $540,000 for our share of the money in dispute. Coalition Managers' Litigation - ------------------------------ In a separate suit, in which we are not a defendant, two 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. One of the parties has subsequently withdrawn from the suit. We expect that this matter will be resolved in favor of the defendants, and that we 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., along with VIMachine, Inc. filed a suit in the U. S. District Court for the Northern District of Texas, Dallas Division against Visa International Service Association and Visa USA, Inc., both d/b/a Visa (Case No. CIV:3-03-CV0976-L). VIMachine is the holder of U.S. Patent No. 5,903,878 (the "VIMachine Patent") that covers, among other things, an improved method of authenticating the cardholder involved in an Internet payment transaction. On July 25, 2003, the Plaintiffs filed an Amended Complaint. The suit seeks damages and injunctive relief (i) related to Visa's infringement of the VIMachine Patent; (ii) related to Visa's breach of certain confidentiality agreements express or implied; (iii) for alleged fraud on the Patent Office based on Visa's pending patent application; and (iv) under California's common law and statutory doctrines of unfair trade practices, misappropriation and/or theft of starpay's intellectual property and/or trade secrets. In addition, Plaintiffs are seeking attorney fees and costs related to the foregoing claims. If willfulness can be shown, Plaintiffs will seek treble damages. In August of 2003 the Defendants filed a motion to dismiss the second, third and fourth claims. Despite objections to such motion by the Plaintiffs, the Judge on February 11, 2004, granted Defendants' motion to dismiss the second and third causes of action, and denied the motion insofar as it sought to dismiss the fourth cause of action. Accordingly, Plaintiffs' fourth claim (misappropriation and/or theft of intellectual property and/or trade secrets) will continue to move forward. On February 23, 2004, Defendants filed an Answer to Plaintiffs' Amended Complaint. In such filing Visa denied each allegation relevant to claim four. Visa asked that the VIMachine Patent be declared invalid, and, even if it is found valid, Visa asked that they be found not to infringe the VIMachine Patent. Visa asked for other related relief based on these two allegations. In April and May 2004, Plaintiffs filed their Patent Infringement Contentions and a aupplement thereto detailing Visa's alleged infringement of the majority of the patent claims depicted in the VIMachine Patent. Subsequently, in May 2004, Defendants filed Preliminary Invalidity Contentions requesting the VIMachine Patent be found invalid. From May through October 2004, the Plaintiffs and Defendants submitted numerous filings related to interpretation of the terms and phrases set out in the VIMachine Patent claims. A hearing regarding patent claim construction (a "Markman hearing") was held on October 21 and 29, 2004, allowing both parties to present oral arguments before the Court regarding the claim construction issues. On January 4, 2005, Magistrate Judge Sanderson filed a Report and Recommendation of the United States Magistrate Judge addressing his findings and recommendations with respect to the claim constructions to be applied to the VIMachine Patent. Judge Sanderson found that 24 of the 28 claims asserted by the Plaintiffs were valid. Both parties have pursued modifications of the Magistrate's recommendations in the form of an appeal to District Judge Lindsey and are awaiting the Court's final ruling on claim construction issues. It is anticipated the Court will rule on these issues during the second quarter of 2005. Both sides anticipate filing dispositve motions in the late summer or fall of 2005. Trial is slated to begin in February 2006. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable. Item 3. Default upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits. (a) The following exhibits are filed with this Form 10-Q and are identified by the numbers indicated: 3.1 Certificate of Incorporation of The New Beard Company as filed with the Secretary of State of Oklahoma on September 20, 2000. (This Exhibit has been previously filed as Exhibit 3(ii) to Registrant's Form 10-Q for the period ended September 30, 2000, filed on November 20, 2000, and same is incorporated herein by reference). 3.2 Registrant's By-Laws as currently in effect. (This Exhibit has been previously filed as Exhibit 3(ii) to Registrant's Form 10-K for the period ended December 31, 1997, filed on March 31, 1998, and same is incorporated herein by reference). 4 Instruments defining the rights of security holders: 4.1 Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant. (This Exhibit has been previously filed as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to Registrant's Registration Statement on Form S-4, File No. 33-66598, and same is incorporated herein by reference). 4.2 Settlement Agreement, with Certificate of Amendment attached thereto, by and among Registrant, Beard Oil, New York Life Insurance Company, New York Life Insurance and Annuity Company, John Hancock Mutual Life Insurance Company, Memorial Drive Trust and Sensor Oil & Gas, Inc., dated as of April 13, 1995. (This Exhibit has been previously filed as Exhibit 4(g) to Registrant's Form 10-K for the period ended December 31, 1994 and same is incorporated herein by reference). 10 Material Contracts: 10.1 Form of 12% Convertible Subordinated Promissory Note. 10.2 Security and Collateral Agent Agreement, by and among Registrant, InvesTrust, N.A. and Beard Technologies, Inc., dated as of January 26, 2005. 10.3 Form of 2005 Warrant. 10.4 Letter Agreement by and between 7HBF, Ltd. ("7HBF") and Registrant dated February 7, 2005. 10.5 Unsecured Promissory Note from BEE/7HBF, LLC to 7HBF dated February 14, 2005. 10.6 Cibola Corporation financial statements for the three years ended December 31, 2004. (This Exhibit has been previously filed as Exhibit 10.9 to Registrant's Form 10-K/A for the period ended December 31, 2004, filed April 17, 2006, and same is incorporated herein by reference.) 31 Rule 13a-14(a)/15d-14(a) Certifications: 31.1 Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a). 31.2 Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a). 32 Section 1350 Certifications: 32.1 Chief Executive Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 32.2 Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. ____________________ * Compensatory plans or arrangements. The Company will furnish to any shareholder a copy of any of the above exhibits upon the payment of $.25 per page. Any request should be sent to The Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112, Attention: Rebecca G. Voth, Secretary. 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) April 12, 2006 ___________________________________ Herb Mee, Jr., President and Chief Financial Officer /s/ Jack A. Martine (Date) April 12, 2006 ___________________________________ 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 12% Convertible Subordinated Filed herewith electronically Promissory Note 10.2 Security and Collateral Agent Agreement, Filed herewith electronically by and among Registrant, InvesTrust, N.A. and Beard Technologies, Inc., dated as of January 26, 2005 10.3 Form of 2005 Warrant Filed herewith electronically 10.4 Letter Agreement by and between 7HBF, Filed herewith electronically Ltd. ("7HBF") and Registrant dated February 7, 2005 10.5 Unsecured Promissory Note from BEE/7HBF, Filed herewith electronically LLC to 7HBF dated February 14, 2005 10.6 Cibola Corporation financial statements Incorporated herein by reference for the three years ended December 31, 2004. 31.1 Chief Executive Officer Certification Filed herewith electronically required by Rule 13a-14(a) or Rule 15d-14(a) 31.2 Chief Financial Officer Certification Filed herewith electronically required by Rule 13a-14(a) or Rule 15d-14(a) 32.1 Chief Executive Officer Certification Filed herewith electronically required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code 32.2 Chief Financial Officer Certification Filed herewith electronically required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code EX-10.1 2 bcex101-051605.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. CONVERTIBLE SUBORDINATED PROMISSORY NOTE $__________.00 _________________, 2005 THE BEARD COMPANY, an Oklahoma corporation (the "Company"), promises to pay to the order of _______________________________ at Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112, or at such other place as may be designated in writing by the Holder, the amount of ________________________ DOLLARS ($___________.00) and interest thereon at the rate stated below. The holder of this Note shall be referred to as the "Holder." This Note is part of a series of promissory notes issued in connection with a private offering (the "Private Placement Offering") made by the Company pursuant to a Private Placement Memorandum dated December 21, 2004, as amended on December 29, 2004, and as amended by Supplement #1 dated January 11, 2005. The promissory notes shall be referred to collectively as the "Notes." 1. Terms of the Note 1.1 Payment of Principal and Interest. (a) Prior to an Event of Default, the unpaid principal balance of this Note will accrue interest at 12% per annum. Commencing on August 15, 2005, and continuing on each February 15 and August 15 thereafter until the Maturity Date the Company shall pay all accrued interest. (b) All interest will be computed on the basis of a 360 day year for the actual number of days in the period for which interest is payable. (c) The entire unpaid principal balance of this Note plus all accrued interest shall be due and payable without notice on February 15, 2010 (the "Maturity Date"). (d) All payments received by the Holder shall be applied first to interest and any balance shall be applied to principal. During the existence of any Event of Default, the Holder may apply payments received as the Holder may determine. (e) The obligations of the Company to pay principal and interest and any other amounts under this Note are collectively referred to as the "Obligations." 1.2 Payments. Whenever any payment required by this Note is due on a day other than a Business Day, the payment shall be made on the next succeeding Business Day and the payment shall include interest for the days the payment due date was so extended. 1.3 Expenses. The Company will pay to the Holder its reasonable attorneys' fees, court costs, and other expenses incurred in collecting this Note. 1.4 Additional Interest. Any amount not paid when due shall accrue interest at the rate specified above plus 3% per annum (the "Additional Interest") and all Additional Interest shall be paid as a condition precedent to curing any Event of Default hereunder. 1.5 Security and Collateral Agent Agreement. This Note shall be subject to all the terms and condition of the Security And Collateral Agent Agreement dated as of January 26, 2005, between InvesTrust, N.A. as the Collateral Agent, the Company, and Beard Technologies, Inc. in the form attached hereto as Exhibit B (the "Security Agreement") until the Security Agreement is terminated. 1.6 Events of Default. Events of Default are: (a) the Company's failure to pay any Obligation when due that is not cured within 30 days; (b) the occurrence of any "Event of Default" as defined in the Security Agreement; or (c) the Company's failure to perform its obligations under Section 2.9 of this Note when due. 1.7 Acceleration. Subject to the provisions of the Security Agreement, upon the occurrence of an Event of Default, the Holder may at any time thereafter declare the Obligations evidenced hereby immediately due and payable. 2. Conversion of the Note 2.1 Conversion Agent. The Company shall initially serve as its own conversion agent. The Company may appoint another conversion agent at any time. The Company shall send Holder written notice within 30 days of any change of conversion agent. References in this Note to the "Conversion Agent" shall refer to the Company unless the Company has appointed another conversion agent in which case "Conversion Agent" shall mean the acting conversion agent appointed by the Company. 2.2 Conversion Privilege. At any time following the date of original issuance of this Note and prior to the close of business on the business day immediately preceding February 15, 2010, the Holder of this Note may convert such Note or any portion thereof into shares of the Company's common stock (the "Common Stock") (the shares of Common Stock issuable upon such conversion, the "Conversion Shares"), at the Conversion Price then in effect. The number of shares of Common Stock issuable upon conversion of this Note shall be determined by dividing the principal amount of the Note or portion thereof surrendered for conversion by the Conversion Price in effect on the conversion date. The initial conversion price of the Note is $1.00 per share (the "Conversion Price") and is subject to adjustment as provided in Section 2.7. Upon conversion of only a portion of the principal balance of the Notes surrendered for conversion, the Company shall issue and deliver upon the written order of the Holder, at the expense of the Company, a new Note for any remaining unpaid principal balance so surrendered as well as a certificate or certificates for the number of shares of Common Stock to which such Holder is entitled, as provided below. The Holder is not entitled to any rights of a holder of Common Stock until such Holder has converted this Note into Common Stock. 2.3 Conversion Procedure. To convert this Note, the Holder must (i) complete and manually sign the Conversion Notice, a form of which is attached hereto as Exhibit A and deliver it to the Conversion Agent (ii) surrender the Note to the Conversion Agent, (iii) furnish appropriate endorsements and transfer documents to the Conversion Agent and (iv) pay any transfer or other tax, if required. The date on which the Holder satisfies all of the foregoing requirements is the conversion date. As soon as practicable after the conversion date, the Company shall deliver to the Holder through its transfer agent a certificate for the number of whole shares of Common Stock issuable upon the conversion. No fractional shares of Common Stock shall be issued upon conversion of the Note. If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of Common Stock would be issuable upon the conversion of any Note or Notes, the Conversion Agent shall make an adjustment thereof in cash at the current market value thereof. For these purposes, the current market value of a share of Common Stock shall be the closing price on the first business day immediately preceding the day on which the Note or Notes are deemed to have been converted. The person in whose name the certificate is registered shall be deemed to be a stockholder of record on the conversion date; provided, however, that no surrender of this Note on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person or persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such date, but such surrender shall be effective to constitute the person or persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; provided, further, that such conversion shall be at the Conversion Price in effect on the date that this Note shall have been surrendered for conversion, as if the stock transfer books of the Company had not been closed. Upon conversion of this Note, Holder shall no longer be a Holder of this Note. No payment or adjustment will be made for accrued interest on a converted Note or for dividends or distributions on shares of Common Stock issued upon conversion of a Note, but if any Holder surrenders this Note for conversion between the record date for the payment of an installment of interest and the next interest payment date, then, notwithstanding such conversion, the interest payable on such interest payment date shall be paid to the Holder on such record date. If the Holder converts more than one Note at the same time, the number of shares of Common Stock issuable upon the conversion shall be based on the aggregate principal amount of Notes converted. 2.4 Forced Conversion. At any time after February 15, 2007, if the weighted average sales price of the Company's common stock has been more than two times the Conversion Price for sixty (60) consecutive trading days, the Company may give the Note holders written notice that they must convert their Notes within thirty (30) days after the date of such notice or that the Notes will terminate and become void as of 5:00 p.m., New York time on the thirty-first (31st) day (the "Forced Conversion Date") after the date of such notice. Upon such Forced Conversion, the person or persons entitled to receive the shares of Common Stock issuable upon such conversion will be treated for all purposes as the record holder or holders of such Common Stock on the Forced Conversion Date whether or not such holder or holders shall have surrendered their Notes to the Conversion Agent. Upon the Forced Conversion Date, the principal balance of the Notes shall be deemed paid and all interest on the Notes shall cease to accrue. As soon as practicable after the surrender in accordance with the procedures set forth in Section 2.3, the Company shall then issue and the Conversion Agent shall deliver to such holder a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled. 2.5 Taxes on Conversion. If the Holder converts a Note, he shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon such conversion. The Conversion Agent may refuse to deliver the certificates representing the Common Stock being issued in a name other than the Holder's name until the Conversion Agent receives a sum sufficient to pay any tax which will be due because the shares are to be issued in a name other than the Holder's name. Nothing herein shall preclude any tax withholding required by law or regulations. 2.6 Company To Provide Stock. The Company shall reserve out of its authorized but unissued Common Stock a sufficient number of shares of Common Stock to permit the conversion of all outstanding Notes for shares of Common Stock. The shares of Common Stock or other securities issued upon conversion of this Notes shall bear the following legend: 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. The Company covenants that all shares of Common Stock delivered upon conversion of the Notes, shall be duly authorized, validly issued, fully paid and non-assessable and shall be free from preemptive rights and free of any lien or adverse claim. 2.7 Adjustment of Conversion Price. The Conversion Price shall be that price set forth in Section 2.2 of this Note and shall be adjusted from time to time by the Conversion Agent in the event the Company shall (i) pay a dividend or other distribution in shares of Common Stock to holders of Common Stock, (ii) subdivide its outstanding Common Stock into a greater number of shares, (iii) combine its outstanding Common Stock into a smaller number of shares or (iv) reclassify its outstanding Common Stock, the Conversion Price in effect immediately prior thereto shall be adjusted so that the Holder of any Note thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which it would have owned or have been entitled to receive had such Note been converted immediately prior to the happening of such event. An adjustment made pursuant to this Section 2.7 shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision, combination or reclassification. 2.8 Notice of Adjustment. Whenever the Conversion Price is adjusted the Company shall promptly mail to the Holder a notice of the adjustment briefly stating the facts requiring the adjustment and the manner of computing it. 2.9 Notice of Certain Transactions. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or (b) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company shall cause to be mailed to each the Holder at its address appearing below or such other address as specified by the Holder, as promptly as possible but in any event at least ten days prior to the applicable date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of a dividend, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend is to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. 2.10 Effect of Reclassification, Consolidation, Merger or Sale on Conversion Privilege. If any of the following shall occur, namely: (i) any reclassification or change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); (ii) any consolidation, combination or merger to which the Company is a party other than a merger in which the Company is the continuing corporation and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination) in, outstanding shares of Common Stock; or (iii) any sale or conveyance of all or substantially all of the assets of the Company ("Asset Sale"), then lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon conversion of the Note, at a per share valuation equal to the Conversion Price then in effect, the number of shares of stock or other securities or property of the successor Company resulting from such reclassification, consolidation, consolidation, combination, merger, or Asset Sale that the Holder of the would have been entitled to receive in such reclassification, consolidation, consolidation, combination, merger, or Asset Sale if the Note had been converted immediately before such reclassification, consolidation, consolidation, combination, merger, or Asset Sale, all subject to further adjustment as provided herein. The foregoing provisions of this Section 2.10 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other Company that are at the time receivable upon the conversion of the Notes. 3. Subordination of the Note 3.1 Note Subordinate to Senior Indebtedness. The Obligations are and shall be junior and subordinate in right of payment, exercise of remedies, and all other respects to the prior indefeasible payment in full of the Senior Indebtedness. Without limiting the foregoing, the priority of the security interest granted in the Security Agreement shall be subordinate in all respects to the priority of any security interest or lien granted to or for the benefit of the holders of the Senior Indebtedness. So long as there is no default under any of the Senior Indebtedness and the Company's payment of the Obligations would not result in a default thereunder, the Company may pay the Obligations in accordance with the terms of this Note. The provisions of this Section 3.1 are made for the benefit of the holders of Senior Indebtedness. The holders of the Senior Indebtedness need not prove reliance on these subordination provisions. 3.2 Default on Senior Indebtedness. In the event and during the continuation of any default in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, or in the event that any event of default with respect to any Senior Indebtedness shall have occurred and be continuing and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable (unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled) or in the event any judicial proceeding such event of default, then no payment shall be made by the Company with respect to the principal of, or interest on, this Note; provided, however, nothing in this Section shall prohibit the Holder from accelerating the Obligations due under this Note. In the event that, notwithstanding the foregoing, any payment shall be received by the Holder when such payment is prohibited by this Section 3.2, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Holder within 30 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Holder shall be paid to the holders of Senior Indebtedness; provided, however, that holders of Senior Indebtedness shall not be entitled to receive payment of any such amounts to the extent that such holders would be required by the subordination provisions of such Senior Indebtedness to pay such amounts over to the obligees on trade accounts payable or other liabilities arising in the ordinary course of the Company's business. 3.3 Definition of Senior Indebtedness. "Senior Indebtedness" means, unless expressly subordinated to or made on a parity with the amounts due under this Note, the principal of (and premium, if any), unpaid interest on, penalties, amounts reimbursable, fees, expenses, costs of enforcement and any other amounts due in connection with (i) indebtedness of the Company, or with respect to which the Company is a guarantor, to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions or other lending institutions regularly engaged in the business of lending money (excluding venture capital, investment banking or similar institutions which sometimes engage in lending activities but which are primarily engaged in investments in equity securities), which is for money borrowed, or purchase or leasing of equipment in the case of lease or other equipment financing, whether or not secured, and (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor. 4. Piggyback Registration Rights 4.1 Participation. Subject to Section 4.2 and 4.3 hereof, if at any time after the date hereof the Company proposes to file a Registration Statement (other than a registration on Form S-4 or S-8 or any successor form to such Forms or any registration of securities as it relates to an offering and sale to management of the Company pursuant to any employee stock plan or other employee benefit plan arrangement) with respect to an offering that includes any shares of Common Stock, then the Company shall give notice of the proposed filing (the "Piggyback Notice") to all Registrable Security Holder as promptly as practicable (but in no event less than fifteen (15) days before the anticipated filing date). The Piggyback Notice shall offer the Registrable Security Holders the opportunity to register such number of shares of Registrable Securities as the Registrable Security Holders may request and shall set forth (i) the anticipated filing date of such Registration Statement and (ii) the number of shares of Common Stock that is proposed to be included in such Registration Statement. The Company shall include in such Registration Statement such shares of Registrable Securities for which it has received written requests to register such shares within ten (10) days after the Piggyback Notice has been given. 4.2 Underwriter's Cutback. Notwithstanding the foregoing, if a Registration pursuant to this Article 4 involves an underwritten offering and the managing underwriter or underwriters of such proposed underwritten offering delivers an opinion to the Registrable Security Holders that the total or kind of securities which such Registrable Security Holders and any other persons or entities intend to include in such offering are reasonably likely to significantly adversely affect the price, timing or distribution of the securities offered in such offering, then the Company shall include in such Registration: (a) If such Registration was a primary registration by the Company of its securities, the Company will include in such Registration to the extent of the number of securities which the managing underwriter advises can be sold in such Underwritten Offering: first, the securities proposed by the Company to be sold for its own account; second, any Registrable Securities requested to be included in such Registration by the Registrable Security Holders, pro rata on the basis of the number of securities sought to be sold by the requesting Registrable Security Holders; and third, other securities of the Company proposed to be included in such Registration, allocated among the Company and the holders thereof in accordance with the priorities then existing among the Company and such holders. (b) If such Registration was requested other than by the Registrable Security Holders or the Company, the Company will include in such Registration to the extent of the number of securities which the managing underwriter advises can be sold in such Underwritten Offering: first, the securities proposed to be sold by the security holder initiating the Registration; second, any Registrable Securities requested to be included in such Registration, pro rata on the basis of the number of securities sought to be sold by the requesting Registrable Security Holders; third, any securities of the Company proposed by any other Persons to be included in such Registration, pro rata on the basis of the number of securities proposed to be sold by the requesting Persons; and fourth the securities proposed by the Company to be sold for its own account. 4.3 Limitation on Participation. Holders of Registrable Securities that are able to sell 100% of their Registrable Securities without registration under Rule 144 of the Securities Act of 1933, as amended, within a period of three consecutive months are not entitled to any Piggyback Registration Rights under this Article 4. 4.4 Expenses. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Article 4. 4.5 Company Control. The Company may decline to file a Registration Statement after giving the Piggyback Notice, or withdraw a Registration Statement after filing and after such Piggyback Notice, but prior to the effectiveness of the Registration Statement, provided that the Company shall promptly notify each Registrable Security Holder in writing of any such action and provided further that the Company shall bear all reasonable expenses incurred by such Registrable Security Holder or otherwise in connection with such withdrawn Registration Statement. 5. Collateral Agent; Grant of Security Interest 5.1 Appointment of Collateral Agent. By acceptance of this Note the Holder appoints InvesTrust, N.A. (with its successors and assigns, the "Collateral Agent") as collateral agent under the Security Agreement and authorizes the Collateral Agent to take the actions and to exercise the powers provided in the Security Agreement. 5.2 Security Interest. The Company shall cause its wholly owned subsidiary, Beard Technologies, Inc. to enter into the Security Agreement for the benefit of all of the holders of the Notes. 5.3 Indemnification. To the extent that the Collateral Agent is not reimbursed and indemnified by Borrower or BTI as required in the Security Agreement, to the extent of its Pro Rata Share the Holder shall reimburse and indemnify the Collateral Agent from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances, or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Collateral Agent in any way relating to or arising out of the Notes, the Security Agreement, or any action taken or omitted by the Collateral Agent under the Security Agreement. The Holder shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements for which there has been a final judicial determination that such liability resulted from the Collateral Agent's gross negligence or willful misconduct. The obligations of the Holder under this section shall survive the payment in full of the Obligations and the termination of the Security Agreement. 5.4 Pro Rata Share. "Pro Rata Share" means the percentage obtained by dividing (i) the principal amount outstanding under this Note by (ii) the total principal amount outstanding under all of the Notes. 5.5 Communication with Collateral Agent. By acceptance of this Note the Holder agrees to promptly provide, upon written request of Collateral Agent, written confirmation of the Holder's status as the holder of this Note and the amounts of principal, interest, and other sums owing on this Note. 6. Miscellaneous 6.1 Governing Law. This Note and the legal relations between the Company and the Holder shall be governed by the laws of the State of Oklahoma without giving effect to any conflict of law provision (whether of the State of Oklahoma or any other jurisdiction) that would cause the application of the law of any other jurisdiction. 6.2 Pari Passu Notes. The payment of all or any portion of the Obligations shall be pari passu in right of payment and in all other respects to the other Notes issued by the Company in the Private Placement Offering. If the Holder receives payments in excess of its Pro Rata Share of the Company's payments to the holders of all of the Notes, the Holder shall hold the excess payment in trust for the benefit of the holders of the other Notes and shall pay such amounts held in trust to the other holders upon demand by the holders. 6.3 Usury. All agreements between the Company and Holder are limited so that in no event whatsoever, whether by the disbursement of proceeds or otherwise, shall the amount of interest or finance charge (as defined by applicable law) paid or agreed to be paid by the Company to the Holder exceed the highest lawful contractual rate of interest or the maximum finance charge permissible under applicable law. If fulfillment of any agreement between the Company and the Holder, at the time the performance of such agreement becomes due, involves exceeding such highest lawful contractual rate or such maximum permissible finance charge, then the obligation to fulfill the agreement shall be reduced so that such obligation does not exceed such highest lawful contractual rate or maximum permissible finance charge. If by any circumstance the Holder shall ever receive as interest or finance charge an amount that would exceed the amount allowed by applicable law, the excess shall be deemed applied to the principal of the Obligations. All interest and finance charges paid or agreed to be paid to the Holder shall be prorated, allocated, and spread throughout the full period of this Note. This paragraph shall control all other provisions of this Note, the Security Agreement, and any other documents executed in connection with this Note. 6.4 Notices. Any notice, request or other communication required or permitted hereunder shall be given in accordance with the Subscription Agreement. 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 EXHIBIT A CONVERSION NOTICE To convert this Note into common stock of the Company, check the box: [ ] To convert only part of this Note, state the amount: [ $__________ ] If you want the stock certificate made out in another person's name, fill in the form below: _________________________________________________________________ (Insert other person's social security or tax I.D. number) _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ (Print or type assignee's name, address and zip code) _________________________________________________________________ Date: ____________________ _______________________ (Signature) _________________________________________________________________ (Sign exactly as your name appears on this Note) EXHIBIT B FORM OF SECURITY AGREEMENT EX-10.2 3 bcex102-051605.txt Exhibit 10.2 SECURITY AND COLLATERAL AGENT AGREEMENT THIS SECURITY AND COLLATERAL AGENT AGREEMENT is made as of January 26, 2005, by Investrust, N.A., a nationally chartered trust company (including any successor thereto, the "Collateral Agent"), The Beard Company, an Oklahoma corporation (the "Borrower"), and Beard Technologies, Inc., an Oklahoma corporation ("BTI"), for the benefit of the holders (the "Note Holders") of Borrower's 12% Convertible Subordinated Notes due February 15, 2010 (the "Notes"). All terms used but not otherwise defined in this Agreement have the same meanings as set forth in the Notes. The parties agree as follows: 1. Appointment of Collateral Agent. In the Notes each of the Note Holders appointed Collateral Agent to serve as collateral agent on the terms in this Agreement and for the benefit of the Note Holders. Collateral Agent accepts this appointment. 2. Grant of Security Interest. (a) BTI grants to Collateral Agent, for the benefit of the Note Holders, a security interest in all equipment of BTI now owned or hereafter acquired and all additions and accessions thereto (the "Collateral"). (b) This Agreement secures the following (the "Obligations"): (i) Borrower's obligations under the Notes and this Agreement; (ii) The repayment of (a) any amounts that Collateral Agent may advance or spend for the maintenance or preservation of the Collateral and (b) any other expenditures that Collateral Agent may make under this Agreement or for the benefit of the Note Holders; (iii) All amounts owed by Borrower or BTI under any modifications, renewals, or extensions of any of the foregoing obligations; and (iv) Any of the foregoing that arise after the filing of a petition by or against Borrower or BTI under the U.S. Bankruptcy Code, even if the obligations do not accrue because of the automatic stay under ss. 362 of the Bankruptcy Code or otherwise. 3. Perfection of Security Interest. BTI authorizes Collateral Agent to file, and ratifies any filing by the Collateral Agent prior to the execution of this Agreement of, any financing statements, continuation statements, certificates, and other documents requested by Collateral Agent to perfect or renew the security interest created by this Agreement. BTI will execute and deliver to Collateral Agent financing statements, certificates, and other documents requested by Collateral Agent to perfect the security interest in any Collateral now owned or hereafter acquired by Borrower or in any replacements or proceeds of the Collateral. 4. Termination of Security Interest. The Security Interest shall terminate upon Borrower's delivery of a certificate (the "Termination Notice") signed by an officer of Borrower certifying to Collateral Agent that Borrower has obtained capital (by any combination of USDA-guaranteed financing, bank financing, additional equity or debt offerings, the proceeds from the Notes, or a sale of an equity interest in Borrower's subsidiary formed to perform the Pinnacle Project) in an amount not less than $7,400,000 to finance the pond fines recovery project in West Virginia for Pinnacle Mining Company, LLC (the "Pinnacle Project"). Upon delivery of the Termination Notice, this Agreement shall terminate and Collateral Agent shall cause the secured party of record for any financing statements filed pursuant to this Agreement to promptly file a termination statement for any financing statements so filed. 5. Possession. BTI shall have possession of the Collateral, except where expressly otherwise provided in this Agreement. Where Collateral is in the possession of a third party, BTI will join with Collateral Agent in notifying the third party of Collateral Agent's security interest and obtaining an acknowledgment in an authenticated record from the third party that it is holding the Collateral for the benefit of Collateral Agent. 6. Covenants Concerning BTI and Collateral. (a) Inspection. Collateral Agent may inspect the Collateral at any time upon reasonable notice. (b) No Disposition. Except as approved in writing by Collateral Agent, BTI shall not sell, transfer, lease, or otherwise dispose of any item of Collateral, other than replacing such items in the ordinary course of business, or grant any other security interest in any of the Collateral. (c) Risk of Loss and Insurance. BTI has the risk of loss of the Collateral. Collateral Agent is not responsible for any injury to, loss to, or loss in value of the Collateral. BTI will continuously maintain insurance on the Collateral with types and amounts of coverages no less than the lesser of (a) the types and amounts as of the execution of this Agreement, and (b) such types and amounts as are usual and customary in BTI's industry, with Collateral Agent named as loss payee and as an additional insured. BTI will, upon request by Collateral Agent, deliver to Collateral Agent certificates evidencing such coverage and evidence of the payment of all premiums. (d) Maintenance. BTI will maintain the Collateral in operating condition, ordinary wear and tear and casualty excepted. (e) Taxes. BTI will pay before delinquency any tax or other governmental charge on the Collateral. (f) Existence. BTI shall preserve its corporate existence and not, in one transaction or a series of related transactions, merge into or consolidate with any other entity or sell all or substantially all of its assets. BTI shall not change the state of its incorporation and shall not change its corporate name without providing Collateral Agent with 30 days prior notice. (g) Personal Property. BTI will not affix any Collateral to any real property in any manner that would change the nature of the property from that of personal property. (h) Liens. BTI will not create, incur or permit to exist on the Collateral any security interest, mortgage, pledge, lien, claim, charge, or encumbrance, whether statutory, consensual, or otherwise (collectively, "Liens") and shall defend the Collateral and Collateral Agent's first priority security interest in the Collateral against the claims of all other persons. (i) Use. BTI shall use the Collateral and operate its business in compliance with all applicable laws, regulations, and ordinances. 7. BTI's Representations and Warranties. BTI represents and warrants to Collateral Agent that: (a) Title. BTI owns the Collateral free and clear of all Liens. There is no financing statement covering or purporting to cover any interest of BTI in the Collateral filed in any jurisdiction. (b) State of Organization and Name. BTI is and has always been a corporation organized and in good standing under the laws of the State of Oklahoma. BTI's exact legal name is as stated in the introductory paragraph of this Agreement. Prior to April 1994, BTI's legal name was White Eagle, Inc. Since April 1994 BTI has never had or done business under any name other than its current name. (c) Company Authorization. The execution, delivery, and performance by BTI of this Agreement are within BTI's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental authority, and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or bylaws of BTI or of any judgment, injunction, order, or decree or any indenture, mortgage, deed of trust, credit agreement, or loan agreement, or any other material agreement or material instrument binding upon BTI, or result in the creation or imposition of any Lien on any of the Collateral. (d) Litigation. There is no action, suit, or proceeding pending against, or to the knowledge of BTI threatened against or affecting, BTI before any court or arbitrator or any governmental authority. (e) Collateral. All of the Collateral is and will be in operating condition and not subject to any licensing, patent, royalty, trademark, trade name, or copyright agreements with any third parties or any infringement claims, and the use, sale, or other disposition of any of the Inventory by Collateral Agent after an Event of Default shall not require the consent of any person and shall not constitute a breach or default under any contract or agreement to which BTI is a party or to which any of the Collateral is subject. 8. Default. BTI will be in default under this Agreement if any of the following (each an "Event of Default") occurs: (a) Default under Notes. Any Event of Default by Borrower under the Notes; (b) Unauthorized Transfer. BTI fails to perform any obligation under this Agreement or any of BTI's representations or warranties in this Agreement are or become inaccurate in any respect and such default or inaccuracy continues after [30] days notice from Collateral Agent; (c) Attachment. Any of the Collateral becomes subject to attachment, execution or levy; (d) Bankruptcy. Borrower or BTI voluntarily files a petition for bankruptcy or reorganization; a petition in bankruptcy is filed against Borrower or BTI; a receiver or other representative is appointed for Borrower or BTI or its business or assets; or Borrower or BTI makes an assignment for the benefit of its creditors; and (e) Evidence of Lack of Priority. Collateral Agent's security interest in the Collateral is or becomes not prior to all other security interests. 9. Remedies Upon Event of Default. Upon the written demand by Note Holders holding a majority of the aggregate outstanding principal amounts of the Notes (the "Majority Holders"), upon an Event of Default: 9.1 General. Collateral Agent may preserve any remedy at law (including those available to secured parties under the Uniform Commercial Code) or in equity to collect, enforce, or satisfy any obligations. 9.2 Specific. Collateral Agent may pursue any of the following remedies separately, successively, or simultaneously: (a) File suit and obtain judgment and, in conjunction with any action, seek any ancillary remedies provided by law, including levy of attachment and garnishment. (b) Take possession of any Collateral if not already in its possession without demand and without legal process. Upon Collateral Agent's demand, BTI shall assemble and make the Collateral available to Collateral Agent as it directs. BTI grants to Collateral Agent the right to enter into or on any premises where Collateral may be located. (c) Without taking possession, sell, lease or otherwise dispose of the Collateral at any public or private sale in accordance with the Uniform Commercial Code. 10. Foreclosure Procedures. 10.1 No Waiver. No delay or omission by Collateral Agent to exercise any right or remedy accruing upon any event of default shall impair any right or remedy, waive any default or operate as an acquiescence to any Event of Default, or affect any subsequent Event of Default of the same or a different nature. 10.2 Notices. Collateral Agent shall give BTI such notice of any private or public sale as may be required by the Uniform Commercial Code. 10.3 Condition of Collateral. Collateral Agent has no obligation to clean up or otherwise prepare the Collateral for sale. 10.4 No Obligation to Pursue Others. Collateral Agent has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them. Collateral Agent may release, modify, or waive any Collateral provided by any other person to secure any of the Obligations, all without affecting Collateral Agent's rights against BTI or Borrower. Borrower and BTI waive any right they may have to require Collateral Agent to pursue any third person for any of the Obligations. 10.5 Compliance with Other Laws. Collateral Agent may comply with any applicable state or federal law requirements in connection with the disposition of the Collateral and compliance shall not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. 10.6 Warranties. Collateral Agent may sell the Collateral without giving any warranties as to the Collateral. Collateral Agent may specifically disclaim any warranties of title or the like. This procedure shall not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. 10.7 No Marshaling. Collateral Agent shall have no obligation to marshal any assets in favor of BTI or against or in payment of the Notes, any of the other Obligations, or any other obligation owed to Collateral Agent or the Note Holders by Borrower, BTI, or any other person. 11. Limitation on Note Holders' Action Against Borrower. Until termination of the security interest in the Collateral, Collateral Agent shall have the exclusive authority to enforce this Agreement and the Notes on behalf of the Note Holders, and no Note Holder may take any action against Borrower, BTI, or the Collateral with respect to the Obligations under the Notes, including, without limitation, sending notices of defaults or events of default, instituting legal proceedings, and exercising any right of set-off or counterclaim. 12. Duties and Obligations of Collateral Agent. 12.1 Performance. In performing its duties, Collateral Agent shall exercise the same care and skill as it would exercise in dealing with loans for its own account. Neither Collateral Agent nor any of its directors, officers, employees or other agents shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the Notes except for its or their own gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction. Without limiting the generality of the foregoing, Collateral Agent: (a) may consult with legal counsel and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith and in accordance with the advice of counsel or such experts; (b) makes no representation or warranty to any Note Holder as to, and shall not be responsible to any Note Holder for, any recital, statement, representation or warranty made in or in connection with this Agreement, any Notes or in any written or oral statement (including a financial or other such statement), instrument or other document delivered in connection herewith or therewith or furnished to any Note Holder by or on behalf of Borrower or BTI; (c) shall have no duty to ascertain or inquire into the performance or observance by Borrower or BTI of any of the covenants or conditions in this Agreement or to inspect any of the Collateral or other property (including the books and records) of Borrower or BTI or inquire into the use of the proceeds of the Notes or to inquire into the existence or possible existence of any Event of Default; (d) shall not be responsible for the due execution, legality, validity, enforceability, effectiveness, genuineness, sufficiency, collectibility or value of this Agreement or the Notes or any instrument or document executed or issued pursuant hereto or in connection herewith, except to the extent that such may be dependent on the due authorization and execution by Collateral Agent itself; (e) shall have no duty or responsibility, either initially or on a continuing basis, to provide to any Note Holder any credit or other information with respect to Borrower or BTI; (f) shall be entitled to rely and act upon, any notice, consent, certificate or other instrument or writing (which may be by facsimile or other electronic means) believed by it to be genuine and correct and to have been signed or sent by the proper party or parties; (g) may execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to this Agreement or any of the Notes; and (h) may perform, exercise, and enforce any and all other rights and remedies of the Note Holders with respect to the Notes, the Obligations, this Agreement, or otherwise related to any of same to the extent reasonably incidental to the exercise by the Collateral Agent of the rights and remedies specifically authorized to be exercised by the Collateral Agent by the terms of this Agreement or any of the Notes. As to any matters not expressly provided for by this Agreement and the Notes (including, without limitation, enforcement or collection of the Obligations), Collateral Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Holders. Instructions of the Majority Holders shall be binding upon all Note Holders. Collateral Agent shall not be required to take any action that, in the reasonable opinion of the Collateral Agent, exposes the Collateral Agent to liability or that is contrary to this Agreement, the Notes, or applicable law. 12.2 Apportionment of Collections. After the occurrence and during the existence of any Event of Default, Collateral Agent shall apply and disburse all collections of the Obligations and proceeds of the Collateral in the following order: (a) first, to amounts due to Collateral Agent under this Agreement, including, without limitation, Collateral Agent Advances, until they are paid in full; and (b) second, to each Note Holder, pro rata on the basis of the ratio of the outstanding principal amounts under its Note to the total principal amount outstanding under all of the Notes. 13. Fees and Expenses of Collateral Agent. 13.1 Collateral Advances. Collateral Agent may from time to time make such disbursements and advances ("Collateral Agent Advances") that Collateral Agent, in its sole discretion, deems necessary or desirable to preserve, protect, prepare for sale or lease or dispose of the Collateral or protect or enforce the security interest in the Collateral. Collateral Agent Advances shall bear interest at the highest rate set forth in the Note and shall be payable on demand. Collateral Agent shall notify each Note Holder, and the Borrower in writing of each such Collateral Agent Advance. Each notice shall include a description of the purpose of the Collateral Agent Advance. Borrower and BTI shall upon demand reimburse Collateral Agent for each Collateral Agent Advance and pay the interest accrued thereon. 13.2 Indemnification. Borrower and BTI shall indemnify and hold harmless Collateral Agent and its directors, officers, agents and employees against any and all claims, damages, losses, liabilities, or expenses (including, but not limited to, reasonable attorneys' fees, court costs, and costs of investigation) of any kind or nature whatsoever arising out of or in connection with this. 13.3 Survival. The obligations of Borrower and BTI to reimburse and pay interest on Collateral Advances and to indemnify Collateral Agent shall survive the termination of the security interest and this Agreement and the earlier resignation or removal of Collateral Agent. When Collateral Agent incurs expenses or renders services in connection with proceedings under the U.S. Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency or other similar law, or in case of any other comparable judicial proceedings relative to Borrower or BTI, such expenses (including the fees and expenses of Collateral Agent's counsel and agents) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally. 14. Resignation by and Removal of Collateral Agent; Successor Collateral Agent. (a) Collateral Agent may at any time resign and terminate its obligations under this Agreement upon at least 60 days prior written notice to Borrower. No resignation shall be effective until a successor Collateral Agent shall have been appointed and accepted its appointment. Promptly after receipt of notice of Collateral Agent's proposed resignation, Borrower shall appoint, by written instrument, a successor Collateral Agent and notify the Note Holders thereof. If a successor Collateral Agent is not appointed in accordance with the foregoing procedures, Collateral Agent may petition a court of competent jurisdiction to appoint a successor Collateral Agent. One original counterpart of such instrument of appointment shall be delivered to each of Collateral Agent, Borrower, BTI, and the successor Collateral Agent. (b) The Majority Holders, upon at least 60 days written notice to Collateral Agent may remove and discharge Collateral Agent (or any successor Collateral Agent thereafter appointed) from the performance of its obligations under this Agreement. Promptly after the giving of notice of removal of Collateral Agent, the Majority Holders shall appoint, by written instrument, a successor Collateral Agent and notify the Note Holders thereof. One original counterpart of the instrument of appointment shall be delivered to the Collateral Agent, Borrower, BTI, the Note Holders, and the successor Collateral Agent. The removal shall become effective until all outstanding amounts due and owing to Collateral Agent are paid in full. (c) In the event of any such resignation or removal, Collateral Agent shall cooperate with Borrower and the successor Collateral Agent to facilitate the continued perfection and priority of the security interest in the Collateral. 15. Limitations of Liability. (a) Collateral Agent shall not be liable to Borrower, BTI, any Note Holder, or any other person with respect to any action taken or not taken by Collateral Agent in good faith in the performance of its obligations under this Agreement. The obligations of Collateral Agent shall be determined solely by the express provisions of this Agreement. No representation, warranty, covenant, agreement, obligation or duty of Collateral Agent shall be implied with respect to this Agreement or Collateral Agent's services hereunder. (b) Collateral Agent may conclusively rely, and shall be fully protected in acting or refraining from acting, upon and need not verify the accuracy of any written instruction, notice, order, request, direction, certificate, opinion or other instrument or document believed by Collateral Agent to be genuine and to have been signed and presented by the proper party or parties. (c) No provision of this Agreement shall require Collateral Agent to expend or risk its own funds or otherwise incur financial liability in the performance of its duties under this Agreement if Collateral Agent has reasonable grounds for believing that repayment or adequate indemnity is not assured. (d) Collateral Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees appointed with due care, and shall not be responsible for any willful misconduct or negligence on the part of any agent, attorney, custodian or nominee so appointed. 16. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by the other party at the addresses shown below whether by personal delivery, express delivery or facsimile, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. If to Borrower: The Beard Company 5600 N. May Avenue, Suite 320 Oklahoma City, OK 73112 Attention: Herb Mee, Jr. If to Collateral Agent: Investrust, N.A. Attn: C.A Hartwig 5101 N. Classen Blvd., Suite 620 Oklahoma City, OK 73118 If to Note Holders: To the addresses specified by each Note Holder in the Subscription Agreement executed by each Note Holder subscribing for the Notes. 17. Governing Law; Venue; Consent to Jurisdiction. (a) The laws of the State of Oklahoma, without giving effect to its choice of law principles, shall govern all matters arising under or relating to this Agreement. (b) The parties agree that any legal proceeding arising out of this Agreement or the transactions contemplated hereby, including any legal proceeding by a third party beneficiary to this Agreement, may be brought and litigated only in the United States District Court for the Western District of Oklahoma, to the extent that it has subject matter jurisdiction and otherwise in the state courts sitting in Oklahoma City, Oklahoma, and each party hereto agrees and consents to such jurisdiction. The parties agree that service of process may be made upon them in any legal proceeding relating to this Agreement by any means allowed under Oklahoma or federal law. The parties hereby waive and agree not to assert, by way of motion, as a defense or otherwise, that any proceeding is brought in an inconvenient forum or that the venue thereof is improper, and further agree to a transfer of any such proceeding to the United States District Court for the Western District of Oklahoma, to the extent that it has subject matter jurisdiction, and otherwise in the state courts sitting in Oklahoma City, Oklahoma. 18. Final Agreement; Amendment. This is the final expression of the entire agreement of the parties regarding the subject matter of this Agreement. The parties may amend this Agreement only by a written agreement that identifies itself as an amendment to this Agreement. Collateral Agent and the Note Holders may amend this Agreement with respect to their duties and obligations to each other without the consent of Borrower or BTI. EXECUTED as of the day and year first written above. BTI: BEARD TECHNOLOGIES, INC., an Oklahoma corporation /s/ Herb Mee, Jr. By: ---------------------------------------- Herb Mee, Jr., Vice President BORROWER: THE BEARD COMPANY, an Oklahoma corporation /s/ Herb Mee, Jr. By: ---------------------------------------- Herb Mee, Jr., President COLLATERAL AGENT: INVESTRUST, N.A., a nationally chartered trust company /s/ C. A. Hartwig By: ---------------------------------------- C. A. Hartwig, Vice President EX-10.3 4 bcex103-051605.txt Exhibit 10.3 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. 2005-___ ________________, 2005 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 _________________________, or his 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, $.0006665 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 Confidential Private Placement Memorandum in connection with the Company's offering of $2,100,000 of 12% Convertible Subordinated Notes due February 15, 2010, as Amended December 29, 2004. 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 ______________, 2010 (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 $1.00 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 fifteen million (15,000,000) shares of Common Stock, par value $0.0006665 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 4,969,565 fully paid and non-assessable shares of Common Stock and 27,838 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: Herb Mee, Jr., President The Beard Company 5600 North May Avenue, Suite 320 Oklahoma City, Oklahoma 73112 Phone: (405) 842-2333 Fax: (405) 842-9901 To the Holder: ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ Phone: ____________________ Fax: ______________________ 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 _____________, 2005. (the "Corporation") THE BEARD COMPANY, an Oklahoma corporation By______________________________________ Herb Mee, Jr., President (the "Holder") _______________________________ _______________________________ By_____________________________ Title:___________________________ EXHIBIT A REGISTRATION RIGHTS AGREEMENT 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Affiliate: With respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. Board: The board of directors of the Company. Common Stock: The common stock, par value $0.0006665 per share, of the Company. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. Holder: Any party hereto (other than the Company) and any holder of Registrable Securities who agrees in writing to be bound by the provisions of this Agreement. Initial Notice: See Section 3(a) hereof. Investor: Investor and any of its Affiliates which hold Registrable Securities, collectively. NASD: National Association of Securities Dealers, Inc. Person: An individual, partnership, limited liability company, joint venture, corporation, trust or unincorporated organization, a government or any department, agency or political subdivision thereof or other entity. Piggyback Notice: See Section 3(a) hereof. Piggyback Registration: A registration pursuant to Section 3 hereof. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registrable Securities: All shares of Common Stock issued or issuable on exercise of the Warrant and any securities of the Company which may be issued or distributed with respect to, or in exchange or substitution for, or conversion of, such Common Stock and such other securities pursuant to a stock dividend, stock split or other distribution, merger, consolidation, recapitalization or reclassification or otherwise; provided, however, that any Registrable Securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such Registrable Securities has been declared effective under the Securities Act and such Registrable Securities have been disposed of in accordance with the plan of distribution set forth in such Registration Statement, (ii) such Registrable Securities are distributed pursuant to Rule 144 (or any similar provision then in force) promulgated under the Securities Act, (iii) such Registrable Securities shall have been otherwise transferred to a Person other than an Investor and new certificates for such securities that do not bear a legend restricting further transfer under the Securities Act shall have been delivered by the Company, or (iv) such Registrable Securities have been held for a period of one (1) year. Any securities that have ceased to be Registrable Securities cannot thereafter become Registrable Securities and any security that is issued or distributed in respect of securities that have ceased to be Registrable Securities is not a Registrable Security. Registration: A Piggyback Registration. Registration Expenses: See Section 6 hereof. Registration Statement: Any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated by reference in such registration statement. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended from time to time. Underwritten Registration or Underwritten Offering: A sale of securities of the Company to an underwriter for reoffering to the public. Warrant: The Warrants issued by the Company pursuant to the Confidential Private Placement Memorandum as Amended December 29, 2004. 2. Securities Subject to this Agreement The securities entitled to the benefits of this Agreement are the Registrable Securities. 3. Piggyback Registrations (a) Participation. Subject to Section 3(b) hereof, if at any time after the date hereof the Company proposes to file a Registration Statement (other than a registration on Form S-4 or S-8 or any successor form to such Forms or any registration of securities as it relates to an offering and sale to management of the Company pursuant to any employee stock plan or other employee benefit plan arrangement) with respect to an offering that includes any shares of Common Stock, then the Company shall give notice of the proposed filing (the "Piggyback Notice") to the Holders as promptly as practicable (but in no event less than fifteen (15) days before the anticipated filing date). The Piggyback Notice shall offer the Holders the opportunity to register such number of shares of Registrable Securities as the Holders may request and shall set forth (i) the anticipated filing date of such Registration Statement and (ii) the number of shares of Common Stock that is proposed to be included in such Registration Statement. The Company shall include in such Registration Statement such shares of Registrable Securities for which it has received written requests to register such shares within 10 days after the Piggyback Notice has been given. (b) Underwriter's Cutback. Notwithstanding the foregoing, if a Registration pursuant to this Section 3 involves an Underwritten Offering and the managing underwriter or underwriters of such proposed Underwritten Offering delivers an opinion to the Holders that the total or kind of securities which such Holders and any other persons or entities intend to include in such offering are reasonably likely to adversely affect the price, timing or distribution of the securities offered in such offering, then the Company shall include in such Registration; (i) If such Registration was a primary registration by the Company of its securities, the Company will include in such Registration to the extent of the number of securities which the managing underwriter advises can be sold in such Underwritten Offering: first, the securities proposed by the Company to be sold for its own account; second, any Registrable Securities requested to be included in such Registration by the Holders, pro rata on the basis of the number of securities sought to be sold by the requesting Holders; and third, other securities of the Company proposed to be included in such Registration, allocated among the Company and the holders thereof in accordance with the priorities then existing among the Company and such holders. (ii) If such Registration was requested other than by the Holders or the Company, the Company will include in such Registration to the extent of the number of securities which the managing underwriter advises can be sold in such Underwritten Offering: first, the securities proposed to be sold by the security holder initiating the Registration; second, any Registrable Securities requested to be included in such Registration, pro rata on the basis of the number of securities sought to be sold by the requesting Holders; third, any securities of the Company proposed by any other Persons to be included in such Registration, pro rata on the basis of the number of securities proposed to be sold by the requesting Persons; and fourth the securities proposed by the Company to be sold for its own account. (c) Expenses. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 3. (d) Company Control. The Company may decline to file a Registration Statement after giving the Initial Notice or the Piggyback Notice, or withdraw a Registration Statement after filing and after such Piggyback Notice, but prior to the effectiveness of the Registration Statement, provided that the Company shall promptly notify each Holder in writing of any such action and provided further that the Company shall bear all reasonable expenses incurred by such Holder or otherwise in connection with such withdrawn Registration Statement. 4. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each Holder whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 hereof agrees, if requested by the managing underwriters in an Underwritten Offering, not to effect any public sale or distribution of securities of the Company the same as or similar to those being registered, or any securities convertible into or exchangeable or exercisable for such securities, in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such Underwritten Registration), during the 10-day period prior to, and during the 90-day period (or such longer period of up to 180 days as may be required by such underwriter of all Persons whose securities are covered by such Registration Statement) beginning on, the effective date of any Registration Statement in which such Holders are participating (except as part of such Registration) or the commencement of the public distribution of securities, to the extent timely notified in writing by the Company or the managing underwriters. (b) Restrictions on Public Sale by the Company and Others. If and to the extent requested by the managing underwriter, the Company agrees: (a) not to effect any public or private sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such equity securities, during the 10 day period prior to and the 90 day period (or such longer period of up to 180 days as may be required by such underwriter) after the effective date of the Registration Statement filed in connection with an Underwritten Offering made pursuant to a Piggyback Registration (or for such shorter period of time as is sufficient and appropriate, in the opinion of the managing underwriter (except as part of such Underwritten Registration and except pursuant to registrations on Form S-4 or Form S-8 promulgated by the Commission or any successor or similar forms thereto; and (b) to cause each officer, director, 10% shareholder and holder of its equity securities (or of any securities convertible into or exchangeable or exercisable for such securities) purchased from the Company at any time after the date of this Agreement (other than in a public offering), to agree, to the extent permitted by law, not to effect any such public or private sale or distribution of such securities (including a sale under Rule 144), during such period, except as part of such underwritten registration. (c) Exclusions. Notwithstanding the foregoing provisions, this section will not prevent the grant of compensatory stock options or similar grants to employees of the Company pursuant to the Company's stock based incentive plans and will not prevent the exercise, conversion or exchange of any securities pursuant to the terms of such securities. 5. Registration Procedures In connection with the Company's Registration obligations pursuant to Section 3 hereof, the Company will use its best efforts to effect such Registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement relating to the Piggyback Registration including all exhibits and financial statements required by the SEC to be filed therewith; prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for a period of 90 days (or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold or withdrawn), or, if such Registration Statement relates to an Underwritten Offering, such longer period as in the opinion of counsel for the underwriters a Prospectus is required by law to be delivered in connection with sales of Registrable Securities by an underwriter or dealer; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (b) notify the selling Holders and the managing underwriters, if any, and (if requested) confirm such advice in writing, as soon as practicable after notice thereof is received by the Company (i) when the Registration Statement or any amendment thereto has been filed or becomes effective, the Prospectus or any amendment or supplement to the Prospectus has been filed, and, to furnish such selling Holders and managing underwriters with copies thereof, (ii) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any preliminary Prospectus or Prospectus or the initiation or threatening of any proceedings for such purposes, (iv) if at any time the representations and warranties of the Company contemplated by paragraph (l) below cease to be true and correct and (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for offering or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (c) (i) promptly notify the selling Holders and the managing underwriters, if any, at any time during the period contemplated by a paragraph (a) above, when the Company becomes aware of the happening of any event as a result of which the Prospectus included in such Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the Prospectus and any preliminary Prospectus, in light of the circumstances under which they were made) when such Prospectus was delivered not misleading or, if for any other reason it shall be necessary during such time period to amend or supplement the Prospectus in order to comply with the Securities Act and, (ii) in either case as promptly as practicable thereafter, prepare and file with the SEC, and furnish without charge to the selling Holders and the managing underwriters, if any, a supplement or amendment to such Prospectus which will correct such statement or omission or effect such compliance; (d) make every reasonable effort to prevent the entry, or obtain the withdrawal, of any stop order or other order suspending the use of any preliminary Prospectus or Prospectus or suspending any qualification of the Registrable Securities; (e) if requested by the managing underwriter or underwriters or a Holder of Registrable Securities being sold in connection with an Underwritten Offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the Holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the Underwritten (or best efforts underwritten) Offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling Holder and each managing underwriter, without charge, one executed copy and as many conformed copies as they may reasonably request, of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling Holder and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary Prospectus) and any amendment or supplement thereto as such Persons may reasonably request (it being understood that the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto) and such other documents as such selling Holder may reasonably request in order to facilitate the disposition of the Registrable Securities by such Holder; (h) on or prior to the date on which the Registration Statement is declared effective, use its best efforts to register or qualify, and cooperate with the selling Holders, the managing underwriter, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of each state and other jurisdiction of the United States as any such seller, underwriter reasonably requests in writing and do any and all other acts or things reasonably necessary or advisable to keep such registration or qualification in effect for so long as such Registration Statement remains in effect and so as to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution of the Registrable Securities covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling Holders and the managing underwriter, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other U.S. governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) not later than the effective date of the applicable Registration, provide a CUSIP number for all Registrable Securities and provide the applicable trustee or transfer agent with printed certificates for the Registrable Securities; (l) make such representations and warranties to the Holders of Registrable Securities being registered, and the underwriters, if any, in form, substance and scope as are customarily made by issuers in primary underwritten public offerings; (m) enter into such customary agreements (including an underwriting agreement) and take all such other actions as the Holders of a majority of the Registrable Securities being sold or the managing underwriter, if any, reasonably request in order to expedite or facilitate the Registration and disposition of such Registrable Securities; (n) obtain for delivery to the Holders of Registrable Securities being registered and to the underwriter an opinion or opinions from counsel for the Company, upon consummation of the sale of such Registrable Securities to the underwriters (the "Closing Date") in customary form and in form, substance and scope reasonably satisfactory to such Holders and their counsel, and the underwriters and their counsel; (o) obtain for delivery to the Company and the underwriter, with copies to the Holders, a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the managing underwriter or the Holders of a majority of the Registrable Securities being sold reasonably request, dated the effective date of the Registration Statement and brought down to the Closing Date; (p) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; (q) make available for inspection by a representative of the Holders of a majority of the Registrable Securities, any underwriter participating in any disposition pursuant to such Registration, and any attorney or accountant retained by such Holders or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by law; (r) use its best efforts to comply with all applicable rules and regulations of the SEC and make generally available to its security holders, as soon as reasonably practicable (but not more than eighteen months) after the effective date of the Registration Statement, an earnings statement satisfying the provisions of Section 11 (a) of the Securities Act and the rules and regulations promulgated thereunder; (s) as promptly as practicable after filing with the SEC of any document which is incorporated by reference into the Registration Statement or the Prospectus, provide copies of such document to counsel for the selling Holders and to the managing underwriters, if any; (t) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such Registration Statement from and after a date not later than the effective date of such Registration Statement; (u) use its best efforts to list (if such Registrable Securities are not already listed) all Registrable Securities covered by such Registration Statement on the principal stock exchange or market on which the Company's Common Stock is then listed; and (v) Take such further actions as are reasonably requested by the Holders in order to expedite or facilitate the disposition of the Registrable Securities. The Company may require each Holder of Registrable Securities as to which any Registration is being effected to furnish to the Company such information regarding the distribution of such securities and such other information relating to such Holder and its ownership of Registrable Securities as the Company may from time to time reasonably request in writing. Each Holder agrees to furnish such information to the Company and to cooperate with the Company as necessary to enable the Company to comply with the provisions of this Agreement. Each Holder agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(c)(i) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(c)(ii) hereof, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event that the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice pursuant to Section 5(c)(i) hereof to the date when the Company shall make available to the Holders a Prospectus supplemented or amended to conform with the requirements of Section 5(c)(ii) hereof. 6. Registration Expenses All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation (i) all registration and filing fees, and any other fees and expenses associated with filings required to be made with any stock exchange, the SEC and the NASD (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules and regulations of the NASD), (ii) all fees and expenses of compliance with state securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling Holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or the Holders of a majority of the Registrable Securities being sold may designate), (iii) all printing and related messenger and delivery expenses (including expenses of printing certificates for the Registrable Securities and of printing Prospectuses), (iv) all fees and disbursements of counsel for the Company and of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (v) Securities Act liability insurance if the Company so desires or the underwriters so require, (vi) all fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange and all rating agency fees, (vii) all reasonable fees and disbursements of one counsel selected by the Holders of the Registrable Securities being registered to represent such Holders in connection with such registration, up to a maximum of $15,000, (viii) all fees and disbursements of underwriters customarily paid by the issuers or sellers of securities, excluding underwriting discounts and commissions and transfer taxes, if any, and fees and disbursements of counsel to underwriters (other than such fees and disbursements incurred in connection with any registration or qualification of Registrable Securities under the securities or blue sky laws of any state), and (ix) fees and expenses of other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), will be borne by the Company, regardless of whether the Registration Statement becomes effective. The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any audit and the fees and expenses of any Person, including special experts, retained by the Company. 7. Indemnification (a) Indemnification by Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each Holder and each Person who controls such Holder (within the meaning of the Securities Act), and each of their respective partners, members, officers, directors, employees and agents (collectively, the "Company Indemnified Persons"), against any and all losses, claims, damages, liabilities, reasonable attorneys fees, costs or expenses and costs and expenses of investigating and defending any such claim (collectively, "Damages"), joint or several, and any action in respect thereof to which any such Company Indemnified Person may become subject under the Securities Act or otherwise, insofar as such Damages (or proceedings in respect thereof) arise out of, or are based upon, any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Holder expressly for use therein, and shall promptly reimburse each Company Indemnified Person for any legal and other expenses reasonably incurred by that Company Indemnified Person in investigating or defending or preparing to defend against any such Damages or proceedings; provided, however, that the Company shall not be liable in any such case to the extent that any such Damages arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) such offering does not involve an underwriter, (ii) such Holder failed to deliver or cause to be delivered a copy of the Prospectus to the Person asserting such loss, claim, damage, liability or expense after the Company had timely furnished such Holder with a sufficient number of copies of the same and (iii) the Prospectus completely corrected in a timely manner such untrue statement or omission; and provided, further, that the Company shall not be liable in any such case to the extent that any such Damages arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if (x) such offering does not involve an underwriter, (y) such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and (z) the Holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of the Registrable Securities to the Person asserting such loss, claim, damage, liability or expense after the Company had furnished such Holder with a sufficient number of copies of the same. The Company also agrees to indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holders. (b) Indemnification by Selling Holder of Underlying Securities. In connection with each Registration, each selling Holder will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any Registration Statement or Prospectus and agrees to indemnify and hold harmless, to the full extent permitted by law, the Company and each Person who controls the Company (within the meaning of the Securities Act), and each of their respective directors, officers, employees and agents, against any and all Damages resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such selling Holder to the Company specifically for inclusion in such Registration Statement or Prospectus and has not been corrected in a subsequent writing prior to or concurrently with the sale of the Registrable Securities to the Person asserting such Damages. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt (but in any event within 30 days after such Person has actual knowledge of the facts constituting the basis for indemnification) written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any delay or failure to so notify the indemnifying party shall relieve the indemnifying party of its obligations hereunder only to the extent, if at all, that it is prejudiced by reason of such delay or failure; provided further, however, that any Person entitled to indemnification hereunder shall have the right to select and employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) the indemnifying party has agreed in writing to pay such fees or expenses, or (b) the indemnifying party shall have failed to assume the defense of such claim within a reasonable time after receipt of notice of such claim from the Person entitled to indemnification hereunder and employ counsel reasonably satisfactory to such Person or (c) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld), provided that an indemnified party shall not be required to consent to any settlement involving the imposition of equitable remedies or involving the imposition of any material obligations on such indemnified party other than financial obligations for which such indemnified party will be indemnified hereunder. No indemnifying party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. Whenever the indemnified party or the indemnifying party receives a firm offer to settle a claim for which indemnification is sought hereunder, it shall promptly notify the other of such offer. If the indemnifying party refuses to accept such offer within 20 business days after receipt of such offer (or of notice thereof), such claim shall continue to be contested and, if such claim is within the scope of the indemnifying party's indemnity contained herein, the indemnified party shall be indemnified pursuant to the terms hereof. If the indemnifying party notifies the indemnified Party in writing that the indemnifying party desires to accept such offer, but the indemnified party refuses to accept such offer within 20 business days after receipt of such notice, the indemnified party may continue to contest such claim and, in such event, the total maximum liability of the indemnifying party to indemnify or otherwise reimburse the indemnified party hereunder with respect to such claim shall be limited to and shall not exceed the amount of such offer, plus reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and disbursements) to the date of notice that the indemnifying party desires to accept such offer, provided that this sentence shall not apply to any settlement of any claim involving the imposition of equitable remedies or to any settlement imposing any material obligations on such indemnified party other than financial obligations for which such indemnified party will be indemnified hereunder. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim in any one jurisdiction, unless in the written opinion of counsel to the indemnified party, reasonably satisfactory to the indemnifying party, use of one counsel would be expected to give rise to a conflict of interest between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of one such additional counsel. (d) Contribution. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such Damages in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no selling Holder shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such selling Holder with respect to the sale of any securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Each selling Holder's obligation to contribute pursuant to this Section 7(d) is several and not joint. The provisions of this Section 8 shall survive, notwithstanding any transfer of the Registrable Securities by any Holder or any termination of this Agreement. 8. Rule 144. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder, and it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemption provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such information and requirements. 9. Participation in Underwritten Registrations No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and this Agreement; provided that (i) no selling Holder shall be required to make any representations or warranties except those which relate solely to such selling Holder and its intended method of distribution, and (ii) the liability of each selling Holder to any underwriter under such underwriting agreement will be limited to liability arising from misstatements or omissions regarding such selling Holder and its intended method of distribution and any such liability shall not exceed an amount equal to the amount of net proceeds such selling Holder derives from such registration; provided, however, that in an offering by the Company in which any Holder requests to be included in a Piggyback Registration, the Company shall use its reasonable best efforts to arrange the terms of the offering such that the provisions set forth in clauses (i) and (ii) of this Section 9 are true; provided further, that if the Company fails in its reasonable best efforts to so arrange the terms, the Holder may withdraw all or any part of its Registrable Securities from the Piggyback Registration and the Company shall reimburse such Holder for all reasonable out-of-pocket expenses (including counsel fees and expenses) incurred prior to such withdrawal. 10. Miscellaneous (a) Remedies. Each Holder, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. Remedies for breach by any Holder of its obligations under this Agreement shall be as set forth in Section 8. (b) Term. This Agreement shall terminate on the earlier to occur of (i) the first anniversary of the date of exercise of the Warrant or (ii) the first date on which there are no longer any Registrable Securities. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Holders of a majority of the outstanding Registrable Securities; provided, however, that the Company and the Investor together may amend, modify or supplement the provisions of this Agreement and may waive or consent to departures from the provisions hereof, without the consent of the Holders of a majority of the outstanding Registrable Securities so long as such amendment, modification, supplement, waiver or consent does not adversely affect the rights of Holders of Registrable Securities hereunder or so long as such amendment, modification, supplement, waiver or consent affects the rights of the Investor and other Holders of Registrable Securities hereunder equally. (d) Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed (A) if within the United States by nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if delivered from outside the United States, by International Federal Express or facsimile, and shall be deemed given (i) if delivered by nationally recognized overnight carrier, one (1) business day after so mailed, (ii) if delivered by International Federal Express, two (2) business days after so mailed, and (iii) if delivered by facsimile, upon electric confirmation of receipt and shall be delivered as addressed as follows: (x) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 10(d); and (y) if to the Company, initially at the address set forth below and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 10(d): The Beard Company, 5600 North May Avenue, Suite 320, Oklahoma City, Oklahoma 73112. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation, and without the need for an express assignment subsequent Holders of Registrable Securities. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oklahoma, without regard to the principles of conflicts of laws. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities issued pursuant to the Warrant. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matters. EX-10.4 5 bcex104-051605.txt Exhibit 10.4 The Beard Company Enterprise Plaza, Suite 320 5600 North May Avenue Oklahoma City, Oklahoma 73112 Fax (405) 842-9901 (405) 842-2333 February 7, 2005 Mr. John Harvison FEDERAL EXPRESS 2810 Glenda Ave. Telephone: 817-838-4740 Fort Worth, TX 76117 Attention: Theresa Smith Re: BEE/7HBF, LLC Tongzhou Venture ("BEE/7HBF Tongzhou Venture") Dear John: This will confirm our agreement last Friday concerning the subject Venture. The terms of the revised deal are detailed in the Terms Sheet attached hereto as "Exhibit A.". Per the discussions at our January 17 meeting we agreed with you that the payments for your investment will be spread over a six-month period. As a result of the revised structure, the new payment schedule is set forth in the Terms Sheet and highlighted in the attached "Exhibit B." The organizational mechanics of the deal are depicted in the Terms Sheet. Upon receipt of a signed copy of this Letter Agreement we will form BEE/7HBF, LLC (the "LLC") which will in turn form the WFOE (once its name has been determined) that will own the initial mini-plant (Plant #1). Further, the LLC will have the first right of refusal to participate in all of Beard's subsequent fertilizer/composting operations in China until and unless it opts out of a participation. If the above meets with your approval, we ask that you please have 7HBF indicate its acceptance by signing and returning one copy of this Letter Agreement together with 7HBF's check in the amount of US$62,500 to cover your US$50,000 capital contribution plus the Month 1 cash requirement of US$12,500. Three extra copies are enclosed for your individual files. We are excited about the opportunity in China, and are doubly excited to have you folks as our partner. Sincerely, ACCEPTED AND AGREED TO THIS THE BEARD COMPANY 11th DAY OF FEBRUARY, 2005 7HBF, Ltd. /s/ Herb Mee, Jr. By: 7HBF Management Company, Ltd. General Partner Herb Mee, Jr., President /s/ Randall W. Harvison HMJr/do By _____________________________ Name: Randall W. Harvison Title: Manager cc: Randall W. Harvison John D. Harvison Exhibit A Terms Sheet Beard Environmental Engineering, L.L.C. ("BEE") is seeking the influx of US$900,000 to fund this project. Following is a summary of the terms of the proposed arrangement.: 1. BEE, an Oklahoma limited liability company, and 7HBF, Ltd., a Texas limited partnership ("7HBF"), will form BEE/7HBF, LLC, an Oklahoma limited liability company (the "LLC"). 2. BEE and 7HBF will each contribute US$50,000 in cash to the LLC. Such contributions will be made to the LLC upon execution of the Letter Agreement. 3. 7HBF will loan US$850,000 to the LLC in exchange for a 5-year Non-Recourse Promissory Note (the "Note") at the current Applicable Federal Mid Term Rate of 3.83%. Advances will be made against the Note in accordance with the following schedule: Upon execution of the Letter Agreement - US$12,500 March 1, 2005 - US$100,000 April 1, 2005 - US$90,000 May 1, 2005 - US$297,500 June 1, 2005 - US$100,000 July 1, 2005 - US$250,000 ---------- Total - US$850,000 ========== Interest will be paid on such Note annually. 4. The total investment will be $US950,000, as follows: 7HBF BEE TOTAL ---- --- ----- Contributions to the LLC - US$50,000 US$50,000 US$100,000 Loan to the LLC - US$850,000 - US$850,000 ---------- --------- ---------- Total - US$900,000 US$50,000 US$950,000 ========== ========= ========== 5. The LLC will use such funds, as required, to fund the ownership and operation of BEE's initial plant (Plant #1) for the formulation of Organic Chemical Compound Fertilizer ("OCCF") at a facility located in Tongzhou, Hebei Province, China. The facility will be controlled and managed by a Chinese Wholly Foreign Owned Enterprise ("WFOE") company whose name has not yet been determined. 6. Beijing Beard Sino-American Bio-Tech Engineering Co. Ltd. ("BTEC") will provide operations oversight, initial management and accounting services to the WFOE and will receive US$30,000 per month therefor during the life of the project ("LOP").* _______________ *If the LLC elects to participate in a second plant (Plant #2), BTEC will receive an additional US$20,000 per month during the LOP for Plant #2 for providing such services. Should additional plants be added thereafter, BTEC may receive additional compensation therefor. It is the intention of the parties that, so long as the LLC is the sole participant in BEE's OCCF activities (see 7. below), BEE will receive as total compensation for such services (i) the total amount of BEE's overhead in China plus (ii) such portion of The Beard Company's ("BRCO") overhead in Oklahoma City as may be reasonably allocated to the OCCF operations in China (collectively, the "China Overhead"). Such amounts shall be estimated on a quarterly basis and adjusted annually upon audit. If at any point the LLC elects to opt out of participation, the China Overhead will be spread proportionally between the LLC and BRCO's other operations in China. 7. The LLC will have the first right of refusal to participate on the same basis as in Plant #1 in all subsequent fertilizer/composting operations undertaken by BRCO and its affiliates in China until and unless it opts out of a participation. 8. 7HBF will have the sole power to determine when and in what amounts principal payments will be made on the loan from available LLC funds. 9. The LLC will elect to be a partnership for U.S. tax purposes. 10. BEE and 7HBF will have equal representation on the Board of Managers. The Board of Managers will elect the Officers of the LLC. 11. Ownership and equity in the LLC shall be shared as follows: BEE - 50%; 7HBF - 50% 12. An LLC Operating Agreement will be furnished for review and approval following execution of the Letter Agreement. Exhibit B BEE/7HBF Tongzhou Venture Summary of Cash Flow Through the First Six Months
==================================================================================================================================== Description PRE-OPERATING Year 1 Total ------------------------------------------------------------------- ------------- Mth 1 Mth 2 Mth 3 Mth 4 Mth 5 Mth 6 ==================================================================================================================================== Cash Inflows 7HBF Loan $ 12,500 $ 100,000 $ 90,000 $ 297,500 $ 100,000 $ 250,000 $ 850,000 Capital Contribution $ 100,000 $ - $ - $ - $ - $ - $ 100,000 Fixed Asset Loan $ - $ - $ - $ - $ - $ - $ - Sales Revenue $ - $ - $ - $ - $ - $ - $ - ----------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Total Inflow $ 112,500 $ 100,000 $ 90,000 $ 297,500 $ 100,000 $ 250,000 $ 950,000 - ---------------------------------------------------------------------------------------------------------------------- Cash Outflows Capital Expenditures $ - $ 80,325 $ 49,815 $ 246,165 $ 59,325 $ - $ 435,630 Manufacturer's Credit $ - $ - $ - $ - $ - $ - $ - Pre-Operating Costs $ 53,179 $ 47,942 $ 47,075 $ 50,568 $ 49,810 $ - $ 248,574 Capital Investment Loan Fee $ - $ - $ - $ - $ - $ - $ - Cost of Goods Sold $ - $ - $ - $ - $ - $ - $ - G&A and Other Expenses $ - $ - $ - $ - $ - $ 53,141 $ 53,141 Value Added Tax $ - $ - $ - $ - $ - $ - $ - Repayment of Manufac. Credit $ - $ - $ - $ - $ - $ - $ - Repayment of Capital Loan $ - $ - $ - $ - $ - $ - $ - Repayment of Fixed Assets Loan $ - $ - $ - $ - $ - $ - $ - $ - Change in Accounts Payable $ - $ - $ - $ - $ - $ (34,036) $ (34,036) Change in Interest Payable $ (40) $ (359) $ (648) $ (1,599) $ (1,923) $ (7,282) $ (11,851) Change in Accrued Payroll $ - $ - $ - $ - $ - $ - $ - Change in Accounts Receivable $ - $ - $ - $ - $ - $ - $ - Change in Inventory $ - $ - $ - $ - $ - $ 185,024 $ 185,024 Depreciation & Amortization $ - $ - $ - $ - $ - $ (7,139) $ (7,139) ----------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Total Outflow $ 53,139 $127,907 $ 96,243 $ 295,134 $ 107,212 $ 189,707 $ 869,342 - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Flow $ 59,361 $(27,907) $ (6,243) $ 2,366 $ (7,212) $ 60,293 $ 80,658 Beginning Cash Balance $ 112,500 $ 59,361 $ 31,453 $ 25,211 $ 27,577 $ 20,365 - ------------------------------------------------------------------------------------------------------------------------------------ Ending Cash Balance $ 59,361 $ 31,453 $ 25,211 $ 27,577 $ 20,365 $ 80,658 - ------------------------------------------------------------------------------------------------------------------------------------ Note: The numbers presented herewith are estimates. Actual results may vary. Totals may not sum exactly as a result of rounding. Source: Beard Environmental Engineering, 2005
EX-10.5 6 bcex105-051605.txt Exhibit 10.5 UNSECURED PROMISSORY NOTE $850,000.00 Oklahoma City, Oklahoma February 14, 2005 For value received, the undersigned, BEE/7HBF, LLC, an Oklahoma limited liability company (the "Maker"), agrees to all of the terms of this Promissory Note (this "Note") and promises to pay to the order of 7HBF, Ltd., a Texas limited partnership (the payee, its successors and assigns are hereinafter called the "Holder"), at Enterprise Plaza, Suite 320, 5600 N. May, Oklahoma City, Oklahoma 73112, or at such other place as may be designated in writing by the Holder of this Note, the principal sum of EIGHT HUNDRED FIFTY THOUSAND DOLLARS ($850,000.00) or, if less than such amount, the aggregate unpaid principal amount of all advances or loans made by the Holder to the Maker, and all interest accruing thereon. Advances will be made by the Holder to the Maker in accordance with the Terms Sheet contained at Pages 1-2 of the revised Confidential Private Placement Memorandum dated February 7, 2005 between The Beard Company and John Harvison, or as subsequently agreed to by the parties. This Note will be payable as follows: Prior to Default the unpaid principal balance of this Note will bear interest at the current Applicable Federal Mid Term Rate of 3.83% (the "Applicable Rate"). Interest will commence to accrue on the date advances or loans are made on the Note and thereafter until the Note is paid in full. Payments of accrued interest shall be due and payable annually commencing on February 14, 2006. The Maker will have the sole power to determine when and in what amounts principal payments will be made on the Note from available LLC funds. All obligations evidenced by and owing pursuant to the terms of this Note, including unpaid principal and interest, are due and payable February 14, 2010 (the "Maturity Date"). Both principal and interest owing pursuant to the terms of this Note are payable in the lawful currency of the United States of America and in immediately available funds. All advances made on the Note will be applied to the Note when received by the Maker hereof. All payments made on this Note will be applied to this Note when received by the Holder hereof. Any sum not paid when due will bear interest at the rate equal to the Applicable Rate plus six percent (6%) and will be paid at the time of, and as a condition precedent to, the curing of any "Default", as that term is hereinafter defined in this Note. During the existence of any Default, the Holder of this Note may apply payments received on any amount due hereunder or under the terms of any instrument hereafter evidencing or securing said indebtedness as the Holder may determine. The Maker agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Holder's rights hereunder, the Maker will pay to the Holder all reasonable attorney's fees and all expenses incurred by the Holder in connection therewith. The undersigned has no in personam liability for the payment of this Note. /s/HMJr THIS NOTE IS GIVEN BY THE MAKER AND ACCEPTED BY THE HOLDER PURSUANT TO A LENDING TRANSACTION CONTRACTED, CONSUMMATED, AND TO BE PERFORMED IN OKLAHOMA CITY, OKLAHOMA COUNTY, OKLAHOMA, AND THIS NOTE SHALL BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF OKLAHOMA. The payment of all indebtedness evidenced by this Note is unsecured. However, in the event of any Default, the Holder may request, and the Maker agrees to furnish to the Holder, agreeable collateral and such security agreements as the Maker may reasonably require to secure the indebtedness. At the option of the Holder, the unpaid balance of this Note, and all other obligations of the Maker to the Holder, whether direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without presentment, protest, notice or demand upon the occurrence or existence of one or more of the following events or conditions ("Default"): 1. any payment required by this Note or any other note or obligation of the Maker to the Holder or to others is not made when due in the amount required; and 2. any default or breach occurs in the performance of any covenant, obligation, representation, warranty, or provision contained in this Note or in any other note or obligation of the Maker to Holder or to others; No waiver of any payment or other right under this Note by the Holder shall operate as a waiver of any other payment or right. Any payments hereunder may, at the option of the Holder, be recorded on this Note and shall be prima facie evidence of such payments and the unpaid balance of this Note. The Maker waives presentment for payment, protest and notice of nonpayment. IN WITNESS WHEREOF, the Maker has executed this instrument as of the 16th day of February, 2005, effective as of February 14, 2005. BEE/7HBF, LLC, an Oklahoma limited liability company By /s/ Herb Mee, Jr. Herb Mee, Jr., Vice President /s/HMJr EX-31.1 7 bcex311-051605.txt Exhibit 31.1 CERTIFICATIONS I, William M. Beard, Chairman of the Board and Chief Executive Officer of The Beard Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Beard Company; 2. Based on my knowledge, this 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 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 report; 4. The registrant's other certifying officer(s) 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 report is being prepared; b) [reserved]; c) 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 d) 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 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(s) 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 registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are 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 controls over financial reporting. Date: April 12, 2006 /s/ William M. Beard Signature: William H. Beard Title: Chairman of the Board and Chief Executive Officer EX-31.2 8 bcex312-051605.txt Exhibit 31.2 CERTIFICATIONS I, Herb Mee, Jr., President and Chief Financial Officer of The Beard Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Beard Company; 2. Based on my knowledge, this 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 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 report; 4. The registrant's other certifying officer(s) 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 report is being prepared; b) [reserved]; c) 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 d) 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 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(s) 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 registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are 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 controls over financial reporting. Date: April 12, 2006 /s/ Herb Mee, Jr. Signature: Herb Mee, Jr. Title: President and Chief Financial Officer EX-32.1 9 bcex321-051605.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with The Beard Company's (the "Company") Report on Form 10-Q for the period ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William M. Beard, Chairman of the Board and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 12, 2005 By: /s/ William M. Beard William M. Beard Chairman of the Board and Chief Executive Officer EX-32.2 10 bcex322-051605.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with The Beard Company's (the "Company") Report on Form 10-Q for the period ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Herb Mee, Jr., President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 12, 2006 By: /s/ Herb Mee, Jr. Herb Mee, Jr. President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----