CONVERTIBLE SUBORDINATED PROMISSORY NOTE

 

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

 

 

$____________                                             December __, 2004

 

 

     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 ($2__________)

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