Exhibit 10.1

 

Execution Copy

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of August 25, 2006, by
and among Cano Petroleum, Inc., a Delaware corporation, with headquarters
located at 801 Cherry St., Suite 3200, Fort Worth, Texas 76102 (the ”Company”),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

A.                                   The Company and each Buyer is executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Section 4(2) of the Securities Act of 1933, as amended
(the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated
by the United States Securities and Exchange Commission (the “SEC”) under the
1933 Act.

 

B.                                     The Company has authorized a new series
of convertible preferred stock of the Company designated as Series D Convertible
Preferred Stock, the terms of which are set forth in the certificate of
designation for such series of preferred stock (the “Certificate of
Designations”) in the form attached hereto as Exhibit A (together with any
convertible preferred shares issued in replacement thereof in accordance with
the terms thereof, the “Preferred Shares”), which Preferred Shares shall be
convertible into the Company’s common stock, par value $0.0001 per share (the
“Common Stock”), in accordance with the terms of the Certificate of
Designations.

 

C.                                     Each Buyer wishes to purchase, and the
Company wishes to sell, upon the terms and conditions stated in this Agreement,
(i) that aggregate number of Preferred Shares set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers (which aggregate number for all
Buyers shall be a maximum of 60,000), if any, (ii) that aggregate number of
shares of the Common Stock set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers (which aggregate amount for all Buyers shall be a maximum
of 7,500,000 shares of Common Stock and shall collectively be referred to herein
as the “Common Shares”), if any, and (iii) warrants substantially in the form
attached hereto as Exhibit B (the “Warrants”) to acquire up to that number of
shares of Common Stock (as exercised, collectively, the “Warrant Shares”) set
forth opposite such Buyer’s name in column (5) on the Schedule of Buyers, if any
(which aggregate amount of Warrant Shares for all Buyers upon exercise shall be
a maximum of 1,875,000 Warrant Shares.

 

D.                                    Contemporaneously with the execution and
delivery of this Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement, substantially in the form attached hereto as
Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company
has agreed to provide certain registration rights with respect to the
Registrable Securities (as defined in the Registration Rights Agreement), under
the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.

 

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E.                                      The Preferred Shares, the shares of
Common Stock issuable upon conversion of the Preferred Shares (the “Conversion
Shares”), the Warrants, the Warrant Shares and the Common Shares are
collectively referred to herein as the “Securities.”

 

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

 

1.                                       PURCHASE AND SALE OF PREFERRED STOCK,
COMMON SHARES AND WARRANTS.

 

(A)                                  PREFERRED SHARES, COMMON SHARES AND
WARRANTS. SUBJECT TO THE SATISFACTION (OR WAIVER) OF THE CONDITIONS SET FORTH IN
SECTIONS 6 AND 7 BELOW, THE COMPANY SHALL ISSUE AND SELL TO EACH BUYER, AND EACH
BUYER SEVERALLY, BUT NOT JOINTLY, AGREES TO PURCHASE FROM THE COMPANY ON THE
CLOSING DATE (AS DEFINED BELOW), (I) THE NUMBER OF PREFERRED SHARES AS IS SET
FORTH OPPOSITE SUCH BUYER’S NAME IN COLUMN (3) ON THE SCHEDULE OF BUYERS, IF
ANY, (II) THE NUMBER OF COMMON SHARES AS IS SET FORTH OPPOSITE SUCH BUYER’S NAME
IN COLUMN (4) ON THE SCHEDULE OF BUYERS, IF ANY, AND (III) WARRANTS TO ACQUIRE
UP TO THAT NUMBER OF WARRANT SHARES AS IS SET FORTH OPPOSITE SUCH BUYER’S NAME
IN COLUMN (5) ON THE SCHEDULE OF BUYERS, IF ANY.

 

(B)                                 CLOSING. THE CLOSING (THE “CLOSING”) OF THE
PURCHASE OF THE PREFERRED SHARES, THE COMMON SHARES AND THE WARRANTS BY THE
BUYERS SHALL OCCUR AT THE OFFICES OF SCHULTE ROTH & ZABEL LLP, 919 THIRD AVENUE,
NEW YORK, NEW YORK 10022. THE DATE AND TIME OF THE CLOSING (THE “CLOSING DATE”)
SHALL BE 10:00 A.M., NEW YORK CITY TIME, ON THE DATE HEREOF AFTER THE
NOTIFICATION OF SATISFACTION (OR WAIVER) OF THE CONDITIONS TO THE CLOSING SET
FORTH IN SECTIONS 6 AND 7 BELOW (OR SUCH OTHER DATE AND TIME AS IS MUTUALLY
AGREED TO BY THE COMPANY AND EACH BUYER).

 

(C)                                  PURCHASE PRICE. THE AGGREGATE PURCHASE
PRICE FOR THE PREFERRED SHARES, THE COMMON SHARES AND THE WARRANTS TO BE
PURCHASED BY EACH BUYER (THE “PURCHASE PRICE”) SHALL BE THE AMOUNT SET FORTH
OPPOSITE SUCH BUYER’S NAME IN COLUMN (6) ON THE SCHEDULE OF BUYERS. EACH BUYER
SHALL PAY $1,000.00 FOR EACH PREFERRED SHARE AND $4.83 FOR EACH COMMON SHARE AND
RELATED WARRANTS TO BE PURCHASED BY SUCH BUYER AT THE CLOSING.

 

(D)                                 FORM OF PAYMENT. ON THE CLOSING DATE, (A)
EACH BUYER SHALL PAY ITS PORTION OF THE PURCHASE PRICE TO THE COMPANY FOR THE
PREFERRED SHARES AND/OR THE COMMON SHARES AND RELATED WARRANTS, AS APPLICABLE,
TO BE ISSUED AND SOLD TO SUCH BUYER AT THE CLOSING, BY WIRE TRANSFER OF
IMMEDIATELY AVAILABLE FUNDS IN ACCORDANCE WITH THE COMPANY’S WRITTEN WIRE
INSTRUCTIONS, THE AMOUNT WITHHELD PURSUANT TO SECTION 4(G)) AND (B) THE COMPANY
SHALL DELIVER TO EACH BUYER THE PREFERRED SHARES (IN SUCH DENOMINATIONS AS IS
SET FORTH OPPOSITE SUCH BUYER’S NAME IN COLUMN (3) ON THE SCHEDULE OF BUYERS),
IF ANY, ONE OR MORE STOCK CERTIFICATES, FREE AND CLEAR OF ALL RESTRICTIVE
LEGENDS (EXCEPT AS EXPRESSLY PROVIDED IN SECTION 2(G) HEREOF), EVIDENCING THE
NUMBER OF COMMON SHARES AS IS SET FORTH OPPOSITE SUCH BUYER’S NAME IN COLUMN (4)
ON THE SCHEDULE OF BUYERS, IF ANY, AND THE WARRANTS (EXERCISABLE FOR THE NUMBER
OF SHARES OF COMMON STOCK AS IS SET FORTH OPPOSITE SUCH BUYER’S NAME IN COLUMN
(5) ON THE SCHEDULE OF BUYERS), IF ANY, EACH DULY EXECUTED ON BEHALF OF THE
COMPANY AND REGISTERED ON THE TRANSFER BOOKS OF THE COMPANY IN THE NAME OF SUCH
BUYER OR ITS DESIGNEE.

 

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2.                                       BUYER’S REPRESENTATIONS AND WARRANTIES.

 

Each Buyer, severally and not jointly, represents and warrants with respect to
only itself that:

 

(A)                                  ORGANIZATION; AUTHORITY. SUCH BUYER IS AN
ENTITY DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS OF
THE JURISDICTION OF ITS ORGANIZATION WITH THE REQUISITE POWER AND AUTHORITY TO
ENTER INTO AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION
DOCUMENTS (AS DEFINED BELOW) TO WHICH IT IS A PARTY AND OTHERWISE TO CARRY OUT
ITS OBLIGATIONS HEREUNDER AND THEREUNDER.

 

(B)                                 NO PUBLIC SALE OR DISTRIBUTION. SUCH BUYER
IS (I) ACQUIRING THE PREFERRED SHARES AND/OR THE COMMON SHARES AND THE WARRANTS,
AS APPLICABLE, (II) UPON CONVERSION OF THE PREFERRED SHARES WILL ACQUIRE THE
CONVERSION SHARES, AND (III) UPON EXERCISE OF THE WARRANTS WILL ACQUIRE THE
WARRANT SHARES, IN EACH CASE, FOR ITS OWN ACCOUNT AND NOT WITH A VIEW TOWARDS,
OR FOR RESALE IN CONNECTION WITH, THE PUBLIC SALE OR DISTRIBUTION THEREOF,
EXCEPT PURSUANT TO SALES REGISTERED OR EXEMPTED UNDER THE 1933 ACT; PROVIDED,
HOWEVER, THAT BY MAKING THE REPRESENTATIONS HEREIN, SUCH BUYER DOES NOT AGREE TO
HOLD ANY OF THE SECURITIES FOR ANY MINIMUM OR OTHER SPECIFIC TERM AND RESERVES
THE RIGHT TO DISPOSE OF THE SECURITIES AT ANY TIME IN ACCORDANCE WITH OR
PURSUANT TO A REGISTRATION STATEMENT OR AN EXEMPTION UNDER THE 1933 ACT. SUCH
BUYER IS ACQUIRING THE SECURITIES HEREUNDER IN THE ORDINARY COURSE OF ITS
BUSINESS. SUCH BUYER DOES NOT PRESENTLY HAVE ANY AGREEMENT OR UNDERSTANDING,
DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE ANY OF THE SECURITIES.

 

(C)                                  ACCREDITED INVESTOR STATUS. SUCH BUYER IS
AN “ACCREDITED INVESTOR” AS THAT TERM IS DEFINED IN RULE 501(A) OF REGULATION D.

 

(D)                                 RELIANCE ON EXEMPTIONS. SUCH BUYER
UNDERSTANDS THAT THE SECURITIES ARE BEING OFFERED AND SOLD TO IT IN RELIANCE ON
SPECIFIC EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF UNITED STATES FEDERAL
AND STATE SECURITIES LAWS AND THAT THE COMPANY IS RELYING IN PART UPON THE TRUTH
AND ACCURACY OF, AND SUCH BUYER’S COMPLIANCE WITH, THE REPRESENTATIONS,
WARRANTIES, AGREEMENTS, ACKNOWLEDGMENTS AND UNDERSTANDINGS OF SUCH BUYER SET
FORTH HEREIN IN ORDER TO DETERMINE THE AVAILABILITY OF SUCH EXEMPTIONS AND THE
ELIGIBILITY OF SUCH BUYER TO ACQUIRE THE SECURITIES.

 

(E)                                  INFORMATION. SUCH BUYER AND ITS ADVISORS,
IF ANY, HAVE BEEN FURNISHED WITH ALL MATERIALS RELATING TO THE BUSINESS,
FINANCES AND OPERATIONS OF THE COMPANY AND MATERIALS RELATING TO THE OFFER AND
SALE OF THE SECURITIES WHICH HAVE BEEN REQUESTED BY SUCH BUYER. SUCH BUYER AND
ITS ADVISORS, IF ANY, HAVE BEEN AFFORDED THE OPPORTUNITY TO ASK QUESTIONS OF THE
COMPANY. NEITHER SUCH INQUIRIES NOR ANY OTHER DUE DILIGENCE INVESTIGATIONS
CONDUCTED BY SUCH BUYER OR ITS ADVISORS, IF ANY, OR ITS REPRESENTATIVES SHALL
MODIFY, AMEND OR AFFECT SUCH BUYER’S RIGHT TO RELY ON THE COMPANY’S
REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN. SUCH BUYER UNDERSTANDS THAT ITS
INVESTMENT IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SUCH BUYER HAS
SOUGHT SUCH ACCOUNTING, LEGAL AND TAX ADVICE AS IT HAS CONSIDERED NECESSARY TO
MAKE AN INFORMED INVESTMENT DECISION WITH RESPECT TO ITS ACQUISITION OF THE
SECURITIES.

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(F)                                    NO GOVERNMENTAL REVIEW. SUCH BUYER
UNDERSTANDS THAT NO UNITED STATES FEDERAL OR STATE AGENCY OR ANY OTHER
GOVERNMENT OR GOVERNMENTAL AGENCY HAS PASSED ON OR MADE ANY RECOMMENDATION OR
ENDORSEMENT OF THE SECURITIES OR THE FAIRNESS OR SUITABILITY OF THE INVESTMENT
IN THE SECURITIES NOR HAVE SUCH AUTHORITIES PASSED UPON OR ENDORSED THE MERITS
OF THE OFFERING OF THE SECURITIES.

 

(G)                                 TRANSFER OR RESALE. SUCH BUYER UNDERSTANDS
THAT EXCEPT AS PROVIDED IN THE REGISTRATION RIGHTS AGREEMENT: (I) THE SECURITIES
HAVE NOT BEEN AND ARE NOT BEING REGISTERED UNDER THE 1933 ACT OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED OR TRANSFERRED
UNLESS (A) SUBSEQUENTLY REGISTERED THEREUNDER, (B) SUCH BUYER SHALL HAVE
DELIVERED TO THE COMPANY AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,
TO THE EFFECT THAT SUCH SECURITIES TO BE SOLD, ASSIGNED OR TRANSFERRED MAY BE
SOLD, ASSIGNED OR TRANSFERRED PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION,
OR (C) SUCH BUYER PROVIDES THE COMPANY WITH REASONABLE ASSURANCE THAT SUCH
SECURITIES CAN BE SOLD, ASSIGNED OR TRANSFERRED PURSUANT TO RULE 144 OR RULE
144A PROMULGATED UNDER THE 1933 ACT, AS AMENDED, (OR A SUCCESSOR RULE THERETO)
(COLLECTIVELY, “RULE 144”); (II) ANY SALE OF THE SECURITIES MADE IN RELIANCE ON
RULE 144 MAY BE MADE ONLY IN ACCORDANCE WITH THE TERMS OF RULE 144 AND FURTHER,
IF RULE 144 IS NOT APPLICABLE, ANY RESALE OF THE SECURITIES UNDER CIRCUMSTANCES
IN WHICH THE SELLER (OR THE PERSON (AS DEFINED IN SECTION 3(S)) THROUGH WHOM THE
SALE IS MADE) MAY BE DEEMED TO BE AN UNDERWRITER (AS THAT TERM IS DEFINED IN THE
1933 ACT) MAY REQUIRE COMPLIANCE WITH SOME OTHER EXEMPTION UNDER THE 1933 ACT OR
THE RULES AND REGULATIONS OF THE SEC THEREUNDER; AND (III) NEITHER THE COMPANY
NOR ANY OTHER PERSON IS UNDER ANY OBLIGATION TO REGISTER THE SECURITIES UNDER
THE 1933 ACT OR ANY STATE SECURITIES LAWS OR TO COMPLY WITH THE TERMS AND
CONDITIONS OF ANY EXEMPTION THEREUNDER. THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES AND SUCH PLEDGE OF SECURITIES SHALL NOT BE
DEEMED TO BE A TRANSFER, SALE OR ASSIGNMENT OF THE SECURITIES HEREUNDER, AND NO
BUYER EFFECTING A PLEDGE OF SECURITIES SHALL BE REQUIRED TO PROVIDE THE COMPANY
WITH ANY NOTICE THEREOF OR OTHERWISE MAKE ANY DELIVERY TO THE COMPANY PURSUANT
TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT (AS DEFINED IN SECTION
3(B)), INCLUDING, WITHOUT LIMITATION, THIS SECTION 2(G).

 

(H)                                 LEGENDS. SUCH BUYER UNDERSTANDS THAT THE
CERTIFICATES OR OTHER INSTRUMENTS REPRESENTING THE PREFERRED SHARES AND THE
WARRANT SHARES AND, UNTIL SUCH TIME AS THE RESALE OF THE CONVERSION SHARES, THE
COMMON SHARES AND THE WARRANT SHARES HAVE BEEN REGISTERED UNDER THE 1933 ACT AS
CONTEMPLATED BY THE REGISTRATION RIGHTS AGREEMENT, THE STOCK CERTIFICATES
REPRESENTING THE CONVERSION SHARES, THE COMMON SHARES AND WARRANT SHARES, EXCEPT
AS SET FORTH BELOW, SHALL BEAR ANY LEGEND AS REQUIRED BY THE “BLUE SKY” LAWS OF
ANY STATE AND A RESTRICTIVE LEGEND IN SUBSTANTIALLY THE FOLLOWING FORM (AND A
STOP-TRANSFER ORDER MAY BE PLACED AGAINST TRANSFER OF SUCH STOCK CERTIFICATES):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE

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REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE 1933 ACT IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that such
sale, assignment or transfer of the Securities may be made without registration
under the applicable requirements of the 1933 Act, or (iii) such holder provides
the Company with reasonable assurance that the Securities can be sold, assigned
or transferred pursuant to Rule 144(k).

 

(I)                                     VALIDITY; ENFORCEMENT. THIS AGREEMENT
AND THE REGISTRATION RIGHTS AGREEMENT HAVE BEEN DULY AND VALIDLY AUTHORIZED,
EXECUTED AND DELIVERED ON BEHALF OF SUCH BUYER AND SHALL CONSTITUTE THE LEGAL,
VALID AND BINDING OBLIGATIONS OF SUCH BUYER ENFORCEABLE AGAINST SUCH BUYER IN
ACCORDANCE WITH THEIR RESPECTIVE TERMS, EXCEPT AS SUCH ENFORCEABILITY MAY BE
LIMITED BY GENERAL PRINCIPLES OF EQUITY OR TO APPLICABLE BANKRUPTCY, INSOLVENCY,
REORGANIZATION, MORATORIUM, LIQUIDATION AND OTHER SIMILAR LAWS RELATING TO, OR
AFFECTING GENERALLY, THE ENFORCEMENT OF APPLICABLE CREDITORS’ RIGHTS AND
REMEDIES.

 

(J)                                     NO CONFLICTS. THE EXECUTION, DELIVERY
AND PERFORMANCE BY SUCH BUYER OF THIS AGREEMENT AND THE REGISTRATION RIGHTS
AGREEMENT AND THE CONSUMMATION BY SUCH BUYER OF THE TRANSACTIONS CONTEMPLATED
HEREBY AND THEREBY WILL NOT (I) RESULT IN A VIOLATION OF THE ORGANIZATIONAL
DOCUMENTS OF SUCH BUYER OR (II) CONFLICT WITH, OR CONSTITUTE A DEFAULT (OR AN
EVENT WHICH WITH NOTICE OR LAPSE OF TIME OR BOTH WOULD BECOME A DEFAULT) UNDER,
OR GIVE TO OTHERS ANY RIGHTS OF TERMINATION, AMENDMENT, ACCELERATION OR
CANCELLATION OF, ANY AGREEMENT, INDENTURE OR INSTRUMENT TO WHICH SUCH BUYER IS A
PARTY, OR (III) RESULT IN A VIOLATION OF ANY LAW, RULE, REGULATION, ORDER,
JUDGMENT OR DECREE (INCLUDING FEDERAL AND STATE SECURITIES LAWS) APPLICABLE TO
SUCH BUYER, EXCEPT IN THE CASE OF CLAUSES (II) AND (III) ABOVE, FOR SUCH
CONFLICTS, DEFAULTS, RIGHTS OR VIOLATIONS WHICH WOULD NOT, INDIVIDUALLY OR IN
THE AGGREGATE, REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT ON THE
ABILITY OF SUCH BUYER TO PERFORM ITS OBLIGATIONS HEREUNDER.

 

(K)                                  RESIDENCY. SUCH BUYER IS A RESIDENT OF THAT
JURISDICTION SPECIFIED BELOW ITS ADDRESS ON THE SCHEDULE OF BUYERS.

 

(L)                                     VOTE FOR STOCKHOLDER APPROVAL. SUCH
BUYER, TO THE EXTENT SUCH BUYER OWNS ANY SHARES OF COMMON STOCK AT THE TIME OF
THE VOTE CONTEMPLATED BY THE STOCKHOLDER APPROVAL, HEREBY AGREES TO VOTE SUCH
SHARES OF COMMON STOCK IN FAVOR OF THE TRANSACTIONS CONTEMPLATED HEREBY IN
CONNECTION WITH THE STOCKHOLDER APPROVAL.

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(M)                               CERTAIN TRADING ACTIVITIES. OTHER THAN WITH
RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREIN, SINCE THE TIME THAT SUCH BUYER
WAS FIRST CONTACTED BY THE COMPANY, EITHER OF THE AGENTS OR ANY OTHER PERSON
REGARDING THIS INVESTMENT IN THE COMPANY NEITHER THE BUYER NOR ANY AFFILIATE OF
SUCH BUYER WHICH (X) HAD KNOWLEDGE OF THE TRANSACTIONS CONTEMPLATED HEREBY, (Y)
HAS OR SHARES DISCRETION RELATING TO SUCH BUYER’S INVESTMENTS OR TRADING OR
INFORMATION CONCERNING SUCH BUYER’S INVESTMENTS AND (Z) IS SUBJECT TO SUCH
BUYER’S REVIEW OR INPUT CONCERNING SUCH AFFILIATE’S INVESTMENTS OR TRADING
(COLLECTIVELY, “TRADING AFFILIATES”) HAS DIRECTLY OR INDIRECTLY, NOR HAS ANY
PERSON ACTING ON BEHALF OF OR PURSUANT TO ANY UNDERSTANDING WITH SUCH BUYER OR
TRADING AFFILIATE, EFFECTED OR AGREED TO EFFECT ANY TRANSACTIONS IN THE
SECURITIES OF THE COMPANY. SUCH BUYER HEREBY COVENANTS AND AGREES NOT TO, AND
SHALL CAUSE ITS TRADING AFFILIATES NOT TO, ENGAGE, DIRECTLY OR INDIRECTLY, IN
ANY TRANSACTIONS IN THE SECURITIES OF THE COMPANY OR INVOLVING THE COMPANY’S
SECURITIES DURING THE PERIOD FROM THE DATE HEREOF UNTIL SUCH TIME AS (I) THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT ARE FIRST PUBLICLY ANNOUNCED AS
DESCRIBED IN SECTION 4(I) HEREOF OR (II) THIS AGREEMENT IS TERMINATED IN FULL
PURSUANT TO SECTION 8 HEREOF.

 

3.                                       REPRESENTATIONS AND WARRANTIES OF THE
COMPANY.

 

The Company represents and warrants to each of the Buyers that:

 

(A)                                  ORGANIZATION AND QUALIFICATION. THE COMPANY
AND ITS “SUBSIDIARIES” (WHICH FOR PURPOSES OF THIS AGREEMENT MEANS ANY JOINT
VENTURE OR ANY ENTITY IN WHICH THE COMPANY, DIRECTLY OR INDIRECTLY, OWNS CAPITAL
STOCK OR HOLDS AN EQUITY OR SIMILAR INTEREST) ARE ENTITIES DULY ORGANIZED AND
VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS OF THE JURISDICTION IN
WHICH THEY ARE FORMED, AND HAVE THE REQUISITE POWER AND AUTHORIZATION TO OWN
THEIR PROPERTIES AND TO CARRY ON THEIR BUSINESS AS NOW BEING CONDUCTED. EACH OF
THE COMPANY AND ITS SUBSIDIARIES IS DULY QUALIFIED AS A FOREIGN ENTITY TO DO
BUSINESS AND IS IN GOOD STANDING IN EVERY JURISDICTION IN WHICH ITS OWNERSHIP OF
PROPERTY OR THE NATURE OF THE BUSINESS CONDUCTED BY IT MAKES SUCH QUALIFICATION
NECESSARY, EXCEPT TO THE EXTENT THAT THE FAILURE TO BE SO QUALIFIED OR BE IN
GOOD STANDING WOULD NOT REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE
EFFECT. AS USED IN THIS AGREEMENT, “MATERIAL ADVERSE EFFECT” MEANS ANY MATERIAL
ADVERSE EFFECT ON THE BUSINESS, PROPERTIES, ASSETS, OPERATIONS, RESULTS OF
OPERATIONS, CONDITION (FINANCIAL OR OTHERWISE) OR PROSPECTS OF THE COMPANY, ITS
SUBSIDIARIES, INDIVIDUALLY OR TAKEN AS A WHOLE, OR ON THE TRANSACTIONS
CONTEMPLATED HEREBY OR IN THE OTHER TRANSACTION DOCUMENTS OR BY THE AGREEMENTS
AND INSTRUMENTS TO BE ENTERED INTO IN CONNECTION HEREWITH OR THEREWITH, OR ON
THE AUTHORITY OR ABILITY OF THE COMPANY TO PERFORM ITS OBLIGATIONS UNDER THE
TRANSACTION DOCUMENTS (AS DEFINED BELOW). THE COMPANY HAS NO SUBSIDIARIES EXCEPT
AS SET FORTH ON
SCHEDULE 3(A).

 

(B)                                 AUTHORIZATION; ENFORCEMENT; VALIDITY. THE
COMPANY HAS THE REQUISITE POWER AND AUTHORITY TO ENTER INTO AND PERFORM ITS
OBLIGATIONS UNDER THIS AGREEMENT, THE CERTIFICATE OF DESIGNATIONS, THE WARRANTS,
THE REGISTRATION RIGHTS AGREEMENT, THE IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
(AS DEFINED IN SECTION 5(B)) AND EACH OF THE OTHER AGREEMENTS ENTERED INTO BY
THE PARTIES HERETO IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT (COLLECTIVELY, THE “TRANSACTION DOCUMENTS”) AND TO ISSUE THE
SECURITIES IN ACCORDANCE WITH THE TERMS HEREOF AND THEREOF. THE EXECUTION AND
DELIVERY OF THE TRANSACTION DOCUMENTS BY THE COMPANY AND THE CONSUMMATION BY THE
COMPANY OF THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY, INCLUDING, WITHOUT
LIMITATION, THE ISSUANCE OF THE PREFERRED SHARES AND THE COMMON

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Shares, the reservation for issuance and the issuance of the Conversion Shares
issuable upon conversion of the Preferred Shares and the issuance of the
Warrants and the reservation for issuance of the Warrant Shares issuable upon
exercise of the Warrants, have been duly authorized by the Company’s board of
directors and (other than the filing with the SEC of a Form D and one or more
Registration Statements in accordance with the requirements of the Registration
Rights Agreement and any other filings as may be required by any state
securities agencies) no further filing, consent, or authorization is required by
the Company, its board of directors or its stockholders. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies. The Certificate of
Designations in the form attached hereto as Exhibit A will be filed with the
Secretary of State of the State of Delaware prior to Closing and will be in full
force and effect, enforceable against the Company in accordance with its terms
and will not be amended.

 

(C)                                  ISSUANCE OF SECURITIES. THE ISSUANCE OF THE
PREFERRED SHARES, THE COMMON SHARES AND THE WARRANTS ARE DULY AUTHORIZED AND
UPON ISSUANCE IN ACCORDANCE WITH THE TERMS OF THE TRANSACTION DOCUMENTS SHALL BE
FREE FROM ALL TAXES, LIENS AND CHARGES WITH RESPECT TO THE ISSUE THEREOF, AND
THE PREFERRED SHARES SHALL BE ENTITLED TO THE RIGHTS AND PREFERENCES SET FORTH
IN THE CERTIFICATE OF DESIGNATIONS. AS OF THE CLOSING, THE COMPANY SHALL HAVE
RESERVED FROM ITS DULY AUTHORIZED CAPITAL STOCK NOT LESS THAN THE SUM OF (I)
130% OF THE MAXIMUM NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
THE PREFERRED SHARES (ASSUMING FOR PURPOSES HEREOF, THAT THE PREFERRED SHARES
ARE CONVERTIBLE AT THE CONVERSION PRICE AND WITHOUT TAKING INTO ACCOUNT ANY
LIMITATIONS ON THE CONVERSION OF THE PREFERRED SHARES SET FORTH IN THE
CERTIFICATE OF DESIGNATIONS) AND (II) 100% OF THE MAXIMUM NUMBER OF SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS (WITHOUT TAKING INTO ACCOUNT
ANY LIMITATIONS ON THE EXERCISE OF THE WARRANTS SET FORTH IN THE WARRANTS). UPON
ISSUANCE OR CONVERSION IN ACCORDANCE WITH THE CERTIFICATE OF DESIGNATIONS OR
EXERCISE IN ACCORDANCE WITH THE WARRANTS, AS THE CASE MAY BE, THE CONVERSION
SHARES AND THE WARRANT SHARES, RESPECTIVELY, WILL BE VALIDLY ISSUED, FULLY PAID
AND NONASSESSABLE AND FREE FROM ALL PREEMPTIVE OR SIMILAR RIGHTS, TAXES, LIENS
AND CHARGES WITH RESPECT TO THE ISSUE THEREOF, WITH THE HOLDERS BEING ENTITLED
TO ALL RIGHTS ACCORDED TO A HOLDER OF COMMON STOCK. SUBJECT TO THE
REPRESENTATIONS AND WARRANTIES OF THE BUYERS IN THIS AGREEMENT, THE OFFER AND
ISSUANCE BY THE COMPANY OF THE SECURITIES IS EXEMPT FROM REGISTRATION UNDER THE
1933 ACT.

 

(D)                                 NO CONFLICTS. EXCEPT AS SET FORTH ON
SCHEDULE 3(D), THE EXECUTION, DELIVERY AND PERFORMANCE OF THE TRANSACTION
DOCUMENTS BY THE COMPANY AND THE CONSUMMATION BY THE COMPANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY (INCLUDING, WITHOUT LIMITATION, THE ISSUANCE OF
THE PREFERRED SHARES, THE COMMON SHARES, THE WARRANTS AND RESERVATION FOR
ISSUANCE OF THE CONVERSION SHARES AND THE WARRANT SHARES) WILL NOT (I) RESULT IN
A VIOLATION OF THE CERTIFICATE OF INCORPORATION (AS DEFINED IN SECTION 3(R)) OF
THE COMPANY OR ANY CERTIFICATE OF INCORPORATION, CERTIFICATE OF FORMATION, ANY
CERTIFICATE OF DESIGNATIONS OR OTHER CONSTITUENT DOCUMENT OF ANY OF ITS
SUBSIDIARIES, ANY CAPITAL STOCK OF THE COMPANY OR BYLAWS (AS DEFINED IN SECTION
3(R)) OR THE CERTIFICATE OF DESIGNATIONS OR ANY OTHER CERTIFICATES OF
DESIGNATIONS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES BYLAWS OR (II) CONFLICT
WITH, OR CONSTITUTE A DEFAULT (OR

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AN EVENT WHICH WITH NOTICE OR LAPSE OF TIME OR BOTH WOULD BECOME A DEFAULT)
UNDER, OR GIVE TO OTHERS ANY RIGHTS OF TERMINATION, AMENDMENT, ACCELERATION OR
CANCELLATION OF, ANY AGREEMENT, INDENTURE OR INSTRUMENT TO WHICH THE COMPANY OR
ANY OF ITS SUBSIDIARIES IS A PARTY, OR (III) RESULT IN A VIOLATION OF ANY LAW,
RULE, REGULATION, ORDER, JUDGMENT OR DECREE (INCLUDING FEDERAL AND STATE
SECURITIES LAWS AND REGULATIONS AND THE RULES AND REGULATIONS OF THE AMERICAN
STOCK EXCHANGE (THE “PRINCIPAL MARKET”) APPLICABLE TO THE COMPANY OR ANY OF ITS
SUBSIDIARIES OR BY WHICH ANY PROPERTY OR ASSET OF THE COMPANY OR ANY OF ITS
SUBSIDIARIES IS BOUND OR AFFECTED.

 

(E)                                  CONSENTS. EXCEPT AS SET FORTH ON SCHEDULE
3(E), NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES IS REQUIRED TO OBTAIN ANY
CONSENT, AUTHORIZATION OR ORDER OF, OR MAKE ANY FILING OR REGISTRATION WITH, ANY
COURT, GOVERNMENTAL AGENCY OR ANY REGULATORY OR SELF-REGULATORY AGENCY OR ANY
OTHER PERSON IN ORDER FOR IT TO EXECUTE, DELIVER OR PERFORM ANY OF ITS
OBLIGATIONS UNDER OR CONTEMPLATED BY THE TRANSACTION DOCUMENTS, IN EACH CASE IN
ACCORDANCE WITH THE TERMS HEREOF OR THEREOF. ALL CONSENTS, AUTHORIZATIONS,
ORDERS, FILINGS AND REGISTRATIONS WHICH THE COMPANY IS REQUIRED TO OBTAIN
PURSUANT TO THE PRECEDING SENTENCE WILL BE OBTAINED OR EFFECTED ON OR PRIOR TO
THE CLOSING DATE, AND THE COMPANY AND ITS SUBSIDIARIES ARE UNAWARE OF ANY FACTS
OR CIRCUMSTANCES WHICH MIGHT PREVENT THE COMPANY FROM OBTAINING OR EFFECTING ANY
OF THE REGISTRATION, APPLICATION OR FILINGS PURSUANT TO THE PRECEDING SENTENCE.
THE COMPANY IS NOT IN VIOLATION OF THE REQUIREMENTS OF THE PRINCIPAL MARKET AND
HAS NO KNOWLEDGE OF ANY FACTS WHICH WOULD REASONABLY LEAD TO DELISTING OR
SUSPENSION OF THE COMMON STOCK IN THE FORESEEABLE FUTURE.

 

(F)                                    ACKNOWLEDGMENT REGARDING BUYER’S PURCHASE
OF SECURITIES. THE COMPANY ACKNOWLEDGES AND AGREES THAT EACH BUYER IS ACTING
SOLELY IN THE CAPACITY OF ARM’S LENGTH PURCHASER WITH RESPECT TO THE TRANSACTION
DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY AND EXCEPT AS SET
FORTH ON SCHEDULE 3(F), THAT NO BUYER IS (I) AN OFFICER OR DIRECTOR OF THE
COMPANY, (II) AN “AFFILIATE” OF THE COMPANY OR ANY OF ITS SUBSIDIARIES (AS
DEFINED IN RULE 144) OR (III) TO THE KNOWLEDGE OF THE COMPANY, A “BENEFICIAL
OWNER” OF MORE THAN 10% OF THE SHARES OF COMMON STOCK (AS DEFINED FOR PURPOSES
OF RULE 13D-3 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE “1934
ACT”)). THE COMPANY FURTHER ACKNOWLEDGES THAT NO BUYER IS ACTING AS A FINANCIAL
ADVISOR OR FIDUCIARY OF THE COMPANY OR ANY OF ITS SUBSIDIARIES (OR IN ANY
SIMILAR CAPACITY) WITH RESPECT TO THE TRANSACTION DOCUMENTS AND THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY, AND ANY ADVICE GIVEN BY A BUYER OR ANY OF ITS
REPRESENTATIVES OR AGENTS IN CONNECTION WITH THE TRANSACTION DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY IS MERELY INCIDENTAL TO SUCH
BUYER’S PURCHASE OF THE SECURITIES. THE COMPANY FURTHER REPRESENTS TO EACH BUYER
THAT THE COMPANY’S DECISION TO ENTER INTO THE TRANSACTION DOCUMENTS HAS BEEN
BASED SOLELY ON THE INDEPENDENT EVALUATION BY THE COMPANY AND ITS
REPRESENTATIVES.

 

(G)                                 NO GENERAL SOLICITATION; PLACEMENT AGENT’S
FEES. NEITHER THE COMPANY, NOR ANY OF ITS SUBSIDIARIES OR AFFILIATES, NOR ANY
PERSON ACTING ON ITS OR THEIR BEHALF, HAS ENGAGED IN ANY FORM OF GENERAL
SOLICITATION OR GENERAL ADVERTISING (WITHIN THE MEANING OF REGULATION D) IN
CONNECTION WITH THE OFFER OR SALE OF THE SECURITIES. THE COMPANY SHALL BE
RESPONSIBLE FOR THE PAYMENT OF ANY PLACEMENT AGENT’S FEES, FINANCIAL ADVISORY
FEES, OR BROKERS’ COMMISSIONS (OTHER THAN FOR PERSONS ENGAGED BY ANY BUYER OR
ITS INVESTMENT ADVISOR) RELATING TO OR ARISING OUT OF THE TRANSACTIONS
CONTEMPLATED HEREBY. THE COMPANY SHALL PAY, AND HOLD EACH BUYER HARMLESS
AGAINST, ANY LIABILITY, LOSS OR EXPENSE (INCLUDING, WITHOUT LIMITATION,
ATTORNEY’S FEES AND OUT-OF-POCKET EXPENSES) ARISING IN CONNECTION WITH ANY SUCH
CLAIM. THE COMPANY ACKNOWLEDGES THAT IT HAS ENGAGED BANC OF AMERICA SECURITIES
AND COKER & PALMER, INC. AS PLACEMENT AGENT

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(COLLECTIVELY, THE “AGENT”) IN CONNECTION WITH THE SALE OF THE SECURITIES. OTHER
THAN THE AGENT, NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES HAS ENGAGED ANY
PLACEMENT AGENT OR OTHER AGENT IN CONNECTION WITH THE SALE OF THE SECURITIES.

 

(H)                                 NO INTEGRATED OFFERING. NONE OF THE COMPANY,
ITS SUBSIDIARIES, ANY OF THEIR AFFILIATES, AND ANY PERSON ACTING ON THEIR BEHALF
HAS, DIRECTLY OR INDIRECTLY, MADE ANY OFFERS OR SALES OF ANY SECURITY OR
SOLICITED ANY OFFERS TO BUY ANY SECURITY, UNDER CIRCUMSTANCES THAT WOULD REQUIRE
REGISTRATION OF ANY OF THE SECURITIES UNDER THE 1933 ACT OR CAUSE THIS OFFERING
OF THE SECURITIES TO BE INTEGRATED WITH PRIOR OFFERINGS BY THE COMPANY FOR
PURPOSES OF THE 1933 ACT OR ANY APPLICABLE STOCKHOLDER APPROVAL PROVISIONS,
INCLUDING, WITHOUT LIMITATION, UNDER THE RULES AND REGULATIONS OF ANY EXCHANGE
OR AUTOMATED QUOTATION SYSTEM ON WHICH ANY OF THE SECURITIES OF THE COMPANY ARE
LISTED OR DESIGNATED. NONE OF THE COMPANY, ITS SUBSIDIARIES, THEIR AFFILIATES
AND ANY PERSON ACTING ON THEIR BEHALF WILL TAKE ANY ACTION OR STEPS REFERRED TO
IN THE PRECEDING SENTENCE THAT WOULD REQUIRE REGISTRATION OF ANY OF THE
SECURITIES UNDER THE 1933 ACT OR CAUSE THE OFFERING OF THE SECURITIES TO BE
INTEGRATED WITH OTHER OFFERINGS.

 

(I)                                     DILUTIVE EFFECT. THE COMPANY UNDERSTANDS
AND ACKNOWLEDGES THAT THE NUMBER OF CONVERSION SHARES ISSUABLE UPON CONVERSION
OF THE PREFERRED SHARES WILL INCREASE IN CERTAIN CIRCUMSTANCES. THE COMPANY
FURTHER ACKNOWLEDGES THAT ITS OBLIGATION TO ISSUE CONVERSION SHARES UPON
CONVERSION OF THE PREFERRED SHARES IN ACCORDANCE WITH THIS AGREEMENT AND THE
CERTIFICATE OF DESIGNATIONS AND ITS OBLIGATION TO ISSUE THE WARRANT SHARES UPON
EXERCISE OF THE WARRANTS IN ACCORDANCE WITH THIS AGREEMENT AND THE WARRANTS IS,
IN EACH CASE, ABSOLUTE AND UNCONDITIONAL REGARDLESS OF THE DILUTIVE EFFECT THAT
SUCH ISSUANCE MAY HAVE ON THE OWNERSHIP INTERESTS OF OTHER STOCKHOLDERS OF THE
COMPANY.

 

(J)                                     APPLICATION OF TAKEOVER PROTECTIONS;
RIGHTS AGREEMENT. THE COMPANY AND ITS BOARD OF DIRECTORS HAVE TAKEN ALL
NECESSARY ACTION, IF ANY, IN ORDER TO RENDER INAPPLICABLE ANY CONTROL SHARE
ACQUISITION, BUSINESS COMBINATION, POISON PILL (INCLUDING ANY DISTRIBUTION UNDER
A RIGHTS AGREEMENT) OR OTHER SIMILAR ANTI-TAKEOVER PROVISION UNDER THE
CERTIFICATE OF INCORPORATION OR ANY CERTIFICATES OF DESIGNATIONS OR THE LAWS OF
THE JURISDICTION OF ITS FORMATION OR INCORPORATION WHICH IS OR COULD BECOME
APPLICABLE TO ANY BUYER AS A RESULT OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE COMPANY’S ISSUANCE OF THE
SECURITIES AND ANY BUYER’S OWNERSHIP OF THE SECURITIES. THE COMPANY HAS NOT
ADOPTED A STOCKHOLDER RIGHTS PLAN OR SIMILAR ARRANGEMENT RELATING TO
ACCUMULATIONS OF BENEFICIAL OWNERSHIP OF COMMON STOCK OR A CHANGE IN CONTROL OF
THE COMPANY.

 

(K)                                  SEC DOCUMENTS; FINANCIAL STATEMENTS. SINCE
MAY 26, 2004, THE COMPANY HAS FILED ALL REPORTS, SCHEDULES, FORMS, STATEMENTS
AND OTHER DOCUMENTS REQUIRED TO BE FILED BY IT WITH THE SEC PURSUANT TO THE
REPORTING REQUIREMENTS OF THE 1934 ACT (ALL OF THE FOREGOING FILED PRIOR TO THE
DATE HEREOF AND ALL EXHIBITS INCLUDED THEREIN AND FINANCIAL STATEMENTS, NOTES
AND SCHEDULES THERETO AND DOCUMENTS INCORPORATED BY REFERENCE THEREIN BEING
HEREINAFTER REFERRED TO AS THE “SEC DOCUMENTS”). THE COMPANY HAS DELIVERED TO
THE BUYERS OR THEIR RESPECTIVE REPRESENTATIVES TRUE, CORRECT AND COMPLETE COPIES
OF EACH OF THE SEC DOCUMENTS NOT AVAILABLE ON THE EDGAR SYSTEM THAT HAVE BEEN
REQUESTED BY EACH BUYER. AS OF THEIR RESPECTIVE DATES, THE SEC DOCUMENTS
COMPLIED IN ALL MATERIAL RESPECTS WITH THE REQUIREMENTS OF THE 1934 ACT AND THE
RULES AND REGULATIONS OF THE SEC PROMULGATED THEREUNDER APPLICABLE TO THE SEC
DOCUMENTS, AND NONE OF THE SEC DOCUMENTS, AT THE TIME THEY WERE FILED WITH THE
SEC,

9

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CONTAINED ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMITTED TO STATE A MATERIAL
FACT REQUIRED TO BE STATED THEREIN OR NECESSARY IN ORDER TO MAKE THE STATEMENTS
THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING. AS OF THEIR RESPECTIVE DATES, THE FINANCIAL STATEMENTS OF THE
COMPANY INCLUDED IN THE SEC DOCUMENTS COMPLIED AS TO FORM IN ALL MATERIAL
RESPECTS WITH APPLICABLE ACCOUNTING REQUIREMENTS AND THE PUBLISHED RULES AND
REGULATIONS OF THE SEC WITH RESPECT THERETO AS IN EFFECT AS OF THE TIME OF
FILING. SUCH FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, CONSISTENTLY APPLIED, DURING THE
PERIODS INVOLVED (EXCEPT (I) AS MAY BE OTHERWISE INDICATED IN SUCH FINANCIAL
STATEMENTS OR THE NOTES THERETO, OR (II) IN THE CASE OF UNAUDITED INTERIM
STATEMENTS, TO THE EXTENT THEY MAY EXCLUDE FOOTNOTES OR MAY BE CONDENSED OR
SUMMARY STATEMENTS) AND FAIRLY PRESENT IN ALL MATERIAL RESPECTS THE FINANCIAL
POSITION OF THE COMPANY AS OF THE DATES THEREOF AND THE RESULTS OF ITS
OPERATIONS AND CASH FLOWS FOR THE PERIODS THEN ENDED (SUBJECT, IN THE CASE OF
UNAUDITED STATEMENTS, TO NORMAL YEAR-END AUDIT ADJUSTMENTS). NO OTHER
INFORMATION PROVIDED ON OR BEHALF OF THE COMPANY TO THE BUYERS WHICH IS NOT
INCLUDED IN THE SEC DOCUMENTS, INCLUDING, WITHOUT LIMITATION, INFORMATION
REFERRED TO IN SECTION 2(E) OF THIS AGREEMENT, CONTAINS ANY UNTRUE STATEMENT OF
A MATERIAL FACT OR OMITS TO STATE ANY MATERIAL FACT NECESSARY IN ORDER TO MAKE
THE STATEMENTS THEREIN, IN THE LIGHT OF THE CIRCUMSTANCE UNDER WHICH THEY ARE OR
WERE MADE, NOT MISLEADING.

 

(L)                                     ABSENCE OF CERTAIN CHANGES. EXCEPT AS
DISCLOSED IN SCHEDULE 3(L), SINCE JUNE 30, 2005, NOTHING HAS OCCURRED THAT COULD
REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT. EXCEPT AS DISCLOSED IN
SCHEDULE 3(L), SINCE JUNE 30, 2005, NEITHER THE COMPANY NOR ANY OF ITS
SUBSIDIARIES HAS (I) DECLARED OR PAID ANY DIVIDENDS, (II) SOLD ANY ASSETS,
INDIVIDUALLY OR IN THE AGGREGATE, IN EXCESS OF $250,000 OUTSIDE OF THE ORDINARY
COURSE OF BUSINESS OR (III) HAD CAPITAL EXPENDITURES, INDIVIDUALLY OR IN THE
AGGREGATE, IN EXCESS OF $500,000. NEITHER THE COMPANY NOR ANY OF ITS
SUBSIDIARIES HAS TAKEN ANY STEPS TO SEEK PROTECTION PURSUANT TO ANY BANKRUPTCY
LAW NOR DOES THE COMPANY HAVE ANY KNOWLEDGE OR REASON TO BELIEVE THAT ITS
CREDITORS INTEND TO INITIATE INVOLUNTARY BANKRUPTCY PROCEEDINGS OR ANY ACTUAL
KNOWLEDGE OF ANY FACT WHICH WOULD REASONABLY LEAD A CREDITOR TO DO SO. THE
COMPANY AND ITS SUBSIDIARIES, INDIVIDUALLY AND ON A CONSOLIDATED BASIS, ARE NOT
AS OF THE DATE HEREOF, AND AFTER GIVING EFFECT TO THE TRANSACTIONS CONTEMPLATED
HEREBY TO OCCUR AT THE CLOSING WILL NOT, BE INSOLVENT (AS DEFINED BELOW). FOR
PURPOSES OF THIS SECTION 3(L), “INSOLVENT” MEANS, WITH RESPECT TO ANY PERSON (AS
DEFINED IN SECTION 3(S)) (I) THE PRESENT FAIR SALEABLE VALUE OF SUCH PERSON’S
ASSETS IS LESS THAN THE AMOUNT REQUIRED TO PAY SUCH PERSON’S TOTAL INDEBTEDNESS
(AS DEFINED IN SECTION 3(S)), (II) SUCH PERSON IS UNABLE TO PAY ITS DEBTS AND
LIABILITIES, SUBORDINATED, CONTINGENT OR OTHERWISE, AS SUCH DEBTS AND
LIABILITIES BECOME ABSOLUTE AND MATURED, (III) SUCH PERSON INTENDS TO INCUR OR
BELIEVES THAT IT WILL INCUR DEBTS THAT WOULD BE BEYOND ITS ABILITY TO PAY AS
SUCH DEBTS MATURE OR (IV) SUCH PERSON HAS UNREASONABLY SMALL CAPITAL WITH WHICH
TO CONDUCT THE BUSINESS IN WHICH IT IS ENGAGED AS SUCH BUSINESS IS NOW CONDUCTED
AND IS PROPOSED TO BE CONDUCTED.

 

(M)                               NO UNDISCLOSED EVENTS, LIABILITIES,
DEVELOPMENTS OR CIRCUMSTANCES. NO EVENT, LIABILITY, DEVELOPMENT OR CIRCUMSTANCE
HAS OCCURRED OR EXISTS, OR IS CONTEMPLATED TO OCCUR WITH RESPECT TO THE COMPANY,
ITS SUBSIDIARIES OR THEIR RESPECTIVE BUSINESS, PROPERTIES, PROSPECTS, OPERATIONS
OR FINANCIAL CONDITION, THAT WOULD BE REQUIRED TO BE DISCLOSED BY THE COMPANY
UNDER APPLICABLE SECURITIES LAWS ON A REGISTRATION STATEMENT ON FORM S-1 FILED
WITH THE SEC RELATING TO AN ISSUANCE AND SALE BY THE COMPANY OF ITS COMMON STOCK
AND WHICH HAS NOT BEEN PUBLICLY ANNOUNCED.

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(N)                                 CONDUCT OF BUSINESS; REGULATORY PERMITS.
NEITHER THE COMPANY NOR ITS SUBSIDIARIES IS IN VIOLATION OF ANY TERM OF OR IN
DEFAULT UNDER ITS CERTIFICATE OF INCORPORATION, THE CERTIFICATE OF DESIGNATIONS,
ANY OTHER CERTIFICATE OF DESIGNATION, PREFERENCES OR RIGHTS OF ANY OTHER
OUTSTANDING SERIES OF PREFERRED STOCK OF THE COMPANY OR BYLAWS OR THEIR
ORGANIZATIONAL CHARTER OR CERTIFICATE OF INCORPORATION OR BYLAWS, RESPECTIVELY.
NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES IS IN VIOLATION OF ANY JUDGMENT,
DECREE OR ORDER OR ANY STATUTE, ORDINANCE, RULE OR REGULATION APPLICABLE TO THE
COMPANY OR ITS SUBSIDIARIES, AND NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES
WILL CONDUCT ITS BUSINESS IN VIOLATION OF ANY OF THE FOREGOING, EXCEPT IN ALL
CASES FOR POSSIBLE VIOLATIONS WHICH COULD NOT, INDIVIDUALLY OR IN THE AGGREGATE,
REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, THE COMPANY IS NOT IN VIOLATION OF ANY OF THE
RULES, REGULATIONS OR REQUIREMENTS OF THE PRINCIPAL MARKET AND HAS NO KNOWLEDGE
OF ANY FACTS OR CIRCUMSTANCES THAT WOULD REASONABLY LEAD TO DELISTING OR
SUSPENSION OF THE COMMON STOCK BY THE PRINCIPAL MARKET IN THE FORESEEABLE
FUTURE. SINCE MAY 5, 2005, (I) THE COMMON STOCK HAS BEEN DESIGNATED FOR
QUOTATION ON THE PRINCIPAL MARKET, (II) TRADING IN THE COMMON STOCK HAS NOT BEEN
SUSPENDED BY THE SEC OR THE PRINCIPAL MARKET AND (III) THE COMPANY HAS RECEIVED
NO COMMUNICATION, WRITTEN OR ORAL, FROM THE SEC OR THE PRINCIPAL MARKET
REGARDING THE SUSPENSION OR DELISTING OF THE COMMON STOCK FROM THE PRINCIPAL
MARKET. THE COMPANY AND ITS SUBSIDIARIES POSSESS ALL CERTIFICATES,
AUTHORIZATIONS AND PERMITS ISSUED BY THE APPROPRIATE REGULATORY AUTHORITIES
NECESSARY TO CONDUCT THEIR RESPECTIVE BUSINESSES, EXCEPT WHERE THE FAILURE TO
POSSESS SUCH CERTIFICATES, AUTHORIZATIONS OR PERMITS WOULD NOT HAVE,
INDIVIDUALLY OR IN THE AGGREGATE, A MATERIAL ADVERSE EFFECT, AND NEITHER THE
COMPANY NOR ANY SUCH SUBSIDIARY HAS RECEIVED ANY NOTICE OF PROCEEDINGS RELATING
TO THE REVOCATION OR MODIFICATION OF ANY SUCH CERTIFICATE, AUTHORIZATION OR
PERMIT.

 

(O)                                 FOREIGN CORRUPT PRACTICES. NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES NOR ANY DIRECTOR, OFFICER, AGENT, EMPLOYEE
OR OTHER PERSON ACTING ON BEHALF OF THE COMPANY OR ANY OF ITS SUBSIDIARIES HAS,
IN THE COURSE OF ITS ACTIONS FOR, OR ON BEHALF OF, THE COMPANY OR ANY OF ITS
SUBSIDIARIES (I) USED ANY CORPORATE FUNDS FOR ANY UNLAWFUL CONTRIBUTION, GIFT,
ENTERTAINMENT OR OTHER UNLAWFUL EXPENSES RELATING TO POLITICAL ACTIVITY; (II)
MADE ANY DIRECT OR INDIRECT UNLAWFUL PAYMENT TO ANY FOREIGN OR DOMESTIC
GOVERNMENT OFFICIAL OR EMPLOYEE FROM CORPORATE FUNDS; (III) VIOLATED OR IS IN
VIOLATION OF ANY PROVISION OF THE U.S. FOREIGN CORRUPT PRACTICES ACT OF 1977, AS
AMENDED; OR (IV) MADE ANY UNLAWFUL BRIBE, REBATE, PAYOFF, INFLUENCE PAYMENT,
KICKBACK OR OTHER UNLAWFUL PAYMENT TO ANY FOREIGN OR DOMESTIC GOVERNMENT
OFFICIAL OR EMPLOYEE.

 

(P)                                 SARBANES-OXLEY ACT. THE COMPANY IS IN
COMPLIANCE WITH ANY AND ALL APPLICABLE REQUIREMENTS OF THE SARBANES-OXLEY ACT OF
2002 THAT ARE EFFECTIVE AS OF THE DATE HEREOF, AND ANY AND ALL APPLICABLE RULES
AND REGULATIONS PROMULGATED BY THE SEC THEREUNDER THAT ARE EFFECTIVE AS OF THE
DATE HEREOF.

 

(Q)                                 TRANSACTIONS WITH AFFILIATES. EXCEPT AS SET
FORTH IN THE SEC DOCUMENTS FILED AT LEAST TEN (10) DAYS PRIOR TO THE DATE HEREOF
AND OTHER THAN THE GRANT OF STOCK OPTIONS OR RESTRICTED STOCK DISCLOSED ON
SCHEDULE 3(Q), NONE OF THE OFFICERS, DIRECTORS OR EMPLOYEES OF THE COMPANY OR
ANY OF ITS SUBSIDIARIES IS PRESENTLY A PARTY TO ANY TRANSACTION WITH THE COMPANY
OR ANY OF ITS SUBSIDIARIES (OTHER THAN FOR ORDINARY COURSE SERVICES AS
EMPLOYEES, OFFICERS OR DIRECTORS), INCLUDING ANY CONTRACT, AGREEMENT OR OTHER
ARRANGEMENT PROVIDING FOR THE FURNISHING OF SERVICES TO OR BY, PROVIDING FOR
RENTAL OF REAL OR PERSONAL PROPERTY TO OR FROM, OR OTHERWISE

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REQUIRING PAYMENTS TO OR FROM ANY SUCH OFFICER, DIRECTOR OR EMPLOYEE OR, TO THE
KNOWLEDGE OF THE COMPANY OR ANY OF ITS SUBSIDIARIES, ANY CORPORATION,
PARTNERSHIP, TRUST OR OTHER ENTITY IN WHICH ANY SUCH OFFICER, DIRECTOR, OR
EMPLOYEE HAS A SUBSTANTIAL INTEREST OR IS AN OFFICER, DIRECTOR, TRUSTEE OR
PARTNER.

 

(R)                                    EQUITY CAPITALIZATION. AS OF THE DATE
HEREOF, THE AUTHORIZED CAPITAL STOCK OF THE COMPANY CONSISTS OF (I) 50,000,000
SHARES OF COMMON STOCK, OF WHICH AS OF THE DATE HEREOF, 26,992,941 ARE ISSUED
AND OUTSTANDING AND 1,055,000 SHARES ARE RESERVED FOR ISSUANCE PURSUANT TO
SECURITIES (OTHER THAN THE PREFERRED SHARES AND THE WARRANTS) EXERCISABLE OR
EXCHANGEABLE FOR, OR CONVERTIBLE INTO, SHARES OF COMMON STOCK AND (II) 5,000,000
SHARES OF PREFERRED STOCK OF WHICH, AS OF THE DATE HEREOF, NONE ARE ISSUED AND
OUTSTANDING. ALL OF SUCH OUTSTANDING SHARES HAVE BEEN, OR UPON ISSUANCE WILL BE,
VALIDLY ISSUED AND ARE FULLY PAID AND NONASSESSABLE. EXCEPT AS DISCLOSED IN
SCHEDULE 3(R): (I) NONE OF THE COMPANY’S CAPITAL STOCK IS SUBJECT TO PREEMPTIVE
RIGHTS OR ANY OTHER SIMILAR RIGHTS OR ANY LIENS OR ENCUMBRANCES SUFFERED OR
PERMITTED BY THE COMPANY; (II) THERE ARE NO OUTSTANDING OPTIONS, WARRANTS,
SCRIP, RIGHTS TO SUBSCRIBE TO, CALLS OR COMMITMENTS OF ANY CHARACTER WHATSOEVER
RELATING TO, OR SECURITIES OR RIGHTS CONVERTIBLE INTO, OR EXERCISABLE OR
EXCHANGEABLE FOR, ANY CAPITAL STOCK OF THE COMPANY OR ANY OF ITS SUBSIDIARIES,
OR CONTRACTS, COMMITMENTS, UNDERSTANDINGS OR ARRANGEMENTS BY WHICH THE COMPANY
OR ANY OF ITS SUBSIDIARIES IS OR MAY BECOME BOUND TO ISSUE ADDITIONAL CAPITAL
STOCK OF THE COMPANY OR ANY OF ITS SUBSIDIARIES OR OPTIONS, WARRANTS, SCRIP,
RIGHTS TO SUBSCRIBE TO, CALLS OR COMMITMENTS OF ANY CHARACTER WHATSOEVER
RELATING TO, OR SECURITIES OR RIGHTS CONVERTIBLE INTO, OR EXERCISABLE OR
EXCHANGEABLE FOR, ANY CAPITAL STOCK OF THE COMPANY OR ANY OF ITS SUBSIDIARIES;
(III) THERE ARE NO OUTSTANDING DEBT SECURITIES, NOTES, CREDIT AGREEMENTS, CREDIT
FACILITIES OR OTHER AGREEMENTS, DOCUMENTS OR INSTRUMENTS EVIDENCING INDEBTEDNESS
(AS DEFINED IN SECTION 3(S)) OF THE COMPANY OR ANY OF ITS SUBSIDIARIES OR BY
WHICH THE COMPANY OR ANY OF ITS SUBSIDIARIES IS OR MAY BECOME BOUND; (IV) THERE
ARE NO FINANCING STATEMENTS SECURING OBLIGATIONS IN ANY MATERIAL AMOUNTS, EITHER
SINGLY OR IN THE AGGREGATE, FILED IN CONNECTION WITH THE COMPANY OR ANY OF ITS
SUBSIDIARIES; (V) THERE ARE NO AGREEMENTS OR ARRANGEMENTS UNDER WHICH THE
COMPANY OR ANY OF ITS SUBSIDIARIES IS OBLIGATED TO REGISTER THE SALE OF ANY OF
THEIR SECURITIES UNDER THE 1933 ACT (EXCEPT PURSUANT TO THE REGISTRATION RIGHTS
AGREEMENT); (VI) THERE ARE NO OUTSTANDING SECURITIES OR INSTRUMENTS OF THE
COMPANY OR ANY OF ITS SUBSIDIARIES WHICH CONTAIN ANY REDEMPTION OR SIMILAR
PROVISIONS, AND THERE ARE NO CONTRACTS, COMMITMENTS, UNDERSTANDINGS OR
ARRANGEMENTS BY WHICH THE COMPANY OR ANY OF ITS SUBSIDIARIES IS OR MAY BECOME
BOUND TO REDEEM A SECURITY OF THE COMPANY OR ANY OF ITS SUBSIDIARIES; (VII)
THERE ARE NO SECURITIES OR INSTRUMENTS CONTAINING ANTI-DILUTION OR SIMILAR
PROVISIONS THAT WILL BE TRIGGERED BY THE ISSUANCE OF THE SECURITIES; (VIII) THE
COMPANY DOES NOT HAVE ANY STOCK APPRECIATION RIGHTS OR “PHANTOM STOCK” PLANS OR
AGREEMENTS OR ANY SIMILAR PLAN OR AGREEMENT; AND (IX) THE COMPANY AND ITS
SUBSIDIARIES HAVE NO LIABILITIES OR OBLIGATIONS REQUIRED TO BE DISCLOSED IN THE
SEC DOCUMENTS BUT NOT SO DISCLOSED IN THE SEC DOCUMENTS, OTHER THAN THOSE
INCURRED IN THE ORDINARY COURSE OF THE COMPANY’S OR ITS SUBSIDIARIES’ RESPECTIVE
BUSINESSES. THE COMPANY HAS FURNISHED TO THE BUYERS TRUE, CORRECT AND COMPLETE
COPIES OF THE COMPANY’S CERTIFICATE OF INCORPORATION, AS AMENDED AND AS IN
EFFECT ON THE DATE HEREOF (THE “CERTIFICATE OF INCORPORATION”), AND THE
COMPANY’S BYLAWS, AS AMENDED AND AS IN EFFECT ON THE DATE HEREOF (THE “BYLAWS”),
AND THE TERMS OF ALL SECURITIES CONVERTIBLE INTO, OR EXERCISABLE OR EXCHANGEABLE
FOR, SHARES OF COMMON STOCK AND THE MATERIAL RIGHTS OF THE HOLDERS THEREOF IN
RESPECT THERETO. SCHEDULE 3(R) SETS FORTH THE SHARES OF COMMON STOCK OWNED
BENEFICIALLY OR OF RECORD AND COMMON STOCK EQUIVALENTS (AS DEFINED BELOW) HELD
BY EACH DIRECTOR AND EXECUTIVE OFFICER.

 

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(S)                                  INDEBTEDNESS AND OTHER CONTRACTS. EXCEPT AS
SET FORTH IN SCHEDULE 3(S), NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES (I)
HAS ANY OUTSTANDING INDEBTEDNESS (AS DEFINED BELOW), (II) IS A PARTY TO ANY
CONTRACT, AGREEMENT OR INSTRUMENT, THE VIOLATION OF WHICH, OR DEFAULT UNDER
WHICH, BY THE OTHER PARTY(IES) TO SUCH CONTRACT, AGREEMENT OR INSTRUMENT COULD
REASONABLY BE EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT, (III) IS IN
MATERIAL VIOLATION OF ANY TERM OF OR IN MATERIAL DEFAULT UNDER ANY MATERIAL
CONTRACT, AGREEMENT OR INSTRUMENT RELATING TO ANY INDEBTEDNESS, OR (IV) IS A
PARTY TO ANY CONTRACT, AGREEMENT OR INSTRUMENT RELATING TO ANY INDEBTEDNESS, THE
PERFORMANCE OF WHICH, IN THE JUDGMENT OF THE COMPANY’S OFFICERS, HAS OR IS
EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT. SCHEDULE 3(S) PROVIDES A DETAILED
DESCRIPTION OF THE MATERIAL TERMS OF ANY SUCH OUTSTANDING INDEBTEDNESS. FOR
PURPOSES OF THIS AGREEMENT: (X) “INDEBTEDNESS” OF ANY PERSON MEANS, WITHOUT
DUPLICATION (A) ALL INDEBTEDNESS FOR BORROWED MONEY, (B) ALL OBLIGATIONS ISSUED,
UNDERTAKEN OR ASSUMED AS THE DEFERRED PURCHASE PRICE OF PROPERTY OR SERVICES
(INCLUDING, WITHOUT LIMITATION, “CAPITAL LEASES” IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES) (OTHER THAN TRADE PAYABLES ENTERED INTO IN THE
ORDINARY COURSE OF BUSINESS), (C) ALL REIMBURSEMENT OR PAYMENT OBLIGATIONS WITH
RESPECT TO LETTERS OF CREDIT, SURETY BONDS AND OTHER SIMILAR INSTRUMENTS, (D)
ALL OBLIGATIONS EVIDENCED BY NOTES, BONDS, DEBENTURES OR SIMILAR INSTRUMENTS,
INCLUDING OBLIGATIONS SO EVIDENCED INCURRED IN CONNECTION WITH THE ACQUISITION
OF PROPERTY, ASSETS OR BUSINESSES, (E) ALL INDEBTEDNESS CREATED OR ARISING UNDER
ANY CONDITIONAL SALE OR OTHER TITLE RETENTION AGREEMENT, OR INCURRED AS
FINANCING, IN EITHER CASE WITH RESPECT TO ANY PROPERTY OR ASSETS ACQUIRED WITH
THE PROCEEDS OF SUCH INDEBTEDNESS (EVEN THOUGH THE RIGHTS AND REMEDIES OF THE
SELLER OR BANK UNDER SUCH AGREEMENT IN THE EVENT OF DEFAULT ARE LIMITED TO
REPOSSESSION OR SALE OF SUCH PROPERTY), (F) ALL MONETARY OBLIGATIONS UNDER ANY
LEASING OR SIMILAR ARRANGEMENT WHICH, IN CONNECTION WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES, CONSISTENTLY APPLIED FOR THE PERIODS COVERED THEREBY, IS
CLASSIFIED AS A CAPITAL LEASE, (G) ALL INDEBTEDNESS REFERRED TO IN CLAUSES (A)
THROUGH (F) ABOVE SECURED BY (OR FOR WHICH THE HOLDER OF SUCH INDEBTEDNESS HAS
AN EXISTING RIGHT, CONTINGENT OR OTHERWISE, TO BE SECURED BY) ANY MORTGAGE,
LIEN, PLEDGE, CHARGE, SECURITY INTEREST OR OTHER ENCUMBRANCE UPON OR IN ANY
PROPERTY OR ASSETS (INCLUDING ACCOUNTS AND CONTRACT RIGHTS) OWNED BY ANY PERSON,
EVEN THOUGH THE PERSON WHICH OWNS SUCH ASSETS OR PROPERTY HAS NOT ASSUMED OR
BECOME LIABLE FOR THE PAYMENT OF SUCH INDEBTEDNESS, AND (H) ALL CONTINGENT
OBLIGATIONS IN RESPECT OF INDEBTEDNESS OR OBLIGATIONS OF OTHERS OF THE KINDS
REFERRED TO IN CLAUSES (A) THROUGH (G) ABOVE; (Y) “CONTINGENT OBLIGATION” MEANS,
AS TO ANY PERSON, ANY DIRECT OR INDIRECT LIABILITY, CONTINGENT OR OTHERWISE, OF
THAT PERSON WITH RESPECT TO ANY INDEBTEDNESS, LEASE, DIVIDEND OR OTHER
OBLIGATION OF ANOTHER PERSON IF THE PRIMARY PURPOSE OR INTENT OF THE PERSON
INCURRING SUCH LIABILITY, OR THE PRIMARY EFFECT THEREOF, IS TO PROVIDE ASSURANCE
TO THE OBLIGEE OF SUCH LIABILITY THAT SUCH LIABILITY WILL BE PAID OR DISCHARGED,
OR THAT ANY AGREEMENTS RELATING THERETO WILL BE COMPLIED WITH, OR THAT THE
HOLDERS OF SUCH LIABILITY WILL BE PROTECTED (IN WHOLE OR IN PART) AGAINST LOSS
WITH RESPECT THERETO; AND (Z) “PERSON” MEANS AN INDIVIDUAL, A LIMITED LIABILITY
COMPANY, A PARTNERSHIP, A JOINT VENTURE, A CORPORATION, A TRUST, AN
UNINCORPORATED ORGANIZATION AND A GOVERNMENT OR ANY DEPARTMENT OR AGENCY
THEREOF.

 

(T)                                    ABSENCE OF LITIGATION. EXCEPT AS SET
FORTH IN SCHEDULE 3(T), THERE IS NO ACTION, SUIT, PROCEEDING, INQUIRY OR
INVESTIGATION BEFORE OR BY THE PRINCIPAL MARKET, ANY COURT, PUBLIC BOARD,
GOVERNMENT AGENCY, SELF-REGULATORY ORGANIZATION OR BODY PENDING OR, TO THE
KNOWLEDGE OF THE COMPANY, THREATENED AGAINST OR AFFECTING THE COMPANY OR ANY OF
ITS SUBSIDIARIES, THE COMMON STOCK OR ANY OF THE COMPANY’S SUBSIDIARIES OR ANY
OF THE COMPANY’S OR ITS SUBSIDIARIES’ OFFICERS OR DIRECTORS, WHETHER OF A CIVIL
OR CRIMINAL NATURE OR OTHERWISE.

 

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(U)                                 INSURANCE. THE COMPANY AND EACH OF ITS
SUBSIDIARIES ARE INSURED BY INSURERS OF RECOGNIZED FINANCIAL RESPONSIBILITY
AGAINST SUCH LOSSES AND RISKS AND IN SUCH AMOUNTS AS MANAGEMENT OF THE COMPANY
BELIEVES TO BE PRUDENT AND CUSTOMARY IN THE BUSINESSES IN WHICH THE COMPANY AND
ITS SUBSIDIARIES ARE ENGAGED. NEITHER THE COMPANY NOR ANY SUCH SUBSIDIARY HAS
BEEN REFUSED ANY INSURANCE COVERAGE SOUGHT OR APPLIED FOR AND NEITHER THE
COMPANY NOR ANY SUCH SUBSIDIARY HAS ANY REASON TO BELIEVE THAT IT WILL NOT BE
ABLE TO RENEW ITS EXISTING INSURANCE COVERAGE AS AND WHEN SUCH COVERAGE EXPIRES
OR TO OBTAIN SIMILAR COVERAGE FROM SIMILAR INSURERS AS MAY BE NECESSARY TO
CONTINUE ITS BUSINESS AT A COST THAT WOULD NOT HAVE A MATERIAL ADVERSE EFFECT.

 

(V)                                 EMPLOYEE RELATIONS. (I) NEITHER THE COMPANY
NOR ANY OF ITS SUBSIDIARIES IS A PARTY TO ANY COLLECTIVE BARGAINING AGREEMENT OR
EMPLOYS ANY MEMBER OF A UNION. THE COMPANY AND ITS SUBSIDIARIES BELIEVE THAT
THEIR RELATIONS WITH THEIR EMPLOYEES ARE GOOD. NO EXECUTIVE OFFICER OF THE
COMPANY OR ANY OF ITS SUBSIDIARIES (AS DEFINED IN RULE 501(F) OF THE 1933 ACT)
HAS NOTIFIED THE COMPANY OR ANY SUCH SUBSIDIARY THAT SUCH OFFICER INTENDS TO
LEAVE THE COMPANY OR ANY SUCH SUBSIDIARY OR OTHERWISE TERMINATE SUCH OFFICER’S
EMPLOYMENT WITH THE COMPANY OR ANY SUCH SUBSIDIARY. NO EXECUTIVE OFFICER OF THE
COMPANY OR ANY OF ITS SUBSIDIARIES IS, OR IS NOW EXPECTED TO BE, IN VIOLATION OF
ANY MATERIAL TERM OF ANY EMPLOYMENT CONTRACT, CONFIDENTIALITY, DISCLOSURE OR
PROPRIETARY INFORMATION AGREEMENT, NON-COMPETITION AGREEMENT, OR ANY OTHER
CONTRACT OR AGREEMENT OR ANY RESTRICTIVE COVENANT, AND THE CONTINUED EMPLOYMENT
OF EACH SUCH EXECUTIVE OFFICER DOES NOT SUBJECT THE COMPANY OR ANY OF ITS
SUBSIDIARIES TO ANY LIABILITY WITH RESPECT TO ANY OF THE FOREGOING MATTERS.

 

(II)                                  THE COMPANY AND ITS SUBSIDIARIES ARE IN
COMPLIANCE WITH ALL FEDERAL, STATE, LOCAL AND FOREIGN LAWS AND REGULATIONS
RESPECTING LABOR, EMPLOYMENT AND EMPLOYMENT PRACTICES AND BENEFITS, TERMS AND
CONDITIONS OF EMPLOYMENT AND WAGES AND HOURS, EXCEPT WHERE FAILURE TO BE IN
COMPLIANCE WOULD NOT, EITHER INDIVIDUALLY OR IN THE AGGREGATE, REASONABLY BE
EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT.

 

(W)                               TITLE. EXCEPT AS SET FORTH ON SCHEDULE 3(W),
THE COMPANY AND ITS SUBSIDIARIES HAVE (I) GOOD AND MARKETABLE TITLE IN FEE
SIMPLE TO ALL REAL PROPERTY OTHER THAN OIL AND GAS INTERESTS, IF ANY, (II) GOOD
AND INDEFEASIBLE TITLE TO ITS OIL AND GAS INTERESTS AND (III) GOOD AND
MARKETABLE TITLE TO ALL PERSONAL PROPERTY OWNED BY THEM WHICH IS MATERIAL TO THE
BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES, IN EACH CASE FREE AND CLEAR OF ALL
LIENS, ENCUMBRANCES AND DEFECTS EXCEPT SUCH AS DO NOT MATERIALLY AFFECT THE
VALUE OF SUCH PROPERTY OR INTERESTS AND DO NOT INTERFERE WITH THE USE MADE AND
PROPOSED TO BE MADE OF SUCH PROPERTY OR INTERESTS BY THE COMPANY AND ANY OF ITS
SUBSIDIARIES. ANY REAL PROPERTY AND FACILITIES HELD UNDER LEASE BY THE COMPANY
OR ANY OF ITS SUBSIDIARIES ARE HELD BY THEM UNDER VALID, SUBSISTING AND
ENFORCEABLE LEASES WITH SUCH EXCEPTIONS AS ARE NOT MATERIAL AND DO NOT INTERFERE
WITH THE USE MADE AND PROPOSED TO BE MADE OF SUCH PROPERTY AND BUILDINGS BY THE
COMPANY AND ITS SUBSIDIARIES. THE NET ACREAGE OF EACH OF THE BARNETT SHALE
PROPERTIES AND THE RICH VALLEY PROPERTIES (AS SUCH TERMS ARE DEFINED IN THE
CERTIFICATE OF DESIGNATIONS) IS AS SET FORTH ON SCHEDULE 3(W) ATTACHED HERETO.

 

(X)                                   INTELLECTUAL PROPERTY RIGHTS. THE COMPANY
AND ITS SUBSIDIARIES OWN OR POSSESS ADEQUATE RIGHTS OR LICENSES TO USE ALL
TRADEMARKS, TRADE NAMES, SERVICE MARKS, SERVICE MARK REGISTRATIONS, SERVICE
NAMES, PATENTS, PATENT RIGHTS, COPYRIGHTS, INVENTIONS, LICENSES, APPROVALS,
GOVERNMENTAL AUTHORIZATIONS, ORIGINAL WORKS OF AUTHORSHIP, TRADE SECRETS AND
OTHER

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INTELLECTUAL PROPERTY RIGHTS AND ALL APPLICATIONS RELATED THERETO (“INTELLECTUAL
PROPERTY RIGHTS”) NECESSARY TO CONDUCT THEIR RESPECTIVE BUSINESSES AS NOW
CONDUCTED EXCEPT WHERE THE FAILURE TO SO OWN OR POSSESS WOULD NOT REASONABLY BE
EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT. NONE OF THE COMPANY’S OR ITS
SUBSIDIARIES’ INTELLECTUAL PROPERTY RIGHTS HAVE EXPIRED, TERMINATED OR BEEN
ABANDONED, OR ARE EXPECTED TO EXPIRE, TERMINATE OR BE ABANDONED, WITHIN THREE
YEARS FROM THE DATE OF THIS AGREEMENT. THE COMPANY DOES NOT HAVE ANY KNOWLEDGE
OF ANY INFRINGEMENT BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OF INTELLECTUAL
PROPERTY RIGHTS OF OTHERS. THERE IS NO CLAIM, ACTION OR PROCEEDING BEING MADE OR
BROUGHT, OR TO THE KNOWLEDGE OF THE COMPANY, BEING THREATENED, AGAINST THE
COMPANY OR ANY OF ITS SUBSIDIARIES REGARDING ITS INTELLECTUAL PROPERTY RIGHTS.
THE COMPANY IS UNAWARE OF ANY FACTS OR CIRCUMSTANCES WHICH MIGHT GIVE RISE TO
ANY OF THE FOREGOING INFRINGEMENTS OR CLAIMS, ACTIONS OR PROCEEDINGS. THE
COMPANY AND ITS SUBSIDIARIES HAVE TAKEN REASONABLE SECURITY MEASURES TO PROTECT
THE SECRECY, CONFIDENTIALITY AND VALUE OF ALL OF THEIR INTELLECTUAL PROPERTY
RIGHTS.

 

(Y)                                 ENVIRONMENTAL LAWS. THE COMPANY AND ITS
SUBSIDIARIES (I) ARE IN COMPLIANCE WITH ANY AND ALL ENVIRONMENTAL LAWS (AS
HEREINAFTER DEFINED), (II) HAVE RECEIVED ALL PERMITS, LICENSES OR OTHER
APPROVALS REQUIRED OF THEM UNDER APPLICABLE ENVIRONMENTAL LAWS TO CONDUCT THEIR
RESPECTIVE BUSINESSES AND (III) ARE IN COMPLIANCE WITH ALL TERMS AND CONDITIONS
OF ANY SUCH PERMIT, LICENSE OR APPROVAL WHERE, IN EACH OF THE FOREGOING CLAUSES
(I), (II) AND (III), THE FAILURE TO SO COMPLY COULD BE REASONABLY EXPECTED TO
HAVE, INDIVIDUALLY OR IN THE AGGREGATE, A MATERIAL ADVERSE EFFECT. THE TERM
“ENVIRONMENTAL LAWS” MEANS ALL FEDERAL, STATE, LOCAL OR FOREIGN LAWS RELATING TO
POLLUTION OR PROTECTION OF HUMAN HEALTH OR THE ENVIRONMENT (INCLUDING, WITHOUT
LIMITATION, AMBIENT AIR, SURFACE WATER, GROUNDWATER, LAND SURFACE OR SUBSURFACE
STRATA), INCLUDING, WITHOUT LIMITATION, LAWS RELATING TO EMISSIONS, DISCHARGES,
RELEASES OR THREATENED RELEASES OF CHEMICALS, POLLUTANTS, CONTAMINANTS, OR TOXIC
OR HAZARDOUS SUBSTANCES OR WASTES (COLLECTIVELY, “HAZARDOUS MATERIALS”) INTO THE
ENVIRONMENT, OR OTHERWISE RELATING TO THE MANUFACTURE, PROCESSING, DISTRIBUTION,
USE, TREATMENT, STORAGE, DISPOSAL, TRANSPORT OR HANDLING OF HAZARDOUS MATERIALS,
AS WELL AS ALL AUTHORIZATIONS, CODES, DECREES, DEMANDS OR DEMAND LETTERS,
INJUNCTIONS, JUDGMENTS, LICENSES, NOTICES OR NOTICE LETTERS, ORDERS, PERMITS,
PLANS OR REGULATIONS ISSUED, ENTERED, PROMULGATED OR APPROVED THEREUNDER.

 

(Z)                                   SUBSIDIARY RIGHTS. EXCEPT AS SET FORTH IN
SCHEDULE 3(Z), THE COMPANY OR ONE OF ITS SUBSIDIARIES HAS THE UNRESTRICTED RIGHT
TO VOTE, AND (SUBJECT TO LIMITATIONS IMPOSED BY APPLICABLE LAW) TO RECEIVE
DIVIDENDS AND DISTRIBUTIONS ON, ALL CAPITAL SECURITIES OF ITS SUBSIDIARIES AS
OWNED BY THE COMPANY OR SUCH SUBSIDIARY.

 

(AA)                            TAX STATUS. THE COMPANY AND EACH OF ITS
SUBSIDIARIES (I) HAS MADE OR FILED ALL FOREIGN, FEDERAL AND STATE INCOME AND ALL
OTHER TAX RETURNS, REPORTS AND DECLARATIONS REQUIRED BY ANY JURISDICTION TO
WHICH IT IS SUBJECT, (II) HAS PAID ALL TAXES AND OTHER GOVERNMENTAL ASSESSMENTS
AND CHARGES THAT ARE MATERIAL IN AMOUNT, SHOWN OR DETERMINED TO BE DUE ON SUCH
RETURNS, REPORTS AND DECLARATIONS, EXCEPT THOSE BEING CONTESTED IN GOOD FAITH
AND (III) HAS SET ASIDE ON ITS BOOKS PROVISION REASONABLY ADEQUATE FOR THE
PAYMENT OF ALL TAXES FOR PERIODS SUBSEQUENT TO THE PERIODS TO WHICH SUCH
RETURNS, REPORTS OR DECLARATIONS APPLY. THERE ARE NO UNPAID TAXES IN ANY
MATERIAL AMOUNT CLAIMED TO BE DUE BY THE TAXING AUTHORITY OF ANY JURISDICTION,
AND THE OFFICERS OF THE COMPANY KNOW OF NO BASIS FOR ANY SUCH CLAIM.

 

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(BB)                          INTERNAL ACCOUNTING AND DISCLOSURE CONTROLS. THE
COMPANY AND EACH OF ITS SUBSIDIARIES MAINTAIN A SYSTEM OF INTERNAL ACCOUNTING
CONTROLS SUFFICIENT TO PROVIDE REASONABLE ASSURANCE THAT (I) TRANSACTIONS ARE
EXECUTED IN ACCORDANCE WITH MANAGEMENT’S GENERAL OR SPECIFIC AUTHORIZATIONS,
(II) TRANSACTIONS ARE RECORDED AS NECESSARY TO PERMIT PREPARATION OF FINANCIAL
STATEMENTS IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND TO
MAINTAIN ASSET AND LIABILITY ACCOUNTABILITY, (III) ACCESS TO ASSETS OR
INCURRENCE OF LIABILITIES IS PERMITTED ONLY IN ACCORDANCE WITH MANAGEMENT’S
GENERAL OR SPECIFIC AUTHORIZATION AND (IV) THE RECORDED ACCOUNTABILITY FOR
ASSETS AND LIABILITIES IS COMPARED WITH THE EXISTING ASSETS AND LIABILITIES AT
REASONABLE INTERVALS AND APPROPRIATE ACTION IS TAKEN WITH RESPECT TO ANY
DIFFERENCE. THE COMPANY MAINTAINS DISCLOSURE CONTROLS AND PROCEDURES (AS SUCH
TERM IS DEFINED IN RULE 13A-14 UNDER THE 1934 ACT) THAT ARE EFFECTIVE IN
ENSURING THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE COMPANY IN THE REPORTS
THAT IT FILES OR SUBMITS UNDER THE 1934 ACT IS RECORDED, PROCESSED, SUMMARIZED
AND REPORTED, WITHIN THE TIME PERIODS SPECIFIED IN THE RULES AND FORMS OF THE
SEC, INCLUDING, WITHOUT LIMITATION, CONTROLS AND PROCEDURES DESIGNED IN TO
ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE COMPANY IN THE REPORTS
THAT IT FILES OR SUBMITS UNDER THE 1934 ACT IS ACCUMULATED AND COMMUNICATED TO
THE COMPANY’S MANAGEMENT, INCLUDING ITS PRINCIPAL EXECUTIVE OFFICER OR OFFICERS
AND ITS PRINCIPAL FINANCIAL OFFICER OR OFFICERS, AS APPROPRIATE, TO ALLOW TIMELY
DECISIONS REGARDING REQUIRED DISCLOSURE. EXCEPT AS SET FORTH IN SCHEDULE 3(BB),
DURING THE TWELVE MONTHS PRIOR TO THE DATE HEREOF NEITHER THE COMPANY NOR ANY OF
ITS SUBSIDIARIES HAVE RECEIVED ANY NOTICE OR CORRESPONDENCE FROM ANY ACCOUNTANT
RELATING TO ANY POTENTIAL MATERIAL WEAKNESS IN ANY PART OF THE SYSTEM OF
INTERNAL ACCOUNTING CONTROLS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES.

 

(CC)                            OFF BALANCE SHEET ARRANGEMENTS. THERE IS NO
MATERIAL TRANSACTION, ARRANGEMENT, OR OTHER RELATIONSHIP BETWEEN THE COMPANY AND
AN UNCONSOLIDATED OR OTHER OFF BALANCE SHEET ENTITY THAT IS REQUIRED TO BE
DISCLOSED BY THE COMPANY IN ITS 1934 ACT FILINGS AND IS NOT SO DISCLOSED.

 

(DD)                          INVESTMENT COMPANY STATUS. THE COMPANY IS NOT, AND
UPON CONSUMMATION OF THE SALE OF THE SECURITIES WILL NOT BE, AN “INVESTMENT
COMPANY,” A COMPANY CONTROLLED BY AN “INVESTMENT COMPANY” OR AN “AFFILIATED
PERSON” OF, OR “PROMOTER” OR “PRINCIPAL UNDERWRITER” FOR, AN “INVESTMENT
COMPANY” AS SUCH TERMS ARE DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED.

 

(EE)                            TRANSFER TAXES. ON THE CLOSING DATE, ALL STOCK
TRANSFER OR OTHER TAXES (OTHER THAN INCOME OR SIMILAR TAXES) WHICH ARE REQUIRED
TO BE PAID IN CONNECTION WITH THE SALE AND TRANSFER OF THE SECURITIES TO BE SOLD
TO EACH BUYER HEREUNDER WILL BE, OR WILL HAVE BEEN, FULLY PAID OR PROVIDED FOR
BY THE COMPANY, AND ALL LAWS IMPOSING SUCH TAXES WILL BE OR WILL HAVE BEEN
COMPLIED WITH.

 

(FF)                                ACKNOWLEDGEMENT REGARDING BUYERS’ TRADING
ACTIVITY. EXCEPT AS SET FORTH IN SECTION 2(M) AND SECTION 4(R), IT IS UNDERSTOOD
AND ACKNOWLEDGED BY THE COMPANY (I) THAT NONE OF THE BUYERS HAVE BEEN ASKED BY
THE COMPANY OR ITS SUBSIDIARIES TO AGREE, NOR HAS ANY BUYER AGREED WITH THE
COMPANY OR ITS SUBSIDIARIES, TO DESIST FROM PURCHASING OR SELLING, LONG AND/OR
SHORT, SECURITIES OF THE COMPANY, OR “DERIVATIVE” SECURITIES BASED ON SECURITIES
ISSUED BY THE COMPANY OR TO HOLD THE SECURITIES FOR ANY SPECIFIED TERM; (II)
THAT ANY BUYER, AND COUNTERPARTIES IN “DERIVATIVE” TRANSACTIONS TO WHICH ANY
SUCH BUYER IS A PARTY, DIRECTLY OR

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INDIRECTLY, PRESENTLY MAY HAVE A “SHORT” POSITION IN THE COMMON STOCK, AND (III)
THAT EACH BUYER SHALL NOT BE DEEMED TO HAVE ANY AFFILIATION WITH OR CONTROL OVER
ANY ARM’S LENGTH COUNTERPARTY IN ANY “DERIVATIVE” TRANSACTION. THE COMPANY
FURTHER UNDERSTANDS AND ACKNOWLEDGES THAT ONE OR MORE BUYERS MAY ENGAGE IN
HEDGING AND/OR TRADING ACTIVITIES AT VARIOUS TIMES DURING THE PERIOD THAT THE
SECURITIES ARE OUTSTANDING, INCLUDING, WITHOUT LIMITATION, DURING THE PERIODS
THAT THE VALUE OF THE CONVERSION SHARES AND THE WARRANT SHARES DELIVERABLE WITH
RESPECT TO SECURITIES ARE BEING DETERMINED AND (B) SUCH HEDGING AND/OR TRADING
ACTIVITIES, IF ANY, CAN REDUCE THE VALUE OF THE EXISTING STOCKHOLDERS’ EQUITY
INTEREST IN THE COMPANY BOTH AT AND AFTER THE TIME THE HEDGING AND/OR TRADING
ACTIVITIES ARE BEING CONDUCTED. THE COMPANY ACKNOWLEDGES THAT SUCH
AFOREMENTIONED HEDGING AND/OR TRADING ACTIVITIES DO NOT CONSTITUTE A BREACH OF
THIS AGREEMENT, THE CERTIFICATE OF DESIGNATIONS, THE WARRANTS OR ANY OF THE
DOCUMENTS EXECUTED IN CONNECTION HEREWITH.

 

(GG)                          MANIPULATION OF PRICE. THE COMPANY HAS NOT, AND TO
ITS KNOWLEDGE NO ONE ACTING ON ITS BEHALF HAS, (I) TAKEN, DIRECTLY OR
INDIRECTLY, ANY ACTION DESIGNED TO CAUSE OR TO RESULT IN THE STABILIZATION OR
MANIPULATION OF THE PRICE OF ANY SECURITY OF THE COMPANY TO FACILITATE THE SALE
OR RESALE OF ANY OF THE SECURITIES, (II) SOLD, BID FOR, PURCHASED, OR PAID ANY
COMPENSATION FOR SOLICITING PURCHASES OF, ANY OF THE SECURITIES, OR (III) PAID
OR AGREED TO PAY TO ANY PERSON ANY COMPENSATION FOR SOLICITING ANOTHER TO
PURCHASE ANY OTHER SECURITIES OF THE COMPANY.

 

(HH)                          NO SIDE ARRANGEMENTS. NEITHER THE COMPANY NOR ANY
OF THE COMPANY’S DIRECTORS, OFFICERS, SUBSIDIARIES OR ANY OF THE COMPANY’S OR
THEIR SUBSIDIARIES’ AFFILIATES HAS ANY ARRANGEMENTS OR AGREEMENTS WITH ANY BUYER
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY THAT IS NOT SET FORTH IN THE
TRANSACTION DOCUMENTS AND THAT ALL THE BUYERS ARE NOT PARTY TO. NEITHER THE
COMPANY NOR ANY OF THE COMPANY’S DIRECTORS, OFFICERS, SUBSIDIARIES OR ANY OF THE
COMPANY’S OR THEIR SUBSIDIARIES’ AFFILIATES SHALL ENTER INTO ANY ARRANGEMENTS OR
AGREEMENTS WITH ANY BUYER RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY
UNLESS ALL BUYERS ARE PROVIDED WITH THE SAME OPPORTUNITY TO BE PARTY TO ANY SUCH
ARRANGEMENT OR AGREEMENT.

 

(II)                                  DISCLOSURE. THE COMPANY CONFIRMS THAT
NEITHER IT NOR ANY OTHER PERSON ACTING ON ITS BEHALF HAS PROVIDED ANY OF THE
BUYERS OR THEIR AGENTS OR COUNSEL WITH ANY INFORMATION THAT CONSTITUTES OR COULD
REASONABLY BE EXPECTED TO CONSTITUTE MATERIAL, NONPUBLIC INFORMATION. THE
COMPANY UNDERSTANDS AND CONFIRMS THAT EACH OF THE BUYERS WILL RELY ON THE
FOREGOING REPRESENTATIONS IN EFFECTING TRANSACTIONS IN SECURITIES OF THE
COMPANY. ALL DISCLOSURE PROVIDED TO THE BUYERS REGARDING THE COMPANY AND ITS
SUBSIDIARIES, THEIR BUSINESS AND THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING
THE SCHEDULES TO THIS AGREEMENT, FURNISHED BY OR ON BEHALF OF THE COMPANY IS
TRUE AND CORRECT AND DOES NOT CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT OR
OMIT TO STATE ANY MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS MADE
THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING. EACH PRESS RELEASE ISSUED BY THE COMPANY OR ITS SUBSIDIARIES DURING
THE TWELVE (12) MONTHS PRECEDING THE DATE OF THIS AGREEMENT DID NOT AT THE TIME
OF RELEASE CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT TO STATE A
MATERIAL FACT REQUIRED TO BE STATED THEREIN OR NECESSARY IN ORDER TO MAKE THE
STATEMENTS THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY ARE MADE,
NOT MISLEADING. NO EVENT OR CIRCUMSTANCE HAS OCCURRED OR INFORMATION EXISTS WITH
RESPECT TO THE COMPANY OR ANY OF ITS SUBSIDIARIES OR ITS OR THEIR BUSINESS,
PROPERTIES, PROSPECTS, OPERATIONS OR FINANCIAL CONDITIONS, WHICH, UNDER
APPLICABLE LAW, RULE OR REGULATION, REQUIRES PUBLIC DISCLOSURE OR ANNOUNCEMENT
BY THE COMPANY BUT WHICH HAS NOT BEEN SO PUBLICLY ANNOUNCED OR DISCLOSED.

 

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4.                                       COVENANTS.

 

(A)                                  BEST EFFORTS. EACH PARTY SHALL USE ITS BEST
EFFORTS TIMELY TO SATISFY EACH OF THE CONDITIONS TO BE SATISFIED BY IT AS
PROVIDED IN SECTIONS 6 AND 7 OF THIS AGREEMENT.

 

(B)                                 FORM D AND BLUE SKY. THE COMPANY AGREES TO
FILE A FORM D WITH RESPECT TO THE SECURITIES AS REQUIRED UNDER REGULATION D AND
TO PROVIDE A COPY THEREOF TO EACH BUYER PROMPTLY AFTER SUCH FILING. THE COMPANY
SHALL, ON OR BEFORE THE CLOSING DATE, TAKE SUCH ACTION AS THE COMPANY SHALL
REASONABLY DETERMINE IS NECESSARY IN ORDER TO OBTAIN AN EXEMPTION FOR OR TO
QUALIFY THE SECURITIES FOR SALE TO THE BUYERS AT THE CLOSING PURSUANT TO THIS
AGREEMENT UNDER APPLICABLE SECURITIES OR “BLUE SKY” LAWS OF THE STATES OF THE
UNITED STATES (OR TO OBTAIN AN EXEMPTION FROM SUCH QUALIFICATION), AND SHALL
PROVIDE EVIDENCE OF ANY SUCH ACTION SO TAKEN TO THE BUYERS ON OR PRIOR TO THE
CLOSING DATE. THE COMPANY SHALL MAKE ALL FILINGS AND REPORTS RELATING TO THE
OFFER AND SALE OF THE SECURITIES REQUIRED UNDER APPLICABLE SECURITIES OR “BLUE
SKY” LAWS OF THE STATES OF THE UNITED STATES FOLLOWING THE CLOSING DATE.

 

(C)                                  REPORTING STATUS. UNTIL THE DATE ON WHICH
THE BUYERS SHALL HAVE SOLD ALL THE CONVERSION SHARES, THE COMMON SHARES AND THE
WARRANT SHARES, AND NONE OF THE PREFERRED SHARES OR WARRANTS IS OUTSTANDING (THE
“REPORTING PERIOD”), THE COMPANY SHALL TIMELY FILE ALL REPORTS REQUIRED TO BE
FILED WITH THE SEC PURSUANT TO THE 1934 ACT, AND THE COMPANY SHALL NOT TERMINATE
ITS STATUS AS AN ISSUER REQUIRED TO FILE REPORTS UNDER THE 1934 ACT EVEN IF THE
1934 ACT OR THE RULES AND REGULATIONS THEREUNDER WOULD NO LONGER REQUIRE OR
OTHERWISE PERMIT SUCH TERMINATION. FROM THE TIME FORM S-3 IS AVAILABLE TO THE
COMPANY FOR THE REGISTRATION OF THE CONVERSION SHARES, THE COMMON SHARES AND THE
WARRANT SHARES, THE COMPANY SHALL TAKE ALL ACTIONS NECESSARY TO MAINTAIN ITS
ELIGIBILITY TO REGISTER THE CONVERSION SHARES, THE COMMON SHARES AND THE WARRANT
SHARES FOR RESALE BY THE BUYERS ON FORM S-3 AND AT ALL TIMES THE COMPANY SHALL
CONDUCT ITS BUSINESS IN ACCORDANCE WITH APPLICABLE LAW.

 

(D)                                 USE OF PROCEEDS. THE COMPANY WILL USE THE
PROCEEDS FROM THE SALE OF THE SECURITIES FOR THE REPAYMENT OF DEBT, WORKING
CAPITAL AND GENERAL CORPORATE PURPOSES, AND NOT FOR THE REDEMPTION OR REPURCHASE
OF ANY OF ITS OR ITS SUBSIDIARIES’ EQUITY SECURITIES.

 

(E)                                  FINANCIAL INFORMATION. THE COMPANY AGREES
TO SEND THE FOLLOWING TO EACH INVESTOR (AS DEFINED IN THE REGISTRATION RIGHTS
AGREEMENT) DURING THE REPORTING PERIOD (I) UNLESS THE FOLLOWING ARE FILED WITH
THE SEC THROUGH EDGAR AND ARE AVAILABLE TO THE PUBLIC THROUGH THE EDGAR SYSTEM,
WITHIN ONE (1) BUSINESS DAY AFTER THE FILING THEREOF WITH THE SEC, A COPY OF ITS
ANNUAL REPORTS AND QUARTERLY REPORTS ON FORM 10-K, 10-KSB, 10-Q OR 10-QSB, ANY
INTERIM REPORTS OR ANY CONSOLIDATED BALANCE SHEETS, INCOME STATEMENTS,
STOCKHOLDERS’ EQUITY STATEMENTS AND/OR CASH FLOW STATEMENTS FOR ANY PERIOD OTHER
THAN ANNUAL, ANY CURRENT REPORTS ON FORM 8-K AND ANY REGISTRATION STATEMENTS
(OTHER THAN ON FORM S-8) OR AMENDMENTS FILED PURSUANT TO THE 1933 ACT AND (II)
COPIES OF ANY NOTICES AND OTHER INFORMATION MADE AVAILABLE OR GIVEN TO THE
STOCKHOLDERS OF THE COMPANY GENERALLY, CONTEMPORANEOUSLY WITH THE MAKING
AVAILABLE OR GIVING THEREOF TO THE STOCKHOLDERS. AS USED HEREIN “BUSINESS DAY”
MEANS ANY DAY OTHER THAN A SATURDAY, SUNDAY OR OTHER DAY ON WHICH COMMERCIAL
BANKS IN THE CITY OF NEW YORK ARE AUTHORIZED OR REQUIRED BY LAW TO REMAIN
CLOSED.

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(F)                                    LISTING.  THE COMPANY SHALL PROMPTLY
SECURE THE LISTING OF ALL OF THE REGISTRABLE SECURITIES (AS DEFINED IN THE
REGISTRATION RIGHTS AGREEMENT) UPON EACH NATIONAL SECURITIES EXCHANGE AND
AUTOMATED QUOTATION SYSTEM, IF ANY, UPON WHICH THE COMMON STOCK IS THEN LISTED
(SUBJECT TO OFFICIAL NOTICE OF ISSUANCE) AND SHALL MAINTAIN SUCH LISTING OF ALL
REGISTRABLE SECURITIES FROM TIME TO TIME ISSUABLE UNDER THE TERMS OF THE
TRANSACTION DOCUMENTS.  THE COMPANY SHALL MAINTAIN THE COMMON STOCKS'
AUTHORIZATION FOR QUOTATION ON THE PRINCIPAL MARKET OR ANY ELIGIBLE MARKET. 
NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES SHALL TAKE ANY ACTION WHICH
WOULD BE REASONABLY EXPECTED TO RESULT IN THE DELISTING OR SUSPENSION OF THE
COMMON STOCK ON THE PRINCIPAL MARKET.  THE COMPANY SHALL PAY ALL FEES AND
EXPENSES IN CONNECTION WITH SATISFYING ITS OBLIGATIONS UNDER THIS SECTION 4(F).

 

(G)                                 FEES.  THE COMPANY SHALL PAY OR REIMBURSE
SCHULTE ROTH & ZABEL LLP OR ITS DESIGNEE(S) (IN ADDITION TO ANY OTHER EXPENSE
AMOUNTS PAID TO ANY BUYER PRIOR TO THE DATE OF THIS AGREEMENT) FOR ALL
REASONABLE COSTS AND EXPENSES INCURRED IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS (INCLUDING ALL REASONABLE LEGAL FEES
AND DISBURSEMENTS IN CONNECTION THEREWITH, DOCUMENTATION AND IMPLEMENTATION OF
THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS AND DUE DILIGENCE IN
CONNECTION THEREWITH), WHICH AMOUNT SHALL BE NON-ACCOUNTABLE AND PAID BY THE
COMPANY AT CLOSING OR UPON TERMINATION OF THIS AGREEMENT.  THE COMPANY SHALL BE
RESPONSIBLE FOR THE PAYMENT OF ANY PLACEMENT AGENT'S FEES, FINANCIAL ADVISORY
FEES, OR BROKER'S COMMISSIONS (OTHER THAN FOR PERSONS ENGAGED BY ANY BUYER)
RELATING TO OR ARISING OUT OF THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING,
WITHOUT LIMITATION, ANY FEES PAYABLE TO THE AGENT.  THE COMPANY SHALL PAY, AND
HOLD EACH BUYER HARMLESS AGAINST, ANY LIABILITY, LOSS OR EXPENSE (INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEY'S FEES AND OUT-OF-POCKET EXPENSES)
ARISING IN CONNECTION WITH ANY CLAIM RELATING TO  ANY SUCH PAYMENT.

 

(H)                                 PLEDGE OF SECURITIES.  THE COMPANY
ACKNOWLEDGES AND AGREES THAT THE SECURITIES MAY BE PLEDGED BY AN INVESTOR (AS
DEFINED IN THE REGISTRATION RIGHTS AGREEMENT) IN CONNECTION WITH A BONA FIDE
MARGIN AGREEMENT OR OTHER LOAN OR FINANCING ARRANGEMENT THAT IS SECURED BY THE
SECURITIES.  THE PLEDGE OF SECURITIES SHALL NOT BE DEEMED TO BE A TRANSFER, SALE
OR ASSIGNMENT OF THE SECURITIES HEREUNDER, AND NO INVESTOR EFFECTING A PLEDGE OF
SECURITIES SHALL BE REQUIRED TO PROVIDE THE COMPANY WITH ANY NOTICE THEREOF OR
OTHERWISE MAKE ANY DELIVERY TO THE COMPANY PURSUANT TO THIS AGREEMENT OR ANY
OTHER TRANSACTION DOCUMENT.  THE COMPANY HEREBY AGREES TO EXECUTE AND DELIVER
SUCH DOCUMENTATION AS A PLEDGEE OF THE SECURITIES MAY REASONABLY REQUEST IN
CONNECTION WITH A PLEDGE OF THE SECURITIES TO SUCH PLEDGEE BY AN INVESTOR.

 

(I)                                     DISCLOSURE OF TRANSACTIONS AND OTHER
MATERIAL INFORMATION.  ON OR BEFORE 8:30 A.M., NEW YORK CITY TIME, ON THE THIRD
BUSINESS DAY FOLLOWING THE DATE OF THIS AGREEMENT, THE COMPANY SHALL ISSUE A
PRESS RELEASE AND FILE A CURRENT REPORT ON FORM 8-K DESCRIBING THE TERMS OF THE
TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS IN THE FORM REQUIRED BY
THE 1934 ACT AND ATTACHING THE MATERIAL TRANSACTION DOCUMENTS (INCLUDING,
WITHOUT LIMITATION, THIS AGREEMENT (AND ALL SCHEDULES TO THIS AGREEMENT), THE
FORM OF CERTIFICATE OF DESIGNATIONS, THE FORM OF WARRANT AND THE FORM OF THE
REGISTRATION RIGHTS AGREEMENT) AS EXHIBITS TO SUCH FILING (INCLUDING ALL
ATTACHMENTS, THE "8-K FILING").  FROM AND AFTER THE FILING OF THE 8-K FILING
WITH THE SEC, NO BUYER SHALL BE IN POSSESSION OF ANY MATERIAL, NONPUBLIC
INFORMATION RECEIVED FROM THE COMPANY, ANY OF ITS SUBSIDIARIES OR ANY OF ITS
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS, THAT IS NOT DISCLOSED IN
THE 8-K FILING.  THE COMPANY SHALL NOT, AND SHALL CAUSE EACH OF ITS

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SUBSIDIARIES AND ITS AND EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES
AND AGENTS, NOT TO, PROVIDE ANY BUYER WITH ANY MATERIAL, NONPUBLIC INFORMATION
REGARDING THE COMPANY OR ANY OF ITS SUBSIDIARIES FROM AND AFTER THE FILING OF
THE 8-K FILING WITH THE SEC WITHOUT THE EXPRESS WRITTEN CONSENT OF SUCH BUYER OR
AS MAY BE REQUIRED UNDER THE TERMS OF THE TRANSACTION DOCUMENTS.  IF A BUYER
HAS, OR BELIEVES IT HAS, RECEIVED ANY SUCH MATERIAL, NONPUBLIC INFORMATION
REGARDING THE COMPANY OR ANY OF ITS SUBSIDIARIES DIRECTLY FROM THE COMPANY, ANY
OF ITS SUBSIDIARIES, ANY OF THEIR AFFILIATES, OFFICERS, DIRECTORS OR ANY OTHER
PERSON ACTING ON THEIR BEHALF,  IT SHALL PROVIDE THE COMPANY WITH WRITTEN NOTICE
THEREOF.  THE COMPANY SHALL, WITHIN FIVE (5) TRADING DAYS (AS DEFINED IN THE
CERTIFICATE OF DESIGNATIONS) OF RECEIPT OF SUCH NOTICE, MAKE PUBLIC DISCLOSURE
OF SUCH MATERIAL, NONPUBLIC INFORMATION.  IN THE EVENT OF A BREACH OF THE
FOREGOING COVENANT BY THE COMPANY, ANY OF ITS SUBSIDIARIES, OR ANY OF ITS OR
THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS, IN ADDITION TO ANY
OTHER REMEDY PROVIDED HEREIN OR IN THE TRANSACTION DOCUMENTS, A BUYER SHALL HAVE
THE RIGHT TO MAKE A PUBLIC DISCLOSURE, IN THE FORM OF A PRESS RELEASE, PUBLIC
ADVERTISEMENT OR OTHERWISE, OF SUCH MATERIAL, NONPUBLIC INFORMATION WITHOUT THE
PRIOR APPROVAL BY THE COMPANY, ITS SUBSIDIARIES, OR ANY OF ITS OR THEIR
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS.  NO BUYER SHALL HAVE ANY
LIABILITY TO THE COMPANY, ITS SUBSIDIARIES, OR ANY OF ITS OR THEIR RESPECTIVE
OFFICERS, DIRECTORS, EMPLOYEES, STOCKHOLDERS OR AGENTS FOR ANY SUCH DISCLOSURE. 
SUBJECT TO THE FOREGOING, NEITHER THE COMPANY, ITS SUBSIDIARIES NOR ANY BUYER
SHALL ISSUE ANY PRESS RELEASES OR ANY OTHER PUBLIC STATEMENTS WITH RESPECT TO
THE TRANSACTIONS CONTEMPLATED HEREBY; PROVIDED, HOWEVER, THAT THE COMPANY SHALL
BE ENTITLED, WITHOUT THE PRIOR APPROVAL OF ANY BUYER, TO MAKE ANY PRESS RELEASE
OR OTHER PUBLIC DISCLOSURE WITH RESPECT TO SUCH TRANSACTIONS (I) IN SUBSTANTIAL
CONFORMITY WITH THE 8-K FILING AND CONTEMPORANEOUSLY THEREWITH AND (II) AS IS
REQUIRED BY APPLICABLE LAW AND REGULATIONS (PROVIDED THAT IN THE CASE OF CLAUSE
(I) EACH BUYER SHALL BE CONSULTED BY THE COMPANY IN CONNECTION WITH ANY SUCH
PRESS RELEASE OR OTHER PUBLIC DISCLOSURE PRIOR TO ITS RELEASE).  WITHOUT THE
PRIOR WRITTEN CONSENT OF ANY APPLICABLE BUYER, NEITHER THE COMPANY NOR ANY OF
ITS SUBSIDIARIES OR AFFILIATES SHALL DISCLOSE THE NAME OF SUCH BUYER IN ANY
FILING, ANNOUNCEMENT, RELEASE OR OTHERWISE, UNLESS SUCH DISCLOSURE IS REQUIRED
BY LAW, REGULATION OR THE PRINCIPAL MARKET.

 

(J)                                     ADDITIONAL REGISTRATION STATEMENTS. 
UNTIL THE EFFECTIVE DATE (AS DEFINED IN THE REGISTRATION RIGHTS AGREEMENT), THE
COMPANY SHALL NOT FILE A REGISTRATION STATEMENT UNDER THE 1933 ACT RELATING TO
SECURITIES THAT ARE NOT THE SECURITIES.

 

(K)                                  CORPORATE EXISTENCE.  SO LONG AS ANY BUYER
BENEFICIALLY OWNS ANY PREFERRED SHARES OR WARRANTS, THE COMPANY SHALL NOT BE
PARTY TO ANY FUNDAMENTAL TRANSACTION (AS DEFINED IN THE CERTIFICATE OF
DESIGNATIONS) UNLESS THE COMPANY IS IN COMPLIANCE WITH THE APPLICABLE PROVISIONS
GOVERNING FUNDAMENTAL TRANSACTIONS SET FORTH IN THE CERTIFICATE OF DESIGNATIONS
AND THE WARRANTS.

 

(L)                                     RESERVATION OF SHARES.  THE COMPANY
SHALL TAKE ALL ACTION NECESSARY TO AT ALL TIMES HAVE AUTHORIZED, AND RESERVED
FOR THE PURPOSE OF ISSUANCE, NO LESS THAN THE SUM OF (I) 130% OF THE MAXIMUM
NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED
SHARES (ASSUMING FOR PURPOSES HEREOF, THAT THE PREFERRED SHARES ARE CONVERTIBLE
AT THE CONVERSION PRICE AND WITHOUT TAKING INTO ACCOUNT ANY LIMITATIONS ON THE
CONVERSION OF THE PREFERRED SHARES SET FORTH IN THE CERTIFICATE OF DESIGNATIONS)
AND (II) 100% OF THE MAXIMUM NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS (WITHOUT TAKING INTO ACCOUNT ANY LIMITATIONS ON THE
EXERCISE OF THE WARRANTS SET FORTH IN THE WARRANTS).

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(M)                               CONDUCT OF BUSINESS.  THE BUSINESS OF THE
COMPANY AND ITS SUBSIDIARIES SHALL NOT BE CONDUCTED IN VIOLATION OF ANY LAW,
ORDINANCE OR REGULATION OF ANY GOVERNMENTAL ENTITY, EXCEPT WHERE SUCH VIOLATIONS
WOULD NOT RESULT, EITHER INDIVIDUALLY OR IN THE AGGREGATE, IN A MATERIAL ADVERSE
EFFECT.

 

(N)                                 ADDITIONAL ISSUANCES OF SECURITIES.

 

(I)                                     FOR PURPOSES OF THIS SECTION 4(N), THE
FOLLOWING DEFINITIONS SHALL APPLY.

 

(1)                                "CONVERTIBLE SECURITIES" MEANS ANY STOCK OR
SECURITIES (OTHER THAN OPTIONS) CONVERTIBLE INTO OR EXERCISABLE OR EXCHANGEABLE
FOR SHARES OF COMMON STOCK.

 

(2)                                "OPTIONS" MEANS ANY RIGHTS, WARRANTS OR
OPTIONS TO SUBSCRIBE FOR OR PURCHASE SHARES OF COMMON STOCK OR CONVERTIBLE
SECURITIES.

 

(3)                                "COMMON STOCK EQUIVALENTS" MEANS,
COLLECTIVELY, OPTIONS AND CONVERTIBLE SECURITIES.

 

(II)                                  FROM THE DATE HEREOF UNTIL THE DATE THAT
IS ONE HUNDRED TWENTY (120) TRADING DAYS (AS DEFINED IN THE CERTIFICATE OF
DESIGNATIONS) AFTER THE EFFECTIVE DATE (THE "TRIGGER DATE"), THE COMPANY WILL
NOT, DIRECTLY OR INDIRECTLY, OFFER, SELL, GRANT ANY OPTION TO PURCHASE, OR
OTHERWISE DISPOSE OF (OR ANNOUNCE ANY OFFER, SALE, GRANT OR ANY OPTION TO
PURCHASE OR OTHER DISPOSITION OF) ANY OF ITS OR ITS SUBSIDIARIES' EQUITY OR
EQUITY EQUIVALENT SECURITIES, INCLUDING WITHOUT LIMITATION ANY DEBT, PREFERRED
STOCK OR OTHER INSTRUMENT OR SECURITY THAT IS, AT ANY TIME DURING ITS LIFE AND
UNDER ANY CIRCUMSTANCES, CONVERTIBLE INTO OR EXCHANGEABLE OR EXERCISABLE FOR
SHARES OF COMMON STOCK OR COMMON STOCK EQUIVALENTS (ANY SUCH OFFER, SALE, GRANT,
DISPOSITION OR ANNOUNCEMENT BEING REFERRED TO AS A "SUBSEQUENT PLACEMENT").

 

(III)                               FROM THE TRIGGER DATE UNTIL NO PREFERRED
SHARES REMAIN OUTSTANDING, THE COMPANY WILL NOT, DIRECTLY OR INDIRECTLY, EFFECT
ANY SUBSEQUENT PLACEMENT UNLESS THE COMPANY SHALL HAVE FIRST COMPLIED WITH THIS
SECTION 4(N)(III).

 

(1)                                 THE COMPANY SHALL DELIVER TO EACH BUYER A
WRITTEN NOTICE (THE "OFFER NOTICE") OF ANY PROPOSED OR INTENDED ISSUANCE OR SALE
OR EXCHANGE (THE "OFFER") OF THE SECURITIES BEING OFFERED (THE "OFFERED
SECURITIES") IN A SUBSEQUENT PLACEMENT, WHICH OFFER NOTICE SHALL (W) IDENTIFY
AND DESCRIBE THE OFFERED SECURITIES, (X) DESCRIBE THE PRICE AND OTHER TERMS UPON
WHICH THEY ARE TO BE ISSUED, SOLD OR EXCHANGED, AND THE NUMBER OR AMOUNT OF THE
OFFERED SECURITIES TO BE ISSUED, SOLD OR EXCHANGED, (Y) IDENTIFY THE PERSONS OR
ENTITIES (IF KNOWN) TO WHICH OR WITH WHICH THE OFFERED SECURITIES ARE TO BE
OFFERED, ISSUED, SOLD OR EXCHANGED AND (Z) OFFER TO ISSUE AND SELL TO OR
EXCHANGE WITH SUCH BUYERS 30% OF THE OFFERED SECURITIES ALLOCATED AMONG SUCH
BUYERS (A) BASED ON SUCH BUYER'S PRO RATA PORTION OF THE AGGREGATE NUMBER OF
PREFERRED SHARES PURCHASED HEREUNDER (THE "BASIC AMOUNT"), AND (B) WITH RESPECT
TO EACH BUYER THAT ELECTS TO PURCHASE ITS BASIC AMOUNT, ANY ADDITIONAL PORTION
OF THE OFFERED SECURITIES ATTRIBUTABLE TO THE BASIC AMOUNTS OF OTHER BUYERS AS
SUCH BUYER SHALL INDICATE IT WILL PURCHASE OR ACQUIRE SHOULD THE OTHER BUYERS
SUBSCRIBE FOR LESS THAN THEIR BASIC AMOUNTS (THE

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"UNDERSUBSCRIPTION AMOUNT"), WHICH PROCESS SHALL BE REPEATED UNTIL THE BUYERS
SHALL HAVE AN OPPORTUNITY TO SUBSCRIBE FOR ANY REMAINING UNDERSUBSCRIPTION
AMOUNT. 

 

(2)                                 TO ACCEPT AN OFFER, IN WHOLE OR IN PART,
SUCH BUYER MUST DELIVER A WRITTEN NOTICE TO THE COMPANY PRIOR TO THE END OF THE
THIRD (3RD) BUSINESS DAY AFTER SUCH BUYER'S RECEIPT OF THE OFFER NOTICE (THE
"OFFER PERIOD"), SETTING FORTH THE PORTION OF SUCH BUYER'S BASIC AMOUNT THAT
SUCH BUYER ELECTS TO PURCHASE AND, IF SUCH BUYER SHALL ELECT TO PURCHASE ALL OF
ITS BASIC AMOUNT, THE UNDERSUBSCRIPTION AMOUNT, IF ANY, THAT SUCH BUYER ELECTS
TO PURCHASE (IN EITHER CASE, THE "NOTICE OF ACCEPTANCE").  IF THE BASIC AMOUNTS
SUBSCRIBED FOR BY ALL BUYERS ARE LESS THAN THE TOTAL OF ALL OF THE BASIC
AMOUNTS, THEN EACH BUYER WHO HAS SET FORTH AN UNDERSUBSCRIPTION AMOUNT IN ITS
NOTICE OF ACCEPTANCE SHALL BE ENTITLED TO PURCHASE, IN ADDITION TO THE BASIC
AMOUNTS SUBSCRIBED FOR, THE UNDERSUBSCRIPTION AMOUNT IT HAS SUBSCRIBED FOR;
PROVIDED, HOWEVER, THAT IF THE UNDERSUBSCRIPTION AMOUNTS SUBSCRIBED FOR EXCEED
THE DIFFERENCE BETWEEN THE TOTAL OF ALL THE BASIC AMOUNTS AND THE BASIC AMOUNTS
SUBSCRIBED FOR (THE "AVAILABLE UNDERSUBSCRIPTION AMOUNT"), EACH BUYER WHO HAS
SUBSCRIBED FOR ANY UNDERSUBSCRIPTION AMOUNT SHALL BE ENTITLED TO PURCHASE ONLY
THAT PORTION OF THE AVAILABLE UNDERSUBSCRIPTION AMOUNT AS THE BASIC AMOUNT OF
SUCH BUYER BEARS TO THE TOTAL BASIC AMOUNTS OF ALL BUYERS THAT HAVE SUBSCRIBED
FOR UNDERSUBSCRIPTION AMOUNTS, SUBJECT TO ROUNDING BY THE COMPANY TO THE EXTENT
ITS DEEMS REASONABLY NECESSARY.  NOTWITHSTANDING THE FOREGOING, IF THE COMPANY
DESIRES TO MODIFY OR AMEND THE TERMS AND CONDITIONS OF THE OFFER PRIOR TO THE
EXPIRATION OF THE OFFER PERIOD, THE COMPANY MAY DELIVER TO THE BUYERS A NEW
OFFER NOTICE AND THE OFFER PERIOD SHALL EXPIRE ON THE THIRD (3RD) BUSINESS DAY
AFTER SUCH BUYER'S RECEIPT OF SUCH NEW OFFER NOTICE.

 

(3)                                 THE COMPANY SHALL HAVE FIFTEEN (15) BUSINESS
DAYS FROM THE EXPIRATION OF THE OFFER PERIOD ABOVE (I) TO OFFER, ISSUE, SELL OR
EXCHANGE ALL OR ANY PART OF SUCH OFFERED SECURITIES AS TO WHICH A NOTICE OF
ACCEPTANCE HAS NOT BEEN GIVEN BY THE BUYERS (THE "REFUSED SECURITIES") PURSUANT
TO A DEFINITIVE AGREEMENT(S) (THE "SUBSEQUENT PLACEMENT AGREEMENT"), BUT ONLY TO
THE OFFEREES DESCRIBED IN THE OFFER NOTICE (IF SO DESCRIBED THEREIN) AND ONLY
UPON TERMS AND CONDITIONS (INCLUDING, WITHOUT LIMITATION, UNIT PRICES AND
INTEREST RATES) THAT ARE NOT MORE FAVORABLE TO THE ACQUIRING PERSON OR PERSONS
OR LESS FAVORABLE TO THE COMPANY THAN THOSE SET FORTH IN THE OFFER NOTICE AND
(II) TO PUBLICLY ANNOUNCE (A) THE EXECUTION OF SUCH SUBSEQUENT PLACEMENT
AGREEMENT, AND (B) EITHER (X) THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
BY SUCH SUBSEQUENT PLACEMENT AGREEMENT OR (Y) THE TERMINATION OF SUCH SUBSEQUENT
PLACEMENT AGREEMENT, WHICH SHALL BE FILED WITH THE SEC ON A CURRENT REPORT ON
FORM 8-K WITH SUCH SUBSEQUENT PLACEMENT AGREEMENT AND ANY DOCUMENTS CONTEMPLATED
THEREIN FILED AS EXHIBITS THERETO.

 

(4)                                 IN THE EVENT THE COMPANY SHALL PROPOSE TO
SELL LESS THAN ALL THE REFUSED SECURITIES (ANY SUCH SALE TO BE IN THE MANNER AND
ON THE TERMS SPECIFIED IN SECTION 4(N)(III)(3) ABOVE), THEN EACH BUYER MAY, AT
ITS SOLE OPTION AND IN ITS SOLE DISCRETION, REDUCE THE NUMBER OR AMOUNT OF THE
OFFERED SECURITIES SPECIFIED IN ITS NOTICE OF ACCEPTANCE TO AN AMOUNT THAT SHALL
BE NOT LESS THAN THE NUMBER OR AMOUNT OF THE OFFERED SECURITIES THAT SUCH BUYER
ELECTED TO PURCHASE PURSUANT TO SECTION 4(N)(III)(2) ABOVE MULTIPLIED BY A
FRACTION, (I) THE NUMERATOR OF WHICH SHALL BE THE NUMBER OR AMOUNT OF OFFERED
SECURITIES THE COMPANY ACTUALLY PROPOSES TO ISSUE, SELL OR EXCHANGE (INCLUDING
OFFERED SECURITIES TO BE ISSUED OR SOLD TO BUYERS PURSUANT TO SECTION
4(N)(III)(3) ABOVE PRIOR TO SUCH REDUCTION) AND (II) THE DENOMINATOR OF WHICH
SHALL BE THE

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ORIGINAL AMOUNT OF THE OFFERED SECURITIES.  IN THE EVENT THAT ANY BUYER SO
ELECTS TO REDUCE THE NUMBER OR AMOUNT OF OFFERED SECURITIES SPECIFIED IN ITS
NOTICE OF ACCEPTANCE, THE COMPANY MAY NOT ISSUE, SELL OR EXCHANGE MORE THAN THE
REDUCED NUMBER OR AMOUNT OF THE OFFERED SECURITIES UNLESS AND UNTIL SUCH
SECURITIES HAVE AGAIN BEEN OFFERED TO THE BUYERS IN ACCORDANCE WITH
SECTION 4(N)(III)(1) ABOVE.

 

(5)                                 UPON THE CLOSING OF THE ISSUANCE, SALE OR
EXCHANGE OF ALL OR LESS THAN ALL OF THE REFUSED SECURITIES, THE BUYERS SHALL
ACQUIRE FROM THE COMPANY, AND THE COMPANY SHALL ISSUE TO THE BUYERS, THE NUMBER
OR AMOUNT OF OFFERED SECURITIES SPECIFIED IN THE NOTICES OF ACCEPTANCE, AS
REDUCED PURSUANT TO SECTION 4(N)(III)(3) ABOVE IF THE BUYERS HAVE SO ELECTED,
UPON THE TERMS AND CONDITIONS SPECIFIED IN THE OFFER.  THE PURCHASE BY THE
BUYERS OF ANY OFFERED SECURITIES IS SUBJECT IN ALL CASES TO THE PREPARATION,
EXECUTION AND DELIVERY BY THE COMPANY AND THE BUYERS OF A PURCHASE AGREEMENT
RELATING TO SUCH OFFERED SECURITIES REASONABLY SATISFACTORY IN FORM AND
SUBSTANCE TO THE BUYERS AND THEIR RESPECTIVE COUNSEL.

 

(6)                                 ANY OFFERED SECURITIES NOT ACQUIRED BY THE
BUYERS OR OTHER PERSONS IN ACCORDANCE WITH SECTION 4(N)(III)(3) ABOVE MAY NOT BE
ISSUED, SOLD OR EXCHANGED UNTIL THEY ARE AGAIN OFFERED TO THE BUYERS UNDER THE
PROCEDURES SPECIFIED IN THIS AGREEMENT.

 

(7)                                 THE COMPANY AND THE BUYERS AGREE THAT IF ANY
BUYER ELECTS TO PARTICIPATE IN THE OFFER, (X) NEITHER THE SUBSEQUENT PLACEMENT
AGREEMENT WITH RESPECT TO SUCH OFFER NOR ANY OTHER TRANSACTION DOCUMENTS RELATED
THERETO (COLLECTIVELY, THE "SUBSEQUENT PLACEMENT DOCUMENTS") SHALL INCLUDE ANY
TERM OR PROVISIONS WHEREBY ANY BUYER SHALL BE REQUIRED TO AGREE TO ANY
RESTRICTIONS IN TRADING AS TO ANY SECURITIES OF THE COMPANY OWNED BY SUCH BUYER
PRIOR TO SUCH SUBSEQUENT PLACEMENT, AND (Y) ANY REGISTRATION RIGHTS SET FORTH IN
SUCH SUBSEQUENT PLACEMENT DOCUMENTS SHALL BE SIMILAR IN ALL MATERIAL RESPECTS TO
THE REGISTRATION RIGHTS CONTAINED IN THE REGISTRATION RIGHTS AGREEMENT.

 

(8)                                 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN
THIS SECTION 4(N) AND UNLESS OTHERWISE AGREED TO BY THE BUYERS, THE COMPANY
SHALL EITHER CONFIRM IN WRITING TO THE BUYERS THAT THE TRANSACTION WITH RESPECT
TO THE SUBSEQUENT PLACEMENT HAS BEEN ABANDONED OR SHALL PUBLICLY DISCLOSE ITS
INTENTION TO ISSUE THE OFFERED SECURITIES, IN EITHER CASE IN SUCH A MANNER SUCH
THAT THE BUYERS WILL NOT BE IN POSSESSION OF MATERIAL NON-PUBLIC INFORMATION, BY
THE FIFTEEN (15TH) BUSINESS DAY FOLLOWING EXPIRATION OF THE OFFER PERIOD.  IF BY
THE FIFTEEN (15TH) BUSINESS DAY FOLLOWING EXPIRATION OF THE OFFER PERIOD NO
PUBLIC DISCLOSURE REGARDING A TRANSACTION WITH RESPECT TO THE OFFERED SECURITIES
HAS BEEN MADE, AND NO NOTICE REGARDING THE ABANDONMENT OF SUCH TRANSACTION HAS
BEEN RECEIVED BY THE BUYERS, SUCH TRANSACTION SHALL BE DEEMED TO HAVE BEEN
ABANDONED AND THE BUYERS SHALL NOT BE DEEMED TO BE IN POSSESSION OF ANY
MATERIAL, NON-PUBLIC INFORMATION WITH RESPECT TO THE COMPANY.  SHOULD THE
COMPANY DECIDE TO PURSUE SUCH TRANSACTION WITH RESPECT TO THE OFFERED
SECURITIES, THE COMPANY SHALL PROVIDE EACH BUYER WITH ANOTHER OFFER NOTICE AND
EACH BUYER WILL AGAIN HAVE THE RIGHT OF PARTICIPATION SET FORTH IN THIS SECTION
4(N)(III).  THE COMPANY SHALL NOT BE PERMITTED TO DELIVER MORE THAN ONE SUCH
OFFER NOTICE TO THE BUYERS IN ANY 60 DAY PERIOD.

 

(9)                                 THE RESTRICTIONS CONTAINED IN SUBSECTIONS
(II) AND (III) OF THIS SECTION 4(N) SHALL NOT APPLY IN CONNECTION WITH THE
ISSUANCE OF ANY EXCLUDED SECURITIES (AS DEFINED IN THE CERTIFICATE OF
DESIGNATIONS).

 

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(10)                           IN THE EVENT THE COMPANY HAS MADE A GOOD FAITH
DETERMINATION THAT ANY MATTERS RELATING TO AN OFFER NOTICE REQUIRED TO BE
PROVIDED TO ANY BUYER PURSUANT TO THIS SECTION 4(N) CONSTITUTE MATERIAL
NON-PUBLIC INFORMATION, PRIOR TO PROVIDING SUCH OFFER NOTICE, THE COMPANY SHALL
PROMPTLY INQUIRE (EITHER ORALLY OR IN WRITING) TO EACH BUYER WHETHER SUCH BUYER
WANTS TO RECEIVE ANY MATERIAL NONPUBLIC INFORMATION (THE "MATERIAL EVENT
NOTICE").  NOTWITHSTANDING ANYTHING CONTAINED IN THIS SECTION 4(N) TO THE
CONTRARY, THE COMPANY SHALL NOT DELIVER AN OFFER NOTICE THAT CONTAINS MATERIAL
NONPUBLIC INFORMATION TO ANY BUYER THAT HAS NOT AFFIRMATIVELY INDICATED (EITHER
ORALLY OR IN WRITING) THAT IT WISHES TO RECEIVE MATERIAL NONPUBLIC INFORMATION. 
UNTIL THE EARLIER TO OCCUR OF (X) THE DATE ON WHICH A BUYER GIVES NOTICE (EITHER
ORALLY OR IN WRITING) TO THE COMPANY AUTHORIZING THE DELIVERY OF MATERIAL
NONPUBLIC INFORMATION TO THE BUYER (THE "MATERIAL EVENT NOTICE ACCEPTANCE") OR
(Y) THE DATE ON WHICH THE MATERIAL NON-PUBLIC INFORMATION WHICH WAS TO BE SET
FORTH IN THE OFFER NOTICE IS PUBLICLY DISCLOSED IN A FILING WITH THE SEC, THE
COMPANY SHALL BE RELIEVED OF ANY OBLIGATION IMPOSED BY THIS SECTION 4(N) TO
DELIVER AN OFFER NOTICE TO THE BUYER CONTAINING MATERIAL NONPUBLIC INFORMATION
AND SUCH BUYER SHALL BE DEEMED TO HAVE WAIVED THE BUYER’S RIGHTS HEREUNDER TO
RECEIVE SUCH OFFER NOTICE UNTIL SUCH TIME AS THE BUYER DELIVERS SUCH MATERIAL
EVENT NOTICE ACCEPTANCE TO THE COMPANY.  NOTWITHSTANDING ANYTHING IN ANY
TRANSACTION DOCUMENT TO THE CONTRARY, THE COMPANY COVENANTS AND AGREES THAT IT
SHALL NOT PROVIDE THE OFFER NOTICE TO ANY BUYER WHICH CONTAINS MATERIAL
NON-PUBLIC INFORMATION UNTIL THE EARLIER TO OCCUR OF (X) SUCH TIME AS THE
MATERIAL EVENT NOTICE ACCEPTANCE IS RECEIVED BY THE COMPANY OR (Y) THE MATERIAL
NON-PUBLIC INFORMATION WHICH WAS TO BE SET FORTH IN THE OFFER NOTICE HAS BEEN
DISCLOSED IN A FILING WITH THE SEC.

 

(O)                                 STOCKHOLDER APPROVAL.  THE COMPANY SHALL
PROVIDE EACH STOCKHOLDER ENTITLED TO VOTE AT A SPECIAL OR ANNUAL MEETING OF
SHAREHOLDERS OF THE COMPANY (THE "STOCKHOLDER MEETING"), WHICH INITIALLY SHALL
BE PROMPTLY CALLED AND HELD NOT LATER THAN DECEMBER 31, 2006 (THE "STOCKHOLDER
MEETING DEADLINE"), A PROXY STATEMENT, SUBSTANTIALLY IN THE FORM WHICH HAS BEEN
PREVIOUSLY REVIEWED BY THE BUYERS AND SCHULTE ROTH & ZABEL LLP AT THE EXPENSE OF
THE COMPANY, SOLICITING EACH SUCH STOCKHOLDER'S AFFIRMATIVE VOTE AT THE
STOCKHOLDER MEETING FOR APPROVAL OF RESOLUTIONS (THE "RESOLUTIONS") PROVIDING
FOR THE COMPANY'S ISSUANCE OF ALL OF THE SECURITIES AS DESCRIBED IN THE
TRANSACTION DOCUMENTS IN ACCORDANCE WITH APPLICABLE LAW AND THE RULES AND
REGULATIONS OF THE PRINCIPAL MARKET (SUCH AFFIRMATIVE APPROVAL BEING REFERRED TO
HEREIN AS THE "STOCKHOLDER APPROVAL" AND THE DATE SUCH APPROVAL IS OBTAINED, THE
"STOCKHOLDER APPROVAL DATE"), AND THE COMPANY SHALL USE ITS REASONABLE BEST
EFFORTS TO SOLICIT ITS STOCKHOLDERS' APPROVAL OF THE RESOLUTIONS AND TO CAUSE
THE BOARD TO RECOMMEND TO THE STOCKHOLDERS THAT THEY APPROVE THE RESOLUTIONS. 
THE COMPANY SHALL BE OBLIGATED TO SEEK TO OBTAIN THE STOCKHOLDER APPROVAL BY THE
STOCKHOLDER MEETING DEADLINE.  IF, DESPITE THE COMPANY'S REASONABLE BEST
EFFORTS, THE STOCKHOLDER APPROVAL IS NOT OBTAINED ON OR PRIOR TO THE STOCKHOLDER
MEETING DEADLINE, THE COMPANY SHALL SOLICIT STOCKHOLDER APPROVAL AT THE ANNUAL
STOCKHOLDERS MEETING EACH YEAR AND USE ITS REASONABLE BEST EFFORTS TO OBTAIN
SUCH STOCKHOLDER APPROVAL UNTIL STOCKHOLDER APPROVAL IS OBTAINED.

 

(P)                                 WITHHOLDING TAXES.  ON EACH DIVIDEND DATE
(AS DEFINED IN THE CERTIFICATE OF DESIGNATIONS), IF THE COMPANY DOES NOT HAVE
CURRENT OR ACCUMULATED "EARNINGS AND PROFITS" WITHIN THE MEANING OF SECTIONS 301
AND 312 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THROUGH SUCH DIVIDEND
DATE, THE COMPANY SHALL NOT WITHHOLD ANY AMOUNT OF THE APPLICABLE DIVIDEND (AS
DEFINED IN THE CERTIFICATE OF DESIGNATIONS) IN RESPECT OF U.S. FEDERAL INCOME
TAX.

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ON OR PRIOR TO ANY SUCH DIVIDEND DATE, THE COMPANY SHALL DELIVER A TRANSMITTAL
LETTER TO THE BUYER OR THE BUYER'S PRIME BROKER INDICATING WHETHER THE COMPANY
BELIEVES IT MUST WITHHOLD ANY AMOUNT OF SUCH DIVIDEND, WHETHER THE COMPANY HAS
ANY "EARNINGS OR PROFITS" AND THE CALCULATIONS, IN REASONABLE DETAIL, SUPPORTING
SUCH CALCULATIONS.

 

(Q)                                 LOCK-UP AGREEMENTS.  THE COMPANY SHALL NOT
AMEND, WAIVE OR MODIFY ANY OF THE LOCK-UP AGREEMENTS OR THE EXISTING LOCK-UP
AGREEMENTS (EACH AS DEFINED BELOW) WITHOUT THE WRITTEN CONSENT OF THE REQUIRED
HOLDERS (AS DEFINED IN THE CERTIFICATE OF DESIGNATIONS).

 

(R)                                    TRADING IN COMMON STOCK.  FOR SO LONG AS
SUCH BUYER OWNS ANY SECURITIES, SUCH BUYER SHALL NOT MAINTAIN A NET SHORT
POSITION.  FOR PURPOSES OF THIS SECTION, A "NET SHORT POSITION" BY A PERSON
MEANS A POSITION WHEREBY SUCH PERSON HAS EXECUTED ONE OR MORE SALES OF COMMON
STOCK THAT IS MARKED AS A SHORT SALE AND THAT IS EXECUTED AT A TIME WHEN SUCH
BUYER HAS NO EQUIVALENT OFFSETTING LONG POSITION IN THE COMMON STOCK OR CONTRACT
FOR THE FOREGOING.  FOR PURPOSES OF DETERMINING WHETHER A BUYER HAS AN
EQUIVALENT OFFSETTING LONG POSITION IN THE COMMON STOCK, ALL COMMON STOCK (I)
THAT IS OWNED BY SUCH BUYER, (II) THAT MAY BE ISSUED PURSUANT TO THE TERMS OF
THE CERTIFICATE OF DESIGNATIONS AND/OR THE WARRANTS TO THE BUYER OR (III) THAT
WOULD BE ISSUABLE UPON CONVERSION OR EXERCISE IN FULL OF ALL SECURITIES OF THE
BUYER (INCLUDING THE SECURITIES) THEN HELD BY SUCH BUYER (ASSUMING THAT SUCH
SECURITIES WERE THEN FULLY CONVERTIBLE OR EXERCISABLE, NOTWITHSTANDING ANY
PROVISIONS TO THE CONTRARY, AND GIVING EFFECT TO ANY CONVERSION OR EXERCISE
PRICE ADJUSTMENTS THAT WOULD TAKE EFFECT GIVEN ONLY THE PASSAGE OF TIME) SHALL
BE DEEMED TO BE HELD LONG BY SUCH BUYER.  WITHOUT LIMITING THE FOREGOING, THE
BUYERS MAY ENGAGE IN HEDGING ACTIVITIES AT VARIOUS TIMES DURING THE PERIOD
FOLLOWING THE PUBLIC ANNOUNCEMENT OF THE EXECUTION OF THIS AGREEMENT AS PROVIDED
IN SECTION 4(I), AND DURING THE PERIOD THAT ANY SECURITIES ARE OUTSTANDING.

 

(S)                                  APPROVAL OF PRINCIPAL MARKET.  THE COMPANY
SHALL USE ITS BEST EFFORTS, ACTING DILIGENTLY AND IN GOOD FAITH, TO OBTAIN THE
APPROVAL OF THE PRINCIPAL MARKET WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED
BY THE TRANSACTION DOCUMENTS AS SOON AS PRACTICABLE.

 

(T)                                    CONSENT OF UNION BANK OF CALIFORNIA.  THE
COMPANY SHALL USE ITS BEST EFFORTS, ACTING DILIGENTLY AND IN GOOD FAITH, TO
OBTAIN THE CONSENT OF UNION BANK OF CALIFORNIA WITH RESPECT TO THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS AS SOON AS PRACTICABLE.

 

5.                                       REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(A)                                  REGISTER.  THE COMPANY SHALL MAINTAIN AT
ITS PRINCIPAL EXECUTIVE OFFICES (OR SUCH OTHER OFFICE OR AGENCY OF THE COMPANY
AS IT MAY DESIGNATE BY NOTICE TO EACH HOLDER OF SECURITIES), A REGISTER FOR THE
PREFERRED SHARES, THE COMMON SHARES AND THE WARRANTS IN WHICH THE COMPANY SHALL
RECORD THE NAME AND ADDRESS OF THE PERSON IN WHOSE NAME THE PREFERRED SHARES,
THE COMMON SHARES AND THE WARRANTS HAVE BEEN ISSUED (INCLUDING THE NAME AND
ADDRESS OF EACH TRANSFEREE), THE NUMBER OF PREFERRED SHARES HELD BY SUCH PERSON
AND THE NUMBER OF CONVERSION SHARES ISSUABLE UPON CONVERSION OF THE PREFERRED
SHARES AND WARRANT SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS HELD BY SUCH
PERSON.  THE COMPANY SHALL KEEP THE REGISTER OPEN

25

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AND AVAILABLE AT ALL TIMES DURING BUSINESS HOURS FOR INSPECTION OF ANY BUYER OR
ITS LEGAL REPRESENTATIVES.

 

(B)                                 TRANSFER AGENT INSTRUCTIONS.  THE COMPANY
SHALL ISSUE IRREVOCABLE INSTRUCTIONS TO ITS TRANSFER AGENT, AND ANY SUBSEQUENT
TRANSFER AGENT, TO ISSUE CERTIFICATES OR CREDIT SHARES TO THE APPLICABLE BALANCE
ACCOUNTS AT THE DEPOSITORY TRUST COMPANY ("DTC"), REGISTERED IN THE NAME OF EACH
BUYER OR ITS RESPECTIVE NOMINEE(S), FOR THE COMMON SHARES ISSUED AT THE CLOSING
AND FOR THE CONVERSION SHARES  AND THE WARRANT SHARES IN SUCH AMOUNTS AS
SPECIFIED FROM TIME TO TIME BY EACH BUYER TO THE COMPANY UPON CONVERSION OF THE
PREFERRED SHARES OR EXERCISE OF THE WARRANTS IN THE FORM OF EXHIBIT D ATTACHED
HERETO (THE "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS").  THE COMPANY WARRANTS
THAT NO INSTRUCTION OTHER THAN THE IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
REFERRED TO IN THIS SECTION 5(B), AND STOP TRANSFER INSTRUCTIONS TO GIVE EFFECT
TO SECTION 2(H) HEREOF, WILL BE GIVEN BY THE COMPANY TO ITS TRANSFER AGENT WITH
RESPECT TO THE SECURITIES, AND THAT THE SECURITIES SHALL OTHERWISE BE FREELY
TRANSFERABLE ON THE BOOKS AND RECORDS OF THE COMPANY, AS APPLICABLE, AND TO THE
EXTENT PROVIDED IN THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS.  IF A
BUYER EFFECTS A SALE, ASSIGNMENT OR TRANSFER OF THE SECURITIES IN ACCORDANCE
WITH SECTION 2(G), THE COMPANY SHALL PERMIT THE TRANSFER AND SHALL PROMPTLY
INSTRUCT ITS TRANSFER AGENT TO ISSUE ONE OR MORE CERTIFICATES OR CREDIT SHARES
TO THE APPLICABLE BALANCE ACCOUNTS AT DTC IN SUCH NAME AND IN SUCH DENOMINATIONS
AS SPECIFIED BY SUCH BUYER TO EFFECT SUCH SALE, TRANSFER OR ASSIGNMENT.  IN THE
EVENT THAT SUCH SALE, ASSIGNMENT OR TRANSFER INVOLVES CONVERSION SHARES, COMMON
SHARES AND/OR WARRANT SHARES SOLD, ASSIGNED OR TRANSFERRED PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT WITH PROSPECTUS DELIVERY (UNLESS AN EXEMPTION
FROM THE PROSPECTUS DELIVERY REQUIREMENTS IS AVAILABLE), OR PURSUANT TO RULE
144, THE TRANSFER AGENT SHALL ISSUE SUCH SECURITIES TO THE BUYER, ASSIGNEE OR
TRANSFEREE, AS THE CASE MAY BE, WITHOUT ANY RESTRICTIVE LEGEND.

 

(C)                                  BREACH.  THE COMPANY ACKNOWLEDGES THAT A
BREACH BY IT OF ITS OBLIGATIONS HEREUNDER WILL CAUSE IRREPARABLE HARM TO A BUYER
AND THAT THE REMEDY AT LAW FOR A BREACH OF ITS OBLIGATIONS UNDER THIS SECTION 5
WILL BE INADEQUATE.  IN ADDITION, THE COMPANY AGREES, IN THE EVENT OF A BREACH
OR THREATENED BREACH BY THE COMPANY OF THE PROVISIONS OF THIS SECTION 5, THAT A
BUYER SHALL BE ENTITLED, IN ADDITION TO ALL OTHER AVAILABLE REMEDIES, TO SEEK AN
ORDER AND/OR INJUNCTION RESTRAINING ANY BREACH AND REQUIRING IMMEDIATE ISSUANCE
AND TRANSFER, WITHOUT THE NECESSITY OF SHOWING ECONOMIC LOSS AND WITHOUT ANY
BOND OR OTHER SECURITY BEING REQUIRED.

 

(D)                                 ADDITIONAL RELIEF.  IF THE COMPANY SHALL
FAIL FOR ANY REASON OR FOR NO REASON TO ISSUE TO SUCH HOLDER UNLEGENDED
CERTIFICATES WITHIN THREE (3) BUSINESS DAYS OF RECEIPT OF DOCUMENTS NECESSARY
FOR THE REMOVAL OF LEGEND SET FORTH ABOVE (THE "DEADLINE DATE"), THEN, IN
ADDITION TO ALL OTHER REMEDIES AVAILABLE TO THE HOLDER, IF ON OR AFTER THE
TRADING DAY (AS DEFINED IN THE CERTIFICATE OF DESIGNATIONS) IMMEDIATELY
FOLLOWING SUCH THREE BUSINESS DAY PERIOD, THE HOLDER PURCHASES (IN AN OPEN
MARKET TRANSACTION OR OTHERWISE) SHARES OF COMMON STOCK TO DELIVER IN
SATISFACTION OF A SALE BY THE HOLDER OF SHARES OF COMMON STOCK THAT THE HOLDER
ANTICIPATED RECEIVING FROM THE COMPANY (A "BUY-IN"), THEN THE COMPANY SHALL,
WITHIN THREE BUSINESS DAYS AFTER THE HOLDER'S REQUEST AND IN THE HOLDER'S
DISCRETION, EITHER (I) PAY CASH TO THE HOLDER IN AN AMOUNT EQUAL TO THE HOLDER'S
TOTAL PURCHASE PRICE (INCLUDING BROKERAGE COMMISSIONS, IF ANY) FOR THE SHARES OF
COMMON STOCK SO PURCHASED (THE "BUY-IN PRICE"), AT WHICH POINT THE COMPANY'S
OBLIGATION TO DELIVER SUCH CERTIFICATE (AND TO ISSUE SUCH SHARES OF COMMON
STOCK) SHALL TERMINATE, OR (II) PROMPTLY HONOR ITS OBLIGATION TO DELIVER TO THE
HOLDER A CERTIFICATE OR

26

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CERTIFICATES REPRESENTING SUCH SHARES OF COMMON STOCK AND PAY CASH TO THE HOLDER
IN AN AMOUNT EQUAL TO THE EXCESS (IF ANY) OF THE BUY-IN PRICE OVER THE PRODUCT
OF (A) SUCH NUMBER OF SHARES OF COMMON STOCK, TIMES (B) THE CLOSING BID PRICE ON
THE DEADLINE DATE.  "CLOSING BID PRICE" MEANS, FOR ANY SECURITY AS OF ANY DATE,
THE LAST CLOSING PRICE FOR SUCH SECURITY ON THE PRINCIPAL MARKET, AS REPORTED BY
BLOOMBERG (AS DEFINED IN THE CERTIFICATE OF DESIGNATIONS), OR, IF THE PRINCIPAL
MARKET BEGINS TO OPERATE ON AN EXTENDED HOURS BASIS AND DOES NOT DESIGNATE THE
CLOSING BID PRICE THEN THE LAST BID PRICE OF SUCH SECURITY PRIOR TO 4:00:00
P.M., NEW YORK TIME, AS REPORTED BY BLOOMBERG, OR, IF THE PRINCIPAL MARKET IS
NOT THE PRINCIPAL SECURITIES EXCHANGE OR TRADING MARKET FOR SUCH SECURITY, THE
LAST CLOSING PRICE OF SUCH SECURITY ON THE PRINCIPAL SECURITIES EXCHANGE OR
TRADING MARKET WHERE SUCH SECURITY IS LISTED OR TRADED AS REPORTED BY BLOOMBERG,
OR IF THE FOREGOING DO NOT APPLY, THE LAST CLOSING PRICE OF SUCH SECURITY IN THE
OVER-THE-COUNTER MARKET ON THE ELECTRONIC BULLETIN BOARD FOR SUCH SECURITY AS
REPORTED BY BLOOMBERG, OR, IF NO CLOSING BID PRICE IS REPORTED FOR SUCH SECURITY
BY BLOOMBERG, THE AVERAGE OF THE BID PRICES OF ANY MARKET MAKERS FOR SUCH
SECURITY AS REPORTED IN THE "PINK SHEETS" BY PINK SHEETS LLC (FORMERLY THE
NATIONAL QUOTATION BUREAU, INC.).  IF THE CLOSING BID PRICE CANNOT BE CALCULATED
FOR A SECURITY ON A PARTICULAR DATE ON ANY OF THE FOREGOING BASES, THE CLOSING
BID PRICE OF SUCH SECURITY ON SUCH DATE SHALL BE THE FAIR MARKET VALUE AS
MUTUALLY DETERMINED BY THE COMPANY AND THE HOLDER.  IF THE COMPANY AND THE
HOLDER ARE UNABLE TO AGREE UPON THE FAIR MARKET VALUE OF SUCH SECURITY, THEN
SUCH DISPUTE SHALL BE RESOLVED PURSUANT TO SECTION 2(D)(III) OF THE CERTIFICATE
OF DESIGNATIONS.  ALL SUCH DETERMINATIONS TO BE APPROPRIATELY ADJUSTED FOR ANY
STOCK DIVIDEND, STOCK SPLIT, STOCK COMBINATION OR OTHER SIMILAR TRANSACTION
DURING THE APPLICABLE CALCULATION PERIOD.

 

6.                                       CONDITIONS TO THE COMPANY'S OBLIGATION
TO SELL.

 

THE OBLIGATION OF THE COMPANY HEREUNDER TO ISSUE AND SELL THE PREFERRED SHARES
AND/OR THE COMMON SHARES AND WARRANTS, AS APPLICABLE, TO EACH BUYER AT THE
CLOSING IS SUBJECT TO THE SATISFACTION, AT OR BEFORE THE CLOSING DATE, OF EACH
OF THE FOLLOWING CONDITIONS, PROVIDED THAT THESE CONDITIONS ARE FOR THE
COMPANY'S SOLE BENEFIT AND MAY BE WAIVED BY THE COMPANY AT ANY TIME IN ITS SOLE
DISCRETION BY PROVIDING EACH BUYER WITH PRIOR WRITTEN NOTICE THEREOF:

 

(A)                                  SUCH BUYER SHALL HAVE EXECUTED EACH OF THE
TRANSACTION DOCUMENTS TO WHICH IT IS A PARTY AND DELIVERED THE SAME TO THE
COMPANY.

 

(B)                                 SUCH BUYER AND EACH OTHER BUYER SHALL HAVE
DELIVERED TO THE COMPANY THE PURCHASE PRICE FOR THE PREFERRED SHARES, IF ANY,
AND THE COMMON SHARES AND THE WARRANTS, IF ANY, BEING PURCHASED BY SUCH BUYER AT
THE CLOSING BY WIRE TRANSFER OF IMMEDIATELY AVAILABLE FUNDS PURSUANT TO THE WIRE
INSTRUCTIONS PROVIDED BY THE COMPANY.

 

(C)                                  THE REPRESENTATIONS AND WARRANTIES OF SUCH
BUYER SHALL BE TRUE AND CORRECT IN ALL MATERIAL RESPECTS (EXCEPT FOR THOSE
REPRESENTATIONS AND WARRANTIES THAT ARE QUALIFIED BY MATERIALITY OR MATERIAL
ADVERSE EFFECT, WHICH SHALL BE TRUE AND CORRECT IN ALL RESPECTS) AS OF THE DATE
WHEN MADE AND AS OF THE CLOSING DATE AS THOUGH MADE AT THAT TIME (EXCEPT FOR
REPRESENTATIONS AND WARRANTIES THAT SPEAK AS OF A SPECIFIC DATE, WHICH SHALL BE
TRUE AND CORRECT AS OF SUCH SPECIFIED DATE), AND SUCH BUYER SHALL HAVE
PERFORMED, SATISFIED AND COMPLIED IN ALL MATERIAL RESPECTS WITH THE COVENANTS,
AGREEMENTS AND CONDITIONS REQUIRED BY THIS AGREEMENT TO BE PERFORMED, SATISFIED
OR COMPLIED WITH BY SUCH BUYER AT OR PRIOR TO THE CLOSING DATE.

27

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(D)                                 THE COMPANY SHALL HAVE OBTAINED THE APPROVAL
OF THE PRINCIPAL MARKET WITH RESPECT TO THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS.

 

(E)                                  THE COMPANY SHALL HAVE OBTAINED THE CONSENT
OF UNION BANK OF CALIFORNIA WITH RESPECT TO THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS. 

 

7.                                       CONDITIONS TO EACH BUYER'S OBLIGATION
TO PURCHASE. 

 

THE OBLIGATION OF EACH BUYER HEREUNDER TO PURCHASE THE PREFERRED SHARES, THE
COMMON SHARES AND/OR THE WARRANTS, AS APPLICABLE, AT THE CLOSING IS SUBJECT TO
THE SATISFACTION, AT OR BEFORE THE CLOSING DATE, OF EACH OF THE FOLLOWING
CONDITIONS, PROVIDED THAT THESE CONDITIONS ARE FOR EACH BUYER'S SOLE BENEFIT AND
MAY BE WAIVED BY SUCH BUYER AT ANY TIME IN ITS SOLE DISCRETION BY PROVIDING THE
COMPANY WITH PRIOR WRITTEN NOTICE THEREOF:

 

(A)                                  THE COMPANY SHALL HAVE DULY EXECUTED AND
DELIVERED TO SUCH BUYER (A) EACH OF THE TRANSACTION DOCUMENTS, (B) THE PREFERRED
SHARES (IN SUCH NUMBERS AS IS SET FORTH ACROSS FROM SUCH BUYER'S NAME IN COLUMN
(3) OF THE SCHEDULE OF BUYERS), IF ANY, (C) THE COMMON SHARES IN SUCH NUMBERS AS
IS SET FORTH ACROSS FROM SUCH BUYER'S NAME IN COLUMN (4) OF THE SCHEDULE OF
BUYERS, IF ANY, AND THE WARRANTS (IN SUCH NUMBERS AS IS SET FORTH ACROSS FROM
SUCH BUYER'S NAME IN COLUMN (5) OF THE SCHEDULE OF BUYERS), IF ANY, BEING
PURCHASED BY SUCH BUYER AT THE CLOSING PURSUANT TO THIS AGREEMENT.

 

(B)                                 SUCH BUYER SHALL HAVE RECEIVED THE OPINION
OF HAYNES AND BOONE, LLP, THE COMPANY'S OUTSIDE COUNSEL, DATED AS OF THE CLOSING
DATE, IN A FORM REASONABLY ACCEPTABLE TO THE BUYERS AND THEIR COUNSEL.

 

(C)                                  THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER A COPY OF THE IRREVOCABLE TRANSFER AGENT INSTRUCTIONS, IN THE FORM OF
EXHIBIT D ATTACHED HERETO, WHICH INSTRUCTIONS SHALL HAVE BEEN DELIVERED TO AND
ACKNOWLEDGED IN WRITING BY THE COMPANY'S TRANSFER AGENT.

 

(D)                                 THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER A CERTIFICATE EVIDENCING THE FORMATION AND GOOD STANDING OF THE COMPANY
AND EACH OF ITS SUBSIDIARIES IN EACH SUCH ENTITY'S JURISDICTION OF FORMATION
ISSUED BY THE SECRETARY OF STATE (OR EQUIVALENT) OF SUCH JURISDICTION OF
FORMATION AS OF A DATE WITHIN TEN (10) DAYS OF THE CLOSING DATE.

 

(E)                                  THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER A CERTIFICATE EVIDENCING THE COMPANY'S QUALIFICATION AS A FOREIGN
CORPORATION AND GOOD STANDING ISSUED BY THE SECRETARY OF STATE (OR COMPARABLE
OFFICE) OF EACH JURISDICTION IN WHICH THE COMPANY CONDUCTS BUSINESS AND IS
REQUIRED TO SO QUALIFY, AS OF A DATE WITHIN TEN (10)  DAYS OF THE CLOSING DATE.

 

(F)                                    THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER A CERTIFIED COPY OF THE CERTIFICATE OF INCORPORATION AS CERTIFIED BY THE
SECRETARY OF STATE OF THE STATE OF DELAWARE WITHIN TEN (10) DAYS OF THE CLOSING
DATE.

 

(G)                                 THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER A CERTIFICATE, EXECUTED BY THE SECRETARY OF THE COMPANY AND DATED AS OF
THE CLOSING DATE, AS TO (I) THE RESOLUTIONS

28

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CONSISTENT WITH SECTION 3(B) AS ADOPTED BY THE COMPANY'S BOARD OF DIRECTORS IN A
FORM REASONABLY ACCEPTABLE TO SUCH BUYER, (II) THE CERTIFICATE OF INCORPORATION
AND (III) THE BYLAWS, EACH AS IN EFFECT AT THE CLOSING, IN THE FORM ATTACHED
HERETO AS EXHIBIT E.

 

(H)                                 THE REPRESENTATIONS AND WARRANTIES OF THE
COMPANY SHALL BE TRUE AND CORRECT IN ALL MATERIAL RESPECTS (EXCEPT FOR THOSE
REPRESENTATIONS AND WARRANTIES THAT ARE QUALIFIED BY MATERIALITY OR MATERIAL
ADVERSE EFFECT, WHICH SHALL BE TRUE AND CORRECT IN ALL RESPECTS) AS OF THE DATE
WHEN MADE AND AS OF THE CLOSING DATE AS THOUGH MADE AT THAT TIME (EXCEPT FOR
REPRESENTATIONS AND WARRANTIES THAT SPEAK AS OF A SPECIFIC DATE, WHICH SHALL BE
TRUE AND CORRECT AS OF SUCH SPECIFIED DATE) AND THE COMPANY SHALL HAVE
PERFORMED, SATISFIED AND COMPLIED IN ALL MATERIAL RESPECTS WITH THE COVENANTS,
AGREEMENTS AND CONDITIONS REQUIRED BY THE TRANSACTION DOCUMENTS TO BE PERFORMED,
SATISFIED OR COMPLIED WITH BY THE COMPANY AT OR PRIOR TO THE CLOSING DATE.  SUCH
BUYER SHALL HAVE RECEIVED A CERTIFICATE, EXECUTED BY THE CHIEF EXECUTIVE OFFICER
OF THE COMPANY, DATED AS OF THE CLOSING DATE, TO THE FOREGOING EFFECT AND AS TO
SUCH OTHER MATTERS AS MAY BE REASONABLY REQUESTED BY SUCH BUYER IN THE FORM
ATTACHED HERETO AS EXHIBIT F.

 

(I)                                     THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER A LETTER FROM THE COMPANY'S TRANSFER AGENT CERTIFYING THE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING AS OF A DATE WITHIN FIVE DAYS OF THE CLOSING DATE.

 

(J)                                     THE COMMON STOCK (I) SHALL BE DESIGNATED
FOR QUOTATION OR LISTED ON THE PRINCIPAL MARKET AND (II) SHALL NOT HAVE BEEN
SUSPENDED, AS OF THE CLOSING DATE, BY THE SEC OR THE PRINCIPAL MARKET FROM
TRADING ON THE PRINCIPAL MARKET NOR SHALL SUSPENSION BY THE SEC OR THE PRINCIPAL
MARKET HAVE BEEN THREATENED, AS OF THE CLOSING DATE, EITHER (A) IN WRITING BY
THE SEC OR THE PRINCIPAL MARKET OR (B) BY FALLING BELOW THE MINIMUM LISTING
MAINTENANCE REQUIREMENTS OF THE PRINCIPAL MARKET.

 

(K)                                  THE COMPANY SHALL HAVE OBTAINED ALL
GOVERNMENTAL, REGULATORY OR THIRD PARTY CONSENTS AND APPROVALS, IF ANY,
NECESSARY FOR THE SALE OF THE SECURITIES.

 

(L)                                     THE CERTIFICATE OF DESIGNATIONS IN THE
FORM ATTACHED HERETO AS EXHIBIT A SHALL HAVE BEEN FILED WITH THE SECRETARY OF
STATE OF THE STATE OF DELAWARE AND SHALL BE IN FULL FORCE AND EFFECT,
ENFORCEABLE AGAINST THE COMPANY IN ACCORDANCE WITH ITS TERMS AND SHALL NOT HAVE
BEEN AMENDED.

 

(M)                               SUCH BUYER SHALL HAVE RECEIVED LOCK-UP
AGREEMENTS (I) IN THE FORM ATTACHED HERETO AS EXHIBIT G (THE "LOCK-UP
AGREEMENTS"), DULY EXECUTED AND DELIVERED BY ALL DIRECTORS AND OFFICERS OF THE
COMPANY.

 

(N)                                 SUCH BUYER SHALL HAVE RECEIVED FROM THE
COMPANY A COPY OF EACH LOCK-UP AGREEMENT BETWEEN THE COMPANY AND ANY PERSON THEN
IN EFFECT (THE "EXISTING LOCK-UP AGREEMENTS").

 

(O)                                 THE COMPANY SHALL HAVE OBTAINED THE APPROVAL
OF THE PRINCIPAL MARKET WITH RESPECT TO THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS AND SHALL HAVE DELIVERED A WRITTEN
COPY OF SUCH APPROVAL TO THE BUYERS OR INFORMED THE BUYERS OF SUCH APPROVAL
ORALLY IF THE PRINCIPAL MARKET IS UNWILLING TO GIVE SUCH APPROVAL IN WRITING.

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(P)                                 THE COMPANY SHALL HAVE OBTAINED THE CONSENT
OF UNION BANK OF CALIFORNIA WITH RESPECT TO THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS AND SHALL HAVE DELIVERED A WRITTEN
COPY OF SUCH CONSENT TO THE BUYERS. 

 

(Q)                                 THE COMPANY SHALL HAVE PAID-OFF THE
SUBORDINATED CREDIT AGREEMENT WITH ENERGY COMPONENTS SPC EEP ENERGY EXPLORATION
AND PRODUCTION SEGREGATED PORTFOLIO CONTEMPORANEOUSLY WITH THE CLOSING AND
PROVIDED TO THE BUYERS PROOF OF SUCH PAY-OFF REASONABLY SATISFACTORY TO THE
BUYERS.

 

(R)                                    THE COMPANY SHALL HAVE DELIVERED TO SUCH
BUYER SUCH OTHER DOCUMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT AS SUCH BUYER OR ITS COUNSEL MAY REASONABLY REQUEST.

 

8.                                       TERMINATION.

 

In the event that the Closing shall not have occurred with respect to a Buyer on
or before ten (10) Business Days from the date hereof due to the Company's or
such Buyer's failure to satisfy the conditions set forth in Sections 6 and 7
above (and the nonbreaching party's failure to waive such unsatisfied
condition(s)), the nonbreaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party; provided, however, if
this Agreement is terminated pursuant to this Section 8, the Company shall
remain obligated to reimburse the non-breaching Buyers for the expenses
described in Section 4(g) above.

 

9.                                       MISCELLANEOUS.

 

(A)                                  GOVERNING LAW; JURISDICTION; JURY TRIAL. 
ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW
PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTIONS)
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTIONS OTHER THAN THE
STATE OF NEW YORK.  EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK,
BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED
HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT,
ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT
IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER
THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED
TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. 
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

 

30

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(B)                                 COUNTERPARTS.  THIS AGREEMENT MAY BE
EXECUTED IN TWO OR MORE IDENTICAL COUNTERPARTS, ALL OF WHICH SHALL BE CONSIDERED
ONE AND THE SAME AGREEMENT AND SHALL BECOME EFFECTIVE WHEN COUNTERPARTS HAVE
BEEN SIGNED BY EACH PARTY AND DELIVERED TO THE OTHER PARTY; PROVIDED THAT A
FACSIMILE SIGNATURE SHALL BE CONSIDERED DUE EXECUTION AND SHALL BE BINDING UPON
THE SIGNATORY THERETO WITH THE SAME FORCE AND EFFECT AS IF THE SIGNATURE WERE AN
ORIGINAL, NOT A FACSIMILE SIGNATURE.

 

(C)                                  HEADINGS.  THE HEADINGS OF THIS AGREEMENT
ARE FOR CONVENIENCE OF REFERENCE AND SHALL NOT FORM PART OF, OR AFFECT THE
INTERPRETATION OF, THIS AGREEMENT.

 

(D)                                 SEVERABILITY.  IF ANY PROVISION OF THIS
AGREEMENT SHALL BE INVALID OR UNENFORCEABLE IN ANY JURISDICTION, SUCH INVALIDITY
OR UNENFORCEABILITY SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE
REMAINDER OF THIS AGREEMENT IN THAT JURISDICTION OR THE VALIDITY OR
ENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT IN ANY OTHER JURISDICTION.

 

(E)                                  ENTIRE AGREEMENT; AMENDMENTS.  THIS
AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS SUPERSEDE ALL OTHER PRIOR ORAL OR
WRITTEN AGREEMENTS BETWEEN THE BUYERS, THE COMPANY, THEIR AFFILIATES AND PERSONS
ACTING ON THEIR BEHALF WITH RESPECT TO THE MATTERS DISCUSSED HEREIN, AND THIS
AGREEMENT, THE OTHER TRANSACTION DOCUMENTS AND THE INSTRUMENTS REFERENCED HEREIN
AND THEREIN CONTAIN THE ENTIRE UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE
MATTERS COVERED HEREIN AND THEREIN AND, EXCEPT AS SPECIFICALLY SET FORTH HEREIN
OR THEREIN, NEITHER THE COMPANY NOR ANY BUYER MAKES ANY REPRESENTATION,
WARRANTY, COVENANT OR UNDERTAKING WITH RESPECT TO SUCH MATTERS.  NO PROVISION OF
THIS AGREEMENT MAY BE AMENDED OTHER THAN BY AN INSTRUMENT IN WRITING SIGNED BY
THE COMPANY AND THE HOLDERS OF AT LEAST A MAJORITY OF THE PREFERRED SHARES
ISSUED AND ISSUABLE HEREUNDER, AND ANY AMENDMENT TO THIS AGREEMENT MADE IN
CONFORMITY WITH THE PROVISIONS OF THIS SECTION 9(E) SHALL BE BINDING ON ALL
BUYERS AND HOLDERS OF SECURITIES, AS APPLICABLE.  NO PROVISION HEREOF MAY BE
WAIVED OTHER THAN BY AN INSTRUMENT IN WRITING SIGNED BY THE PARTY AGAINST WHOM
ENFORCEMENT IS SOUGHT.  NO SUCH AMENDMENT SHALL BE EFFECTIVE TO THE EXTENT THAT
IT APPLIES TO LESS THAN ALL OF THE HOLDERS OF THE PREFERRED SHARES THEN
OUTSTANDING.  NO CONSIDERATION SHALL BE OFFERED OR PAID TO ANY PERSON TO AMEND
OR CONSENT TO A WAIVER OR MODIFICATION OF ANY PROVISION OF ANY OF THE
TRANSACTION DOCUMENTS UNLESS THE SAME CONSIDERATION ALSO IS OFFERED TO ALL OF
THE PARTIES TO THE TRANSACTION DOCUMENTS, HOLDERS OF PREFERRED SHARES, HOLDERS
OF THE COMMON SHARES OR HOLDERS OF WARRANTS, AS THE CASE MAY BE.  THE COMPANY
HAS NOT, DIRECTLY OR INDIRECTLY, MADE ANY AGREEMENTS WITH ANY BUYERS RELATING TO
THE TERMS OR CONDITIONS OF THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION
DOCUMENTS EXCEPT AS SET FORTH IN THE TRANSACTION DOCUMENTS.  WITHOUT LIMITING
THE FOREGOING, THE COMPANY CONFIRMS THAT, EXCEPT AS SET FORTH IN THIS AGREEMENT,
NO BUYER HAS MADE ANY COMMITMENT OR PROMISE OR HAS ANY OTHER OBLIGATION TO
PROVIDE ANY FINANCING TO THE COMPANY OR OTHERWISE.

 

(F)                                    NOTICES.  ANY NOTICES, CONSENTS, WAIVERS
OR OTHER COMMUNICATIONS REQUIRED OR PERMITTED TO BE GIVEN UNDER THE TERMS OF
THIS AGREEMENT MUST BE IN WRITING AND WILL BE DEEMED TO HAVE BEEN DELIVERED: 
(I) UPON RECEIPT, WHEN DELIVERED PERSONALLY; (II) UPON RECEIPT, WHEN SENT BY
FACSIMILE (PROVIDED CONFIRMATION OF TRANSMISSION IS MECHANICALLY OR
ELECTRONICALLY GENERATED AND KEPT ON FILE BY THE SENDING PARTY); OR (III) ONE
BUSINESS DAY AFTER DEPOSIT WITH AN OVERNIGHT COURIER SERVICE, IN EACH CASE
PROPERLY ADDRESSED TO THE PARTY TO RECEIVE THE SAME.  THE ADDRESSES AND
FACSIMILE NUMBERS FOR SUCH COMMUNICATIONS SHALL BE:

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If to the Company:

Cano Petroleum, Inc.
801 Cherry St.
Suite 3200
Fort Worth, Texas 76102

Telephone:                            (817) 698-0900

Facsimile:                                (817) 334-0222

Attention:                               Morris B. Smith and James K. Teringo,
Jr. 

With a copy (for informational purposes only) to:

W. Bruce Newsome

Haynes and Boone, LLP

901 Main St., Suite 3100

Dallas, TX 75202
Telephone:  (214) 651-5119
Facsimile:  (214) 200-0636

 

 

If to the Transfer Agent:

Interwest Transfer Company
1981 East Murray Holladay Road
Suite 100
P.O. Box 17136
Salt Lake City, UT 84117
Telephone:                            (801) 272-9294

Facsimile:                                (801) 277-3147

Attention:                               Lorraine Smith

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers,

with a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York  10022
Telephone:                               (212) 756-2000

Facsimile:                                    (212) 593-5955

Attention:                                    Eleazer N. Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party pursuant to this Section.  Written confirmation of receipt (A)
given by the recipient of such notice, consent, waiver or other communication,
(B) mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first

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--------------------------------------------------------------------------------

 

page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from
an overnight courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

 

(G)                                 SUCCESSORS AND ASSIGNS.  THIS AGREEMENT
SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES AND THEIR
RESPECTIVE SUCCESSORS AND ASSIGNS, INCLUDING ANY PURCHASERS OF THE PREFERRED
SHARES, THE COMMON SHARES OR THE WARRANTS.  THE COMPANY SHALL NOT ASSIGN THIS
AGREEMENT OR ANY RIGHTS OR OBLIGATIONS HEREUNDER WITHOUT THE PRIOR WRITTEN
CONSENT OF THE HOLDERS OF AT LEAST A MAJORITY OF THE AGGREGATE NUMBER OF THE
PREFERRED SHARES ISSUED HEREUNDER, INCLUDING BY WAY OF A FUNDAMENTAL TRANSACTION
(UNLESS THE COMPANY IS IN COMPLIANCE WITH THE APPLICABLE PROVISIONS GOVERNING
FUNDAMENTAL TRANSACTIONS SET FORTH IN THE CERTIFICATE OF DESIGNATIONS AND THE
WARRANTS).  A BUYER MAY ASSIGN SOME OR ALL OF ITS RIGHTS HEREUNDER IN CONNECTION
WITH TRANSFER OF ANY OF ITS SECURITIES WITHOUT THE CONSENT OF THE COMPANY, IN
WHICH EVENT SUCH ASSIGNEE SHALL BE DEEMED TO BE A BUYER HEREUNDER WITH RESPECT
TO SUCH ASSIGNED RIGHTS.

 

(H)                                 NO THIRD PARTY BENEFICIARIES.  THIS
AGREEMENT IS INTENDED FOR THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE
PERMITTED SUCCESSORS AND ASSIGNS, AND IS NOT FOR THE BENEFIT OF, NOR MAY ANY
PROVISION HEREOF BE ENFORCED BY, ANY OTHER PERSON.

 

(I)                                     SURVIVAL.  UNLESS THIS AGREEMENT IS
TERMINATED UNDER SECTION 8, THE REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE BUYERS CONTAINED IN SECTIONS 2 AND 3 AND THE AGREEMENTS AND COVENANTS
SET FORTH IN SECTIONS 4, 5 AND 9 SHALL SURVIVE THE CLOSING AND THE DELIVERY AND
EXERCISE OF SECURITIES, AS APPLICABLE.  EACH BUYER SHALL BE RESPONSIBLE ONLY FOR
ITS OWN REPRESENTATIONS, WARRANTIES, AGREEMENTS AND COVENANTS HEREUNDER.

 

(J)                                     FURTHER ASSURANCES.  EACH PARTY SHALL DO
AND PERFORM, OR CAUSE TO BE DONE AND PERFORMED, ALL SUCH FURTHER ACTS AND
THINGS, AND SHALL EXECUTE AND DELIVER ALL SUCH OTHER AGREEMENTS, CERTIFICATES,
INSTRUMENTS AND DOCUMENTS, AS ANY OTHER PARTY MAY REASONABLY REQUEST IN ORDER TO
CARRY OUT THE INTENT AND ACCOMPLISH THE PURPOSES OF THIS AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY.

 

(K)                                  INDEMNIFICATION.  IN CONSIDERATION OF EACH
BUYER'S EXECUTION AND DELIVERY OF THE TRANSACTION DOCUMENTS AND ACQUIRING THE
SECURITIES THEREUNDER AND IN ADDITION TO ALL OF THE COMPANY'S OTHER OBLIGATIONS
UNDER THE TRANSACTION DOCUMENTS, THE COMPANY SHALL DEFEND, PROTECT, INDEMNIFY
AND HOLD HARMLESS EACH BUYER AND EACH OTHER HOLDER OF THE SECURITIES (OTHER THAN
HOLDERS OF SECURITIES PURCHASED ON ANY ELIGIBLE MARKET (AS DEFINED IN THE
CERTIFICATE OF DESIGNATIONS) OR THE PRINCIPAL MARKET WITH RESPECT TO THOSE
SECURITIES), AND ALL OF SUCH BUYER'S STOCKHOLDERS, PARTNERS, MEMBERS, OFFICERS,
DIRECTORS, EMPLOYEES AND DIRECT OR INDIRECT INVESTORS AND ANY OF THE FOREGOING
PERSONS' AGENTS OR OTHER REPRESENTATIVES (INCLUDING, WITHOUT LIMITATION, THOSE
RETAINED IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT)
(COLLECTIVELY, THE "INDEMNITEES"), AS INCURRED, FROM AND AGAINST ANY AND ALL
ACTIONS, CAUSES OF ACTION, SUITS, CLAIMS, LOSSES, COSTS, PENALTIES, FEES,
LIABILITIES AND DAMAGES, AND EXPENSES IN CONNECTION THEREWITH (IRRESPECTIVE OF
WHETHER ANY SUCH INDEMNITEE IS A PARTY TO THE ACTION FOR WHICH INDEMNIFICATION
HEREUNDER IS SOUGHT), AND INCLUDING REASONABLE ATTORNEYS' FEES AND
DISBURSEMENTS, BUT EXCLUDING ANY CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES
(THE "INDEMNIFIED LIABILITIES"), INCURRED BY ANY INDEMNITEE AS A RESULT OF, OR
ARISING OUT OF, OR RELATING TO (A) ANY MISREPRESENTATION OR BREACH OF ANY
REPRESENTATION OR WARRANTY MADE BY THE

33

--------------------------------------------------------------------------------

 

COMPANY IN THE TRANSACTION DOCUMENTS, (B) ANY BREACH OF ANY COVENANT, AGREEMENT
OR OBLIGATION OF THE COMPANY CONTAINED IN THE TRANSACTION DOCUMENTS OR (C) ANY
CAUSE OF ACTION, SUIT OR CLAIM BROUGHT OR MADE AGAINST SUCH INDEMNITEE BY A
THIRD PARTY (INCLUDING FOR THESE PURPOSES A DERIVATIVE ACTION BROUGHT ON BEHALF
OF THE COMPANY) AND ARISING OUT OF OR RESULTING FROM (I) THE EXECUTION,
DELIVERY, PERFORMANCE OR ENFORCEMENT OF THE TRANSACTION DOCUMENTS OR ANY OTHER
CERTIFICATE, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR THEREBY, (II) ANY
TRANSACTION FINANCED OR TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR
INDIRECTLY, WITH THE PROCEEDS OF THE ISSUANCE OF THE SECURITIES, (III) ANY
DISCLOSURE MADE BY SUCH BUYER PURSUANT TO SECTION 4(I), OR (IV) THE STATUS OF
SUCH BUYER OR HOLDER OF THE SECURITIES (OTHER THAN HOLDERS OF SECURITIES
PURCHASED ON ANY ELIGIBLE MARKET OR THE PRINCIPAL MARKET WITH RESPECT TO THOSE
SECURITIES), AS AN INVESTOR IN THE COMPANY PURSUANT TO THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS.  TO THE EXTENT THAT THE FOREGOING
UNDERTAKING BY THE COMPANY MAY BE UNENFORCEABLE FOR ANY REASON, THE COMPANY
SHALL MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF
THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW.  EXCEPT
AS OTHERWISE SET FORTH HEREIN, THE MECHANICS AND PROCEDURES WITH RESPECT TO THE
RIGHTS AND OBLIGATIONS UNDER THIS SECTION 9(K) SHALL BE THE SAME AS THOSE SET
FORTH IN SECTION 6 OF THE REGISTRATION RIGHTS AGREEMENT.

 

(L)                                     NO STRICT CONSTRUCTION.  THE LANGUAGE
USED IN THIS AGREEMENT WILL BE DEEMED TO BE THE LANGUAGE CHOSEN BY THE PARTIES
TO EXPRESS THEIR MUTUAL INTENT, AND NO RULES OF STRICT CONSTRUCTION WILL BE
APPLIED AGAINST ANY PARTY.

 

(M)                               REMEDIES.  EACH BUYER AND EACH HOLDER OF THE
SECURITIES SHALL HAVE ALL RIGHTS AND REMEDIES SET FORTH IN THE TRANSACTION
DOCUMENTS AND ALL RIGHTS AND REMEDIES WHICH SUCH HOLDERS HAVE BEEN GRANTED AT
ANY TIME UNDER ANY OTHER AGREEMENT OR CONTRACT AND ALL OF THE RIGHTS WHICH SUCH
HOLDERS HAVE UNDER ANY LAW.  ANY PERSON HAVING ANY RIGHTS UNDER ANY PROVISION OF
THIS AGREEMENT SHALL BE ENTITLED TO ENFORCE SUCH RIGHTS SPECIFICALLY (WITHOUT
POSTING A BOND OR OTHER SECURITY), TO RECOVER DAMAGES BY REASON OF ANY BREACH OF
ANY PROVISION OF THIS AGREEMENT AND TO EXERCISE ALL OTHER RIGHTS GRANTED BY
LAW.  FURTHERMORE, THE COMPANY RECOGNIZES THAT IN THE EVENT THAT IT FAILS TO
PERFORM, OBSERVE, OR DISCHARGE ANY OR ALL OF ITS OBLIGATIONS UNDER THE
TRANSACTION DOCUMENTS, ANY REMEDY AT LAW MAY PROVE TO BE INADEQUATE RELIEF TO
THE BUYERS.  THE COMPANY THEREFORE AGREES THAT THE BUYERS SHALL BE ENTITLED TO
SEEK TEMPORARY AND PERMANENT INJUNCTIVE RELIEF IN ANY SUCH CASE WITHOUT THE
NECESSITY OF PROVING ACTUAL DAMAGES AND WITHOUT POSTING A BOND OR OTHER
SECURITY.  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NO BUYER
OR HOLDER OF SECURITIES SHALL BE ENTITLED TO CONSEQUENTIAL, INDIRECT OR
INCIDENTAL DAMAGES HEREUNDER.  HOWEVER, THE FOREGOING SHALL NOT IN ANY WAY LIMIT
A BUYER OR HOLDER OF SECURITIES FROM BEING REIMBURSED FOR ITS COSTS, FEES OR
EXPENSES, INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES AND
DISBURSEMENTS IN CONNECTION WITH ANY OF ITS RIGHTS AND REMEDIES HEREUNDER.

 

(N)                                 RESCISSION AND WITHDRAWAL RIGHT. 
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN (AND WITHOUT LIMITING ANY
SIMILAR PROVISIONS OF) THE TRANSACTION DOCUMENTS, WHENEVER ANY BUYER EXERCISES A
RIGHT, ELECTION, DEMAND OR OPTION UNDER A TRANSACTION DOCUMENT AND THE COMPANY
DOES NOT TIMELY PERFORM ITS RELATED OBLIGATIONS WITHIN THE PERIODS THEREIN
PROVIDED, THEN SUCH BUYER MAY RESCIND OR WITHDRAW, IN ITS SOLE DISCRETION FROM
TIME TO TIME PRIOR TO THE COMPANY'S PERFORMANCE UPON WRITTEN NOTICE TO THE
COMPANY, ANY

34

--------------------------------------------------------------------------------

 

RELEVANT NOTICE, DEMAND OR ELECTION IN WHOLE OR IN PART WITHOUT PREJUDICE TO ITS
FUTURE ACTIONS AND RIGHTS.

 

(O)                                 PAYMENT SET ASIDE.  TO THE EXTENT THAT THE
COMPANY MAKES A PAYMENT OR PAYMENTS TO THE BUYERS HEREUNDER OR PURSUANT TO ANY
OF THE OTHER TRANSACTION DOCUMENTS OR THE BUYERS ENFORCE OR EXERCISE THEIR
RIGHTS HEREUNDER OR THEREUNDER, AND SUCH PAYMENT OR PAYMENTS OR THE PROCEEDS OF
SUCH ENFORCEMENT OR EXERCISE OR ANY PART THEREOF ARE SUBSEQUENTLY INVALIDATED,
DECLARED TO BE FRAUDULENT OR PREFERENTIAL, SET ASIDE, RECOVERED FROM, DISGORGED
BY OR ARE REQUIRED TO BE REFUNDED, REPAID OR OTHERWISE RESTORED TO THE COMPANY,
A TRUSTEE, RECEIVER OR ANY OTHER PERSON UNDER ANY LAW (INCLUDING, WITHOUT
LIMITATION, ANY BANKRUPTCY LAW, FOREIGN, STATE OR FEDERAL LAW, COMMON LAW OR
EQUITABLE CAUSE OF ACTION), THEN TO THE EXTENT OF ANY SUCH RESTORATION THE
OBLIGATION OR PART THEREOF ORIGINALLY INTENDED TO BE SATISFIED SHALL BE REVIVED
AND CONTINUED IN FULL FORCE AND EFFECT AS IF SUCH PAYMENT HAD NOT BEEN MADE OR
SUCH ENFORCEMENT OR SETOFF HAD NOT OCCURRED.

 

(P)                                 INDEPENDENT NATURE OF BUYERS' OBLIGATIONS
AND RIGHTS.  THE OBLIGATIONS OF EACH BUYER UNDER ANY TRANSACTION DOCUMENT ARE
SEVERAL AND NOT JOINT WITH THE OBLIGATIONS OF ANY OTHER BUYER, AND NO BUYER
SHALL BE RESPONSIBLE IN ANY WAY FOR THE PERFORMANCE OF THE OBLIGATIONS OF ANY
OTHER BUYER UNDER ANY TRANSACTION DOCUMENT.  NOTHING CONTAINED HEREIN OR IN ANY
OTHER TRANSACTION DOCUMENT, AND NO ACTION TAKEN BY ANY BUYER PURSUANT HERETO OR
THERETO, SHALL BE DEEMED TO CONSTITUTE THE BUYERS AS, AND THE COMPANY
ACKNOWLEDGES THAT THE BUYERS DO NOT SO CONSTITUTE, A PARTNERSHIP, AN
ASSOCIATION, A JOINT VENTURE OR ANY OTHER KIND OF ENTITY, OR CREATE A
PRESUMPTION THAT THE BUYERS ARE IN ANY WAY ACTING IN CONCERT OR AS A GROUP WITH
RESPECT TO SUCH OBLIGATIONS OR THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION
DOCUMENTS AND THE COMPANY ACKNOWLEDGES THAT THE BUYERS ARE NOT ACTING IN CONCERT
OR AS A GROUP, AND THE COMPANY WILL NOT ASSERT ANY SUCH CLAIM, WITH RESPECT TO
SUCH OBLIGATIONS OR THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS. 
THE COMPANY ACKNOWLEDGES AND EACH BUYER CONFIRMS THAT IT HAS INDEPENDENTLY
PARTICIPATED IN THE NEGOTIATION OF THE TRANSACTION CONTEMPLATED HEREBY WITH THE
ADVICE OF ITS OWN COUNSEL AND ADVISORS.  EACH BUYER SHALL BE ENTITLED TO
INDEPENDENTLY PROTECT AND ENFORCE ITS RIGHTS, INCLUDING, WITHOUT LIMITATION, THE
RIGHTS ARISING OUT OF THIS AGREEMENT OR OUT OF ANY OTHER TRANSACTION DOCUMENTS,
AND IT SHALL NOT BE NECESSARY FOR ANY OTHER BUYER TO BE JOINED AS AN ADDITIONAL
PARTY IN ANY PROCEEDING FOR SUCH PURPOSE.

 

[Signature Page Follows]

35

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

COMPANY:

 

 

 

CANO PETROLEUM, INC.

 

 

 

 

 

By:

/s/ S. Jeffrey Johnson

 

 

 

Name:

S. Jeffrey Johnson

 

 

Title:

Chairman and CEO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

WILLIAM HERBERT HUNT TRUST

 

ESTATE

 

 

 

 

 

By:

/s/ J. W. Beavers, Jr., Trustee

 

 

 

Name:

J. W. Beavers, Jr.

 

 

Title:

Trustee

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

S.A.C. CAPITAL ASSOCIATES, LLC

 

 

 

By:   S.A.C. Capital Advisors, LLC

 

 

 

 

 

By:

/s/ Peter Nussbaum

 

 

 

Name:

Peter Nussbaum

 

 

Title:

General Counsel

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

RADCLIFFE SPC, LTD., for and on
behalf of the Class A Convertible
Crossover Segregated Portfolio

 

 

 

By:   RG Capital Management, L.P.

 

 

 

By:   RGC Management Company, LLC

 

 

 

 

 

By:

/s/ Steven B. Katznelson

 

 

 

Name:

Steven B. Katznelson

 

 

Title:

Managing Director

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

D.E. SHAW LAMINAR PORTFOLIOS,
L.L.C.

 

 

 

 

 

By:

/s/ Julies Gaudio

 

 

 

Name:

Julies Gaudio

 

 

Title:

Authorized Signatory

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

INVESTCORP INTERLACHEN MULTI-STRATEGY
MASTER FUND LIMITED

 

 

 

By:

Interlachen Capital Group LP,
Authorized Signatory

 

 

 

 

 

By:

/s/ Gregg T. Colburn

 

 

 

Name:

Gregg T. Colburn

 

 

Title:

Authorized Signatory

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

ING VP NATURAL RESOURCES
TRUST c/o ING Investment Management
Co.

 

 

 

 

 

By:

/s/ Sal DiGanzi

 

 

 

Name:

Sal DiGanzi

 

 

Title:

VP Compliance

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

ING GLOBAL RESOURCES

 

PORTFOLIO c/o ING Investment

 

Management Co.

 

 

 

 

 

By:

/s/ Sal DiGanzi

 

 

 

Name:

Sal DiGanzi

 

 

Title:

VP Compliance

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

TRUK OPPORTUNITY FUND, LLC

 

 

 

By:   Atoll Asset Management, LLC

 

 

 

 

 

By:

/s/ Michael E. Fein

 

 

 

Name:

Michael E. Fein

 

 

Title:

Principal

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

TRUK INTERNATIONAL FUND, LP

 

 

 

By:   Atoll Asset Management, LLC

 

 

 

 

 

By:

/s/ Michael E. Fein

 

 

 

Name:

Michael E. Fein

 

 

Title:

Principal

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

FORT MASON MASTER, LP

 

 

 

 

 

By:

/s/ Dan German

 

 

 

Name:

Dan German

 

 

Title:

Managing Member

 

 

 

Fort Mason Capital, LLC

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

FORT MASON PARTNERS, LP

 

 

 

 

 

By:

/s/ Dan German

 

 

 

Name:

Dan German

 

 

Title:

Managing Member

 

 

 

Fort Mason Capital, LLC

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

UBS O’CONNOR LLC fbo O’Connor
Pipes Corporate Strategies

 

 

 

 

 

By:

Illegible Signature

 

 

 

Name:

 

 

 

Title:

 

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

DYNAMIS ENERGY FUND, LP

 

 

 

 

 

By:

/s/ John H. Bocock

 

 

 

Name:

John H. Bocock

 

 

Title:

Managing Member

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

DYNAMIS ENERGY FUND, LTD.

 

 

 

 

 

By:

/s/ John H. Bocock

 

 

 

Name:

John H. Bocock

 

 

Title:

Managing Member

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

KELLOGG CAPITAL GROUP LLC

 

 

 

 

 

By:

/s/ Nicholas Cappalleri

 

 

 

Name:

Nicholas Cappalleri

 

 

Title:

Director – Finance and

 

 

 

Operations

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

GLG PARTNERS, LP acting as
investment manager for GLG North
American Opportunity Fund

 

 

 

 

 

By:

/s/ Simon White

 

 

 

Name:

Simon White

 

 

Title:

Chief Operating Officer GLG

 

 

Partners LP

 

 

 

 

By:

/s/ Victoria Parry

 

 

 

Name:

Victoria Parry

 

 

Title:

Senior Legal Counsel

 

 

 

GLG Partners LP

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

BUYERS:

 

 

 

CAMCAP ENERGY OFFSHORE
MASTER FUND, L.P.

 

 

 

 

 

By:

/s/ Roland A. von Metzsch

 

 

 

Name:

Roland A. von Metzsch

 

 

Title:

Managing Member,
CamCap Energy Partners, LLC
GP of CamCap Energy
Offshore Master Fund, L.P.

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

TOURADJI DEEPROCK MASTER
FUND, LTD.

 

 

 

 

 

By:

/s/ Thomas S. Dwan

 

 

 

Name:

Thomas S. Dwan

 

 

Title:

CFO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

TOURADJI GLOBAL RESOURCES
MASTER FUND, LTD.

 

 

 

 

 

By:

/s/ Thomas S. Dwan

 

 

 

Name:

Thomas S. Dwan

 

 

Title:

CFO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

EUROPA INTERNATIONAL, INC.

 

 

 

 

 

By:

/s/ Fred Knoll

 

 

 

Name:

Fred Knoll

 

 

Title:

Knoll Capital Management
Investment Manager for
Europa International, Inc.

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

KNOLL CAPITAL FUND II MASTER
FUND, LTD.

 

 

 

 

 

By:

/s/ Fred Knoll

 

 

 

Name:

Fred Knoll

 

 

Title:

KOM Capital Management
Investment Manager

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

ADVANTAGE ADVISORS CATALYST
INT’L LTD.

 

 

 

 

 

By:

/s/ Todd McElroy

 

 

 

Name:

Todd McElroy

 

 

Title:

CFO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

ADVANTAGE ADVISORS CATALYST
PARTNERS LP

 

 

 

 

 

By:

/s/ Todd McElroy

 

 

 

Name:

Todd McElroy

 

 

Title:

CFO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

RIDGECREST PARTNERS LTD.

 

 

 

 

 

By:

/s/ Todd McElroy

 

 

 

Name:

Todd McElroy

 

 

Title:

CFO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

RIDGECREST PARTNERS QP, L.P.

 

 

 

 

 

By:

/s/ Todd McElroy

 

 

 

Name:

Todd McElroy

 

 

Title:

CFO

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

SPENDRIFT INVESTORS (BERMUDA)
L.P.

 

 

 

By:

Wellington Management Company,
LLP as Investment Advisor

 

 

 

 

 

By:

/s/ Gregory S. Konzal

 

 

 

Name:

Gregory S. Konzal

 

 

Title:

Vice President and Counsel

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

SPENDRIFT PARTNERS, L.P.

 

 

 

By:

Wellington Management Company,
LLP as Investment Advisor

 

 

 

 

 

By:

/s/ Gregory S. Konzal

 

 

 

Name:

Gregory S. Konzal

 

 

Title:

Vice President and Counsel

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

BRIGHTSTREAM FUND, LLC

 

 

 

 

 

By:

/s/ David Zusman

 

 

 

Name:

David Zusman

 

 

Title:

Managing Partner

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

BRIGHTSTREAM MASTER FUND, LP

 

 

 

 

 

By:

/s/ David Zusman

 

 

 

Name:

David Zusman

 

 

Title:

Managing Partner

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

HFR HE BRIGHTWATER MASTER
TRUST

 

 

 

 

 

By:

/s/ David Zusman

 

 

 

Name:

David Zusman

 

 

Title:

Manager

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

TRAPEZE CAPITAL CORP.

 

 

 

 

 

By:

/s/ Herbert Abramson

 

 

 

Name:

Herbert Abramson

 

 

Title:

President

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

BUYERS:

 

 

 

TRAPEZE ASSET MANAGEMENT, INC.

 

 

 

 

 

By:

/s/ Herbert Abramson

 

 

 

Name:

Herbert Abramson

 

 

Title:

President

 

--------------------------------------------------------------------------------

 

SCHEDULE OF BUYERS

(1)

 

(2)

 

(3)

 

(4)

 

(5)

 

(6)

 

(7)

 

(8)

 

(9)

 

Buyer

 

Address and Facsimile Number

 

Aggregate
Number of
Preferred
Shares

 

Aggregate
Number of
Common
Shares

 

Aggregate
Number of
Warrant
Shares

 

Purchase Price

 

Dividend
Election
(Cash or PIK)

 

Maximum
Ownership
Percentage

 

Legal
Representative’s
Address and
Facsimile
Number

 

Brightstream Fund, LLC

 

c/o Brightstream Asset Management
598 Madison Avenue, 5th Floor
New York, NY 10022
Attention: Donald Kreuger
Facsimile: 212-452-6160
Telephone: 212-452-6100

 

106

 

0

 

0

 

$

106,000

 

Cash

 

9.99

%

 

 

Brightstream Master Fund, LP

 

c/o Brightstream Asset Management
598 Madison Avenue, 5th Floor
New York, NY 10022
Attention: Donald Kreuger
Facsimile: 212-452-6160
Telephone: 212-452-6100

 

1,120

 

0

 

0

 

$

1,120,000

 

Cash

 

9.99

%

 

 

HFR HE Brightwater Master Trust

 

c/o Brightstream Asset Management
598 Madison Avenue, 5th Floor
New York, NY 10022
Attention: Donald Kreuger
Facsimile: 212-452-6160
Telephone: 212-452-6100

 

287

 

0

 

0

 

$

287,000

 

Cash

 

9.99

%

 

 

D.E. Shaw Laminar Portfolios, L.L.C.

 

c/o D.E. Shaw & Co
120 West 45th Street, 39th Floor
New York, NY 10036
Attention: Maureen Welby Knoblauch
Facsimile: 212-845-1628
Telephone: 212-478-0628

 

10,005

 

0

 

0

 

$

10,005,000

 

PIK

 

9.99

%

 

 

Dynamis Energy Fund, LTD

 

c/o Spectrum Global Fund
Administration (Cayman)
PO Box 10243 APO
Grand Cayman, Cayman Islands
Attention: John H. Bocock
Facsimile: 434-220-0234
Telephone: 434-220-4621

 

180

 

75,630

 

18,907

 

$

545,293

 

Cash

 

9.99

%

 

 

Dynamis Energy Fund, LP

 

c/o Spectrum Global Fund
Administration (Cayman)
PO Box 10243 APO
Grand Cayman, Cayman Islands
Attention: John H. Bocock
Facsimile: 434-220-0234
Telephone: 434-220-4621

 

820

 

344,538

 

86,135

 

$

2,484,119

 

Cash

 

9.99

%

 

 

Fort Mason Master, LP

 

c/o Fort Mason Capital, LLC
4 Embarcadero Center, Suite 2050
San Francisco, CA 94111
Attention: KC Lynch and Marshall Jensen
Facsimile: 415-288-8113
Telephone: 415-288-8100

 

3,756

 

0

 

0

 

$

3,756,000

 

Cash

 

9.99

%

 

 

Fort Mason Partners, LP

 

c/o Fort Mason Capital, LLC
4 Embarcadero Center, Suite 2050
San Francisco, CA 94111
Attention: KC Lynch and Marshall Jensen
Facsimile: 415-288-8113
Telephone: 415-288-8100

 

244

 

0

 

0

 

$

244,000

 

Cash

 

9.99

%

 

 

 

--------------------------------------------------------------------------------

 

GLG North American Opportunity Fund

 

c/o GLG Partners LP
Walker House, P.O. Box 908GT,
Mary Street
Georgetown, Grand Cayman,
Cayman Islands
Attention: Gitesh Parmar
Facsimile: 44-207-016-7200
Telephone: 44-207-016-7000

 

5,175

 

1,050,000

 

262,500

 

$

10,246,500

 

Cash

 

9.99

%

 

 

Investcorp Interlachen Multi-Strategy Master Fund Limited

 

c/o Interlachen Capital Group LP
800 Nicollet Mall, Suite 2500
Minneapolis, MN 55402
Attention: Gregg Colburn and
Legal Department
Facsimile: 612-659-4457
Telephone: 612-659-4407

 

1,254

 

0

 

0

 

$

1,254,000

 

PIK

 

9.99

%

 

 

Kellogg Capital Group LLC

 

55 Broadway, 4th Floor
New York, NY 10006
Attention: Nicholas Cappelleri
Facsimile: 212-380-5665
Telephone: 212-607-5061

 

2,013

 

0

 

0

 

$

2,013,000

 

Cash

 

9.99

%

 

 

William Herbert Hunt Trust Estate

 

c/o J.W. Beavers, Jr., Trustee
1601 Elm Street, Suite 3400
Dallas, TX 75201
Attention: David S. Hunt
Facsimile: 214-880-7101
Telephone: 214-880-8484

 

2,875

 

500,000

 

125,000

 

$

5,290,000

 

PIK

 

9.99

%

 

 

Radcliffe SPC, Ltd. For and on behalf of the Class A Convertible Crossover
Segregated Portfolio

 

c/o RG Capital Management, L.P.
3 Bala Plaza - East, Suite 501
Bala Cynwyd, PA 19004
Attention: Gerald F. Stahlecker
Facsimile: 610-617-0580
Telephone: 610-617-5900

 

2,013

 

0

 

0

 

$

2,013,000

 

Cash

 

9.99

%

 

 

Truk Opportunity Fund, LLC

 

c/o Atoll Asset Management, LLC
1 East 52nd Street, 6th Floor
New York, NY 10022
Attention: Antonia Koleva
Facsimile: 212-888-0334
Telephone: 212-888-2224

 

523

 

0

 

0

 

$

523,000

 

Cash

 

9.99

%

 

 

Truk International Fund, LP

 

c/o Atoll Asset Management, LLC
1 East 52nd Street, 6th Floor
New York, NY 10022
Attention: Antonia Koleva
Facsimile: 212-888-0334
Telephone: 212-888-2224

 

52

 

0

 

0

 

$

52,000

 

Cash

 

9.99

%

 

 

Touradji DeepRock Master Fund, Ltd.

 

c/o Spectrum Global Fund
Administration (Cayman)
PO Box 10243 APO, Anchorage
Center, Second Floor
George Town, Grand Cayman,
Cayman Islands, BWI
Attention: Thomas S. Dwan
Facsimile: 212-984-8881
Telephone: 212-984-8899

 

1,000

 

250,000

 

62,500

 

$

2,207,500

 

Cash

 

No Limit

 

 

 

 

--------------------------------------------------------------------------------

 

Touradji Global Resources Master Fund, Ltd.

 

c/o Spectrum Global Fund
Administration (Cayman)
PO Box 10243 APO, Anchorage
Center, Second Floor
George Town, Grand Cayman,
Cayman Islands, BWI
Attention: Thomas S. Dwan
Facsimile: 212-984-8881
Telephone: 212-984-8899

 

0

 

250,000

 

62,500

 

$

1,207,500

 

 

 

No Limit

 

 

 

Trapeze Capital Corp.

 

c/o Trapeze Asset Management Inc.
22 St. Clair Avenue East, 18th Floor
Toronto, ON, M4T 253
Attention: Randall Abramson
Facsimile: 416-867-9771
Telephone: 416-861-0774

 

810

 

412,500

 

103,125

 

$

2,802,375

 

Cash

 

9.99

%

 

 

Trapeze Asset Management, Inc.

 

22 St. Clair Avenue East, 18th Floor
Toronto, ON, M4T 253
Attention: Randall Abramson
Facsimile: 416-867-9771
Telephone: 416-861-0774

 

2,269

 

1,187,500

 

296,875

 

$

8,004,625

 

Cash

 

9.99

%

 

 

O’Connor PIPEs Corporate Strategies Master Limited

 

c/o UBS O’Connor LLC
1 North Wacker Drive, 32nd Floor
Chicago, IL 60606
Attention: Brian Herward
Facsimile: 312-525-6271
Telephone: 312-525-5868

 

1,254

 

0

 

0

 

$

1,254,000

 

Cash

 

9.99

%

 

 

Spindrift Partners, L.P.

 

c/o Wellington Management
Company, LLP
75 State Street\
Boston, MA 02109
Attention: 914-225-4924
Facsimile: 617-204-7006
Telephone: 617-790-7006

 

5,837

 

0

 

0

 

$

5,837,000

 

PIK

 

No Limit

 

 

 

Spindrift Investors (Bermuda) L.P.

 

c/o Wellington Management
Company, LLP
75 State Street\
Boston, MA 02109
Attention: 914-225-4924
Facsimile: 617-204-7006
Telephone: 617-790-7006

 

7,100

 

0

 

0

 

$

7,100,000

 

PIK

 

No Limit

 

 

 

CamCap Energy Offshore Mater Fund, L.P.

 

c/o BISYS Hedge Fund Services
(Cayman) Ltd.
P.O. Box 1748GT, Cayman
Corporate Center, 27 Hospital Road
George Town, Grand Cayman,
Cayman Islands
Attention: Roland von Metzsch
Facsimile: 415-658-3020
Telephone: 415-658-3010

 

0

 

215,000

 

53,750

 

$

1,038,450

 

 

 

9.99

%

 

 

ING VP Natural Resources Trust

 

c/o ING Investment Management
Company
230 Park Avenue
New York, NY 10169
Attention: Sal Digangi
Facsimile: 212-309-8247
Telephone: 212-309-1755

 

0

 

222,047

 

55,512

 

$

1,072,487

 

 

 

9.99

%

 

 

ING Global Resources Portfolio

 

c/o ING Investment Management
Company
230 Park Avenue
New York, NY 10169
Attention: Sal Digangi
Facsimile: 212-309-8247
Telephone: 212-309-1755

 

0

 

912,953

 

228,238

 

$

4,409,563

 

 

 

9.99

%

 

 

Europa International Inc.

 

c/o Knoll Capital Management
666 Fifth Avenue, Suite 3702
New York, NY 10103
Attention: Fred Knoll
Facsimile: 212-808-7475
Telephone: 212-808-7474

 

0

 

325,000

 

81,250

 

$

1,569,750

 

 

 

9.99

%

 

 

 

--------------------------------------------------------------------------------

 

Knoll Capital Fund II Master Fund Ltd.

 

c/o KOM Capital Management
666 Fifth Avenue, Suite 3702
New York, NY 10103
Attention: Fred Knoll
Facsimile: 212-808-7475
Telephone: 212-808-7474

 

0

 

325,000

 

81,250

 

$

1,569,750

 

 

 

9.99

%

 

 

Ridgecrest Partners Ltd.

 

c/o Ridgecrest Partners
220 East 42nd Street, 29 Floor
New York, NY 10017
Attention: Todd McElroy
Facsimile: 212-476-9159
Telephone: 212-476-5517

 

0

 

13,000

 

3,250

 

$

62,790

 

 

 

9.99

%

 

 

Ridgecrest Partners QP, L.P.

 

c/o Ridgecrest Partners
220 East 42nd Street, 29 Floor
New York, NY 10017
Attention: Todd McElroy
Facsimile: 212-476-9159
Telephone: 212-476-5517

 

0

 

50,000

 

12,500

 

$

241,500

 

 

 

9.99

%

 

 

Advantage Advisors Catalyst International Ltd.

 

c/o Ridgecrest Partners
220 East 42nd Street, 29 Floor
New York, NY 10017
Attention: Todd McElroy
Facsimile: 212-476-9159
Telephone: 212-476-5517

 

0

 

18,500

 

4,625

 

$

89,355

 

 

 

9.99

%

 

 

Advantage Advisors Catalyst Partners L.P.

 

c/o Ridgecrest Partners
220 East 42nd Street, 29 Floor
New York, NY 10017
Attention: Todd McElroy
Facsimile: 212-476-9159
Telephone: 212-476-5517

 

0

 

18,500

 

4,625

 

$

89,355

 

 

 

9.99

%

 

 

S.A.C. Capital Associates, LLC

 

c/o S.A.C. Capital Associates, LLC
P.O. Box 58, Victoria House
The Valley, Anguilla, BWI

 

0

 

414,079

 

103,520

 

$

2,000,002

 

 

 

4.99

%

 

 

 

 

INFORMATION FOR
DISTRIBUTION OF SHARES
AND CORRESPONDENCE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c/o S.A.C. Capital Advisors, LLC
72 Cummings Point Road
Stamford, CT 06902
Attention: General Counsel
Tel: (203) 890-2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

EXHIBITS

Exhibit A

 

Form of Certificate of Designations

Exhibit B

 

Form of Warrant

Exhibit C

 

Form of Registration Rights Agreement

Exhibit D

 

Form of Irrevocable Transfer Agent Instructions

Exhibit E

 

Form of Secretary’s Certificate

Exhibit F

 

Form of Officer’s Certificate

Exhibit G

 

Form of Lock-Up Agreement

 

SCHEDULES

Schedule 3(a)

 

Subsidiaries

Schedule 3(d)

 

No Conflicts

Schedule 3(e)

 

Consents

Schedule 3(f)

 

Acknowledgment Regarding Buyer’s Purchase of Securities

Schedule 3(l)

 

Absence of Certain Changes

Schedule 3(q)

 

Transactions with Affiliates

Schedule 3(r)

 

Equity Capitalization

Schedule 3(s)

 

Indebtedness and Other Contracts

Schedule 3(t)

 

Absence of Litigation

Schedule 3(w)

 

Title

Schedule 3(z)

 

Subsidiary Rights

Schedule 3(bb)

 

Internal Accounting and Disclosure Controls

 

--------------------------------------------------------------------------------

EXHIBIT A

CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK
OF
CANO PETROLEUM, INC.

Cano Petroleum, Inc. (the “Company”), a corporation organized and existing under
the General Company Law of the State of Delaware (the “DGCL”), does hereby
certify that, pursuant to authority conferred upon the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Sections 151 and 141 of the DGCL, the Board of Directors of the
Company adopted resolutions (i) designating a series of the Company’s previously
authorized preferred stock, without par value per share, and (ii) providing for
the designations, preferences and relative, participating, optional or other
rights, and the qualifications, limitations or restrictions thereof, of Sixty
Thousand (60,000) shares of Series D Convertible Preferred Stock of the Company,
as follows:

RESOLVED, that the Company is authorized to issue 60,000 shares of Series D
Convertible Preferred Stock (the “Preferred Shares”), without par value per
share, which shall have the following powers, designations, preferences and
other special rights:

(1)   DIVIDENDS.  THE HOLDERS OF THE PREFERRED SHARES (EACH, A “HOLDER” AND
COLLECTIVELY, THE “HOLDERS”) SHALL BE ENTITLED TO RECEIVE DIVIDENDS
(“DIVIDENDS”) PAYABLE IN CASH ON THE STATED VALUE (AS DEFINED BELOW) OF SUCH
PREFERRED SHARE AT THE DIVIDEND RATE (AS DEFINED BELOW), WHICH SHALL BE
CUMULATIVE.  DIVIDENDS ON THE PREFERRED SHARES SHALL COMMENCE ACCRUING ON THE
INITIAL ISSUANCE DATE AND SHALL BE COMPUTED ON THE BASIS OF A 360-DAY YEAR
CONSISTING OF TWELVE 30-DAY MONTHS.  TO THE EXTENT PERMITTED BY LAW, DIVIDENDS
SHALL BE PAYABLE (A) IN ARREARS ON THE LAST DAY OF EACH CALENDAR QUARTER (EACH,
AN “DIVIDEND DATE”) WITH THE FIRST DIVIDEND DATE BEING SEPTEMBER 30, 2006, (B)
ON EACH CONVERSION DATE THEREAFTER BY INCLUSION IN THE APPLICABLE CONVERSION
AMOUNT (AS DEFINED BELOW) AND (C) ON THE MATURITY DATE (AS DEFINED BELOW) (EACH,
A “DIVIDEND DATE”).  IF A DIVIDEND DATE IS NOT A BUSINESS DAY (AS DEFINED
BELOW), THEN THE DIVIDEND SHALL BE DUE AND PAYABLE ON THE BUSINESS DAY
IMMEDIATELY FOLLOWING SUCH DIVIDEND DATE.  ON EACH DIVIDEND DATE, IF THE COMPANY
DOES NOT HAVE CURRENT OR ACCUMULATED “EARNINGS AND PROFITS” WITHIN THE MEANING
OF SECTIONS 301 AND 312 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED,
THROUGH SUCH DIVIDEND DATE, THE COMPANY SHALL NOT WITHHOLD ANY AMOUNT OF THE
APPLICABLE DIVIDEND IN RESPECT OF U.S. FEDERAL INCOME TAX.  NOTWITHSTANDING THE
FOREGOING, IN THE CASE OF ANY ELECTING HOLDER THE COMPANY SHALL NOT MAKE PAY ANY
DIVIDENDS IN CASH ON THE DIVIDEND DATE BUT INSTEAD SUCH DIVIDENDS SHALL BE
INCLUDED IN THE CALCULATION OF SUCH HOLDER’S CONVERSION AMOUNT FOR PURPOSES OF
ANY CONVERSION OR REDEMPTION HEREUNDER.

(2)   CONVERSION OF PREFERRED SHARES.  PREFERRED SHARES SHALL BE CONVERTIBLE
INTO SHARES OF THE COMPANY’S COMMON STOCK, PAR VALUE $0.0001 PER SHARE (THE
“COMMON STOCK”), ON THE TERMS AND CONDITIONS SET FORTH IN THIS SECTION 2.

(A)   CERTAIN DEFINED TERMS.  FOR PURPOSES OF THIS CERTIFICATE OF DESIGNATIONS,
THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING MEANINGS:

--------------------------------------------------------------------------------

 

(I)            “ADDITIONAL AMOUNT” MEANS, ON A PER PREFERRED SHARE BASIS, THE
PRODUCT OF (X) THE RESULT OF THE FOLLOWING FORMULA: (DIVIDEND RATE)(N/360) AND
(Y) THE STATED VALUE.

(II)           “ADJUSTED PRICE” MEANS, FOR ANY DILUTIVE ISSUANCE, THE PRODUCT OF
(A) THE CONVERSION PRICE IN EFFECT IMMEDIATELY PRIOR TO SUCH DILUTIVE ISSUANCE
AND (B) THE QUOTIENT OF (1) THE SUM OF (X) THE PRODUCT OF THE APPLICABLE PRICE
AND THE NUMBER OF SHARES OF COMMON STOCK DEEMED OUTSTANDING IMMEDIATELY PRIOR TO
SUCH DILUTIVE ISSUANCE AND (Y) THE CONSIDERATION, IF ANY, RECEIVED BY THE
COMPANY UPON SUCH DILUTIVE ISSUANCE, DIVIDED BY (2) THE PRODUCT OF (X) THE
APPLICABLE PRICE MULTIPLIED BY (Y) THE NUMBER OF SHARES OF COMMON STOCK DEEMED
OUTSTANDING IMMEDIATELY AFTER SUCH DILUTIVE ISSUANCE.

(III) “ALLOCATION PERCENTAGE” MEANS A FRACTION, THE NUMERATOR OF WHICH IS THE
NUMBER OF PREFERRED SHARES ISSUED TO A HOLDER ON THE INITIAL ISSUANCE DATE AND
THE DENOMINATOR OF WHICH IS THE AGGREGATE AMOUNT OF ALL THE PREFERRED SHARES
ISSUED ON THE INITIAL ISSUANCE DATE.

(IV)          “AMEX” MEANS THE AMERICAN STOCK EXCHANGE.

(V)           “APPROVED STOCK PLAN” MEANS ANY EMPLOYEE BENEFIT PLAN CURRENTLY
EXISTING OR HEREINAFTER CREATED WHICH HAS BEEN APPROVED BY THE BOARD OF
DIRECTORS OF THE COMPANY, PURSUANT TO WHICH THE COMPANY’S SECURITIES MAY BE
ISSUED TO ANY EMPLOYEE, CONSULTANT, OFFICER OR DIRECTOR FOR SERVICES PROVIDED TO
THE COMPANY.

(VI)          “ASSET SALE” MEANS, IN ONE TRANSACTION OR A SERIES OF RELATED
TRANSACTIONS, (I) THE SALE, LEASE, CONVEYANCE OR OTHER DISPOSITION OF ANY ASSETS
OR RIGHTS OTHER THAN IN THE ORDINARY COURSE OF BUSINESS CONSISTENT WITH PAST
PRACTICE, OR (II) THE SALE OF EQUITY INTERESTS IN ANY OF THE COMPANY’S
SUBSIDIARIES, WHICH SALE, LEASE CONVEYANCE OR OTHER DISPOSITION OF ASSETS OR
RIGHTS OR SALE OF EQUITY INTERESTS GENERATES PROCEEDS TO THE COMPANY EQUAL TO OR
GREATER THAN $15,000,000; PROVIDED, HOWEVER, THAT NEITHER (A) A SALE, LEASE,
CONVEYANCE OR OTHER DISPOSITION OF THE RICH VALLEY PROPERTIES NOR (B) ANY SALE,
LEASE, CONVEYANCE OR OTHER DISPOSITION OF THE BARNETT SHALE PROPERTIES MADE
SOLELY FOR THE PURPOSE OF CONTRIBUTING SUCH BARNETT SHALE PROPERTIES TO A JOINT
VENTURE ENTITY IN WHICH THE COMPANY, OR ONE OF ITS WHOLLY-OWNED SUBSIDIARIES,
OWNS ANY EQUITY INTERESTS THEREOF, SHALL BE CONSIDERED AN ASSET SALE FOR
PURPOSES OF THIS CERTIFICATE OF DESIGNATIONS.

(VII)         “AVAILABLE ASSET SALE PROCEEDS” MEANS, FOR ANY ASSET SALES, THE
DIFFERENCE BETWEEN (I) THE CASH PROCEEDS GENERATED IN SUCH ASSET SALE AND (II)
THE OUTSTANDING PRINCIPAL AMOUNT (INCLUDING ANY INTEREST THEREON) OF THE SENIOR
DEBT; PROVIDED, HOWEVER, THAT IN THE EVENT OF ANY ASSET SALE RELATING TO BARNETT
SHALE PROPERTIES THE AVAILABLE ASSET SALE

2

--------------------------------------------------------------------------------

 

PROCEEDS SHALL BE EQUAL TO THE DIFFERENCE BETWEEN (A) THE CASH PROCEEDS
GENERATED IN SUCH ASSET SALE AND (B) $15,000,000.

(VIII)        “BARNETT SHALE PROPERTIES” MEANS THE STRATIGRAPHIC EQUIVALENT OF
THAT CERTAIN INTERVAL DESCRIBED AS 100’ ABOVE AND 100’ BELOW THE INTERVAL SEEN
BETWEEN 3,450’ AND 3,650’ ON THE WELEX SPECTRAL DENSITY – DUAL SPACED NEUTRON
LOG DATED JULY 29, 1986 FOR THE HOGTOWN MOORE UNIT #13-2 WELL LOCATED IN THE
GEORGE E. MOORE SURVEY, EASTLAND COUNTY, TEXAS, AS SUCH STRATIGRAPHIC EQUIVALENT
UNDERLIES, COMPRISES A PORTION OF OR IS ATTRIBUTABLE TO (I) THE DESDEMONA FIELD
UNIT (BEING THAT CERTAIN UNIT COVERING 7,273 ACRES, MORE OR LESS, SITUATED IN
EASTLAND, ERATH AND COMANCHE COUNTIES, TEXAS, AS MORE PARTICULARLY DESCRIBED IN
THAT CERTAIN UNIT AGREEMENT DATED JULY 1, 1986, RECORDED IN VOLUME 1089, PAGES
1-72 OF THE DEED RECORDS OF EASTLAND COUNTY, TEXAS, IN VOLUME 51, PAGES 202-272
OF THE OIL & GAS RECORDS OF ERATH COUNTY, TEXAS AND IN VOLUME 616, PAGES 43-115
OF THE DEED RECORDS OF COMANCHE COUNTY, TEXAS), AS SUCH MAY HAVE BEEN AMENDED,
MODIFIED OR ALTERED, AND/OR (II) THE HOGTOWN-MOORE UNIT (BEING THAT CERTAIN UNIT
COVERING 2,675.5 ACRES, MORE OR LESS, SITUATED IN EASTLAND AND ERATH COUNTIES,
TEXAS, AS MORE PARTICULARLY DESCRIBED IN THAT CERTAIN UNIT AGREEMENT OCTOBER 1,
1985 RECORDED IN  VOLUME 1000, PAGE 226, ET SEQ. OF THE DEED RECORDS OF EASTLAND
COUNTY, TEXAS AND IN VOLUME 47, PAGE 237, ET SEQ. OF THE OIL & GAS RECORDS OF
ERATH COUNTY, TEXAS), AS SUCH MAY HAVE BEEN AMENDED, MODIFIED OR ALTERED.

(IX)           “BLOOMBERG” MEANS BLOOMBERG FINANCIAL MARKETS.

(X)            “BUSINESS DAY” MEANS ANY DAY OTHER THAN SATURDAY, SUNDAY OR OTHER
DAY ON WHICH COMMERCIAL BANKS IN THE CITY OF NEW YORK ARE AUTHORIZED OR REQUIRED
BY LAW TO REMAIN CLOSED.

(XI)           “CALENDAR QUARTER” MEANS EACH OF THE FOLLOWING PERIODS:  THE
PERIOD BEGINNING ON AND INCLUDING JANUARY 1 AND ENDING ON AND INCLUDING MARCH
31; THE PERIOD BEGINNING ON AND INCLUDING APRIL 1 AND ENDING ON AND INCLUDING
JUNE 30; THE PERIOD BEGINNING ON AND INCLUDING JULY 1 AND ENDING ON AND
INCLUDING SEPTEMBER 30; AND THE PERIOD BEGINNING ON AND INCLUDING OCTOBER 1 AND
ENDING ON AND INCLUDING DECEMBER 31.

(XII)          “CAPITAL STOCK” MEANS: (1)  IN THE CASE OF A CORPORATION,
CORPORATE STOCK; (2) IN THE CASE OF AN ASSOCIATION OR BUSINESS ENTITY, ANY AND
ALL SHARES, INTERESTS, PARTICIPATIONS, RIGHTS OR OTHER EQUIVALENTS (HOWEVER
DESIGNATED) OF CORPORATE STOCK;  (3) IN THE CASE OF A PARTNERSHIP OR LIMITED
LIABILITY COMPANY, PARTNERSHIP INTERESTS (WHETHER GENERAL OR LIMITED) OR
MEMBERSHIP INTERESTS; AND (4) ANY OTHER INTEREST OR PARTICIPATION THAT CONFERS
ON A PERSON THE RIGHT TO RECEIVE A SHARE OF THE PROFITS AND LOSSES OF, OR
DISTRIBUTIONS OF ASSETS OF, THE ISSUING PERSON.

3

--------------------------------------------------------------------------------

 

(XIII)         “CHANGE OF CONTROL” MEANS ANY FUNDAMENTAL TRANSACTION OTHER THAN
(I) ANY REORGANIZATION, RECAPITALIZATION OR RECLASSIFICATION OF THE COMMON STOCK
IN WHICH HOLDERS OF THE COMPANY’S VOTING POWER IMMEDIATELY PRIOR TO SUCH
REORGANIZATION, RECAPITALIZATION OR RECLASSIFICATION CONTINUE AFTER SUCH
REORGANIZATION, RECAPITALIZATION OR RECLASSIFICATION TO HOLD PUBLICLY TRADED
SECURITIES AND, DIRECTLY OR INDIRECTLY, THE VOTING POWER OF THE SURVIVING ENTITY
OR ENTITIES NECESSARY TO ELECT A MAJORITY OF THE MEMBERS OF THE BOARD OF
DIRECTORS (OR THEIR EQUIVALENT IF OTHER THAN A CORPORATION) OF SUCH ENTITY OR
ENTITIES, OR (II) PURSUANT TO A MIGRATORY MERGER EFFECTED SOLELY FOR THE PURPOSE
OF CHANGING THE JURISDICTION OF INCORPORATION OF THE COMPANY.

(XIV)        “CHANGE OF CONTROL REDEMPTION PREMIUM” MEANS (I) FOR CHANGE OF
CONTROL NOTICE DELIVERED OR REQUIRED TO BE DELIVERED IN CONNECTION WITH A CHANGE
OF CONTROL PRIOR TO THE FIRST (1ST) ANNIVERSARY OF THE INITIAL ISSUANCE DATE,
115%, (II) FOR CHANGE OF CONTROL NOTICE DELIVERED OR REQUIRED TO BE DELIVERED IN
CONNECTION WITH A CHANGE OF CONTROL ON OR FOLLOWING THE FIRST (1ST) ANNIVERSARY
OF THE INITIAL ISSUANCE DATE BUT PRIOR TO THE SECOND (2ND) ANNIVERSARY OF THE
INITIAL ISSUANCE DATE, 112%, AND (III) FOR ANY CHANGE OF CONTROL NOTICE
DELIVERED OR REQUIRED TO BE DELIVERED IN CONNECTION WITH A CHANGE OF CONTROL ON
OR FOLLOWING THE SECOND (2ND) ANNIVERSARY OF THE INITIAL ISSUANCE DATE, 110%.

(XV)         “CLOSING SALE PRICE” MEANS, FOR ANY SECURITY AS OF ANY DATE, THE
LAST CLOSING TRADE PRICE FOR SUCH SECURITY ON THE PRINCIPAL MARKET, AS REPORTED
BY BLOOMBERG, OR, IF THE PRINCIPAL MARKET BEGINS TO OPERATE ON AN EXTENDED HOURS
BASIS AND DOES NOT DESIGNATE THE CLOSING TRADE PRICE THEN THE LAST TRADE PRICE
OF SUCH SECURITY PRIOR TO 4:00:00 P.M., NEW YORK TIME, AS REPORTED BY BLOOMBERG,
OR, IF THE PRINCIPAL MARKET IS NOT THE PRINCIPAL SECURITIES EXCHANGE OR TRADING
MARKET FOR SUCH SECURITY THE LAST TRADE PRICE OF SUCH SECURITY ON THE PRINCIPAL
SECURITIES EXCHANGE OR TRADING MARKET WHERE SUCH SECURITY IS LISTED OR TRADED AS
REPORTED BY BLOOMBERG, OR IF THE FOREGOING DO NOT APPLY, THE LAST TRADE PRICE OF
SUCH SECURITY IN THE OVER-THE-COUNTER MARKET ON THE ELECTRONIC BULLETIN BOARD
FOR SUCH SECURITY AS REPORTED BY BLOOMBERG, OR, IF NO LAST TRADE PRICE IS
REPORTED FOR SUCH SECURITY BY BLOOMBERG, THE AVERAGE OF THE ASK PRICES OF ANY
MARKET MAKERS FOR SUCH SECURITY AS REPORTED IN THE “PINK SHEETS” BY PINK SHEETS
LLC (FORMERLY THE NATIONAL QUOTATION BUREAU, INC.).  IF THE CLOSING SALE PRICE
CANNOT BE CALCULATED FOR A SECURITY ON A PARTICULAR DATE ON ANY OF THE FOREGOING
BASES, THE CLOSING SALE PRICE OF SUCH SECURITY ON SUCH DATE SHALL BE THE FAIR
MARKET VALUE AS MUTUALLY DETERMINED BY THE COMPANY AND THE REQUIRED HOLDERS.  IF
THE COMPANY AND THE REQUIRED HOLDERS ARE UNABLE TO AGREE UPON THE FAIR MARKET
VALUE OF SUCH SECURITY, THEN SUCH DISPUTE SHALL BE RESOLVED PURSUANT TO SECTION
2(D)(III).  ALL SUCH DETERMINATIONS TO BE APPROPRIATELY ADJUSTED FOR ANY STOCK
DIVIDEND, STOCK SPLIT, STOCK COMBINATION OR OTHER SIMILAR TRANSACTION DURING THE
APPLICABLE CALCULATION PERIOD.

4

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(XVI)        “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 SECTIONS
2(F)(I)(A) AND 2(F)(I)(B) HEREOF REGARDLESS OF WHETHER THE OPTIONS OR
CONVERTIBLE SECURITIES ARE ACTUALLY EXERCISABLE AT SUCH TIME, BUT EXCLUDING ANY
SHARES OF COMMON STOCK OWNED OR HELD BY OR FOR THE ACCOUNT OF THE COMPANY OR
ISSUABLE UPON CONVERSION OF THE PREFERRED SHARES.

(XVII)       “CONVERSION AMOUNT” MEANS THE SUM OF (1) THE ADDITIONAL AMOUNT AND
(2) THE STATED VALUE.

(XVIII)      “CONVERSION PRICE” MEANS $5.75, SUBJECT TO ADJUSTMENT AS PROVIDED
HEREIN.

(XIX)         “CONVERTIBLE SECURITIES” MEANS ANY STOCK OR SECURITIES (OTHER THAN
OPTIONS) DIRECTLY OR INDIRECTLY CONVERTIBLE INTO OR EXCHANGEABLE OR EXERCISABLE
FOR COMMON STOCK.

(XX)          “DEFAULT CONVERSION PRICE” MEANS AS OF ANY DATE OF DETERMINATION,
THE PRODUCT OF (A) 90% AND (B) THE LOWER OF (1) THE CONVERSION PRICE AND (2)
$[   ](1), SUBJECT TO ADJUSTMENT AS PROVIDED HEREIN.

(XXI)         “DIVIDEND RATE” MEANS (I) 7.875% PER ANNUM AND (II) FOR THE PERIOD
FROM AND AFTER THE OCCURRENCE OF A TRIGGERING EVENT THROUGH SUCH TIME THAT SUCH
TRIGGERING EVENT IS CURED, FIFTEEN PERCENT (15%) PER ANNUM.

(XXII)        “ELECTING HOLDER” MEANS ANY HOLDER OF PREFERRED SHARES THAT HAS
IRREVOCABLY ELECTED, AS SUCH ELECTION IS SET FORTH IN COLUMN (7) OF THE SCHEDULE
OF BUYERS TO THE SECURITIES PURCHASE AGREEMENT, TO “PIK” DIVIDENDS ON EACH
DIVIDEND DATE RATHER THAN RECEIVE CASH ON EACH SUCH DATE.  THE ELECTION TO
RECEIVE “PIK” DIVIDENDS SHALL BE BINDING ANY SUBSEQUENT ASSIGNEE OR TRANSFEREE
OF SUCH HOLDER’S PREFERRED SHARES.

(XXIII)       “ELIGIBLE MARKET” MEANS THE NYSE, THE NASDAQ GLOBAL SELECT MARKET,
THE NASDAQ GLOBAL MARKET OR THE NASDAQ CAPITAL MARKET.

(XXIV)       “EQUITY CONDITIONS” MEANS:  (I) ON EACH DAY DURING THE PERIOD
BEGINNING SIX (6) MONTHS PRIOR TO THE APPLICABLE DATE OF DETERMINATION AND
ENDING ON AND INCLUDING THE APPLICABLE DATE OF DETERMINATION (THE “EQUITY
CONDITIONS MEASURING PERIOD”), EITHER

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(1)             Insert price equal to the arithmetic average of the Weighted
Average Price of the Common Stock during the five (5) Trading Day period ending
on the Trading Day immediately prior to the Subscription Date.

5

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(X) THE REGISTRATION STATEMENT (AS DEFINED IN THE REGISTRATION RIGHTS AGREEMENT)
FILED PURSUANT TO THE REGISTRATION RIGHTS AGREEMENT SHALL BE EFFECTIVE AND
AVAILABLE FOR THE RESALE OF ALL OF THE REGISTRABLE SECURITIES IN ACCORDANCE WITH
THE TERMS OF THE REGISTRATION RIGHTS AGREEMENT AND THERE SHALL NOT HAVE BEEN ANY
GRACE PERIODS OR (Y) ALL SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE
PREFERRED SHARES SHALL BE ELIGIBLE FOR SALE WITHOUT RESTRICTION AND WITHOUT THE
NEED FOR REGISTRATION UNDER ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS;
(II) ON EACH DAY DURING THE EQUITY CONDITIONS MEASURING PERIOD, THE COMMON STOCK
IS DESIGNATED FOR QUOTATION ON A PRINCIPAL MARKET AND SHALL NOT HAVE BEEN
SUSPENDED FROM TRADING ON SUCH EXCHANGE OR MARKET (OTHER THAN SUSPENSIONS OF NOT
MORE THAN THREE (3) DAYS AND OCCURRING PRIOR TO THE APPLICABLE DATE OF
DETERMINATION DUE TO BUSINESS ANNOUNCEMENTS BY THE COMPANY) NOR SHALL
PROCEEDINGS FOR SUCH DELISTING OR SUSPENSION BY SUCH EXCHANGE OR MARKET HAVE
BEEN COMMENCED, THREATENED OR PENDING EITHER (A) IN WRITING BY SUCH EXCHANGE OR
MARKET, WHICH HAS NOT BEEN SATISFIED IN FAVOR OF THE COMPANY OR (B) BY FALLING
BELOW THE MINIMUM LISTING MAINTENANCE REQUIREMENTS OF SUCH EXCHANGE OR MARKET;
(III) ON EACH DAY DURING THE EQUITY CONDITIONS MEASURING PERIOD, THE COMPANY
SHALL HAVE DELIVERED COMMON STOCK UPON CONVERSION OF THE PREFERRED SHARES TO THE
HOLDERS ON A TIMELY BASIS AS SET FORTH IN SECTION 2(D)(II) HEREOF, RESPECTIVELY;
(IV) ANY APPLICABLE SHARES OF COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
EVENT REQUIRING DETERMINATION MAY BE ISSUED IN FULL WITHOUT VIOLATING SECTION 7
HEREOF OR THE RULES OR REGULATIONS OF THE APPLICABLE PRINCIPAL MARKET AND FROM
AND AFTER THE STOCKHOLDER MEETING DEADLINE (AS DEFINED IN THE SECURITIES
PURCHASE AGREEMENT), THE COMPANY SHALL HAVE OBTAINED THE STOCKHOLDER APPROVAL
(AS DEFINED IN THE SECURITIES PURCHASE AGREEMENT); (V) DURING THE EQUITY
CONDITIONS MEASURING PERIOD, THE COMPANY SHALL NOT HAVE FAILED TO TIMELY MAKE
ANY PAYMENTS WITHIN FIVE (5) BUSINESS DAYS OF WHEN SUCH PAYMENT IS DUE PURSUANT
TO ANY TRANSACTION DOCUMENT (AS DEFINED IN THE SECURITIES PURCHASE AGREEMENT);
(VI) DURING THE EQUITY CONDITIONS MEASURING PERIOD, THERE SHALL NOT HAVE
OCCURRED EITHER (A) THE PUBLIC ANNOUNCEMENT OF A PENDING, PROPOSED OR INTENDED
FUNDAMENTAL TRANSACTION WHICH HAS NOT BEEN ABANDONED, TERMINATED OR CONSUMMATED
OR (B) A TRIGGERING EVENT OR AN EVENT THAT WITH THE PASSAGE OF TIME OR GIVING OF
NOTICE WOULD CONSTITUTE A TRIGGERING EVENT; (VII) THE COMPANY SHALL HAVE NO
KNOWLEDGE OF ANY FACT THAT WOULD CAUSE (X) THE REGISTRATION STATEMENTS REQUIRED
PURSUANT TO THE REGISTRATION RIGHTS AGREEMENT NOT TO BE EFFECTIVE AND AVAILABLE
FOR THE RESALE OF AT LEAST ALL OF THE REGISTRABLE SECURITIES IN ACCORDANCE WITH
THE TERMS OF THE REGISTRATION RIGHTS AGREEMENT OR (Y) ANY SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION OF THE PREFERRED SHARES NOT TO BE ELIGIBLE FOR SALE
WITHOUT RESTRICTION PURSUANT TO RULE 144(K) AND ANY APPLICABLE STATE SECURITIES
LAWS; AND (VIII) THE COMPANY OTHERWISE SHALL HAVE BEEN IN MATERIAL COMPLIANCE
WITH AND SHALL NOT HAVE MATERIALLY BREACHED ANY PROVISION, COVENANT,
REPRESENTATION OR WARRANTY OF ANY TRANSACTION DOCUMENT.

6

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(XXV)        “EQUITY INTERESTS” MEANS CAPITAL STOCK AND ALL WARRANTS, OPTIONS OR
OTHER RIGHTS TO ACQUIRE CAPITAL STOCK.

(XXVI)       “EXCLUDED SECURITIES” MEANS ANY COMMON STOCK ISSUED OR ISSUABLE OR
DEEMED TO BE ISSUED IN ACCORDANCE WITH SECTION 2(F) HEREOF BY THE COMPANY: (I)
IN CONNECTION WITH ANY APPROVED STOCK PLAN; (II) UPON CONVERSION OF THE
PREFERRED SHARES; (III) UPON EXERCISE OF THE WARRANTS (AS DEFINED IN THE
SECURITIES PURCHASE AGREEMENT), (IV) PURSUANT TO A BONA FIDE FIRM COMMITMENT
UNDERWRITTEN PUBLIC OFFERING WITH A NATIONALLY RECOGNIZED UNDERWRITER WHICH
GENERATES GROSS PROCEEDS TO THE COMPANY IN EXCESS OF $50,000,000 (OTHER THAN AN
“AT-THE-MARKET OFFERING” AS DEFINED IN RULE 415(A)(4) UNDER THE 1933 ACT AND
“EQUITY LINES”); (V) IN CONNECTION WITH ANY STRATEGIC ACQUISITION OR TRANSACTION
WHETHER THROUGH AN ACQUISITION OF STOCK OR A MERGER OF ANY BUSINESS, ASSETS OR
TECHNOLOGIES THE PRIMARY PURPOSE OF WHICH IS NOT TO RAISE EQUITY CAPITAL; (VI)
UPON CONVERSION, EXERCISE OR EXCHANGE OF ANY OPTIONS OR CONVERTIBLE SECURITIES
WHICH ARE OUTSTANDING ON THE DAY IMMEDIATELY PRECEDING THE SUBSCRIPTION DATE,
PROVIDED THAT SUCH ISSUANCE OF COMMON STOCK UPON EXERCISE OF SUCH OPTIONS OR
CONVERTIBLE SECURITIES IS MADE PURSUANT TO THE TERMS OF SUCH OPTIONS OR
CONVERTIBLE SECURITIES IN EFFECT ON THE DATE IMMEDIATELY PRECEDING THE
SUBSCRIPTION DATE AND SUCH OPTIONS OR CONVERTIBLE SECURITIES ARE NOT AMENDED,
MODIFIED OR CHANGED ON OR AFTER THE SUBSCRIPTION DATE; AND (VII) IN CONNECTION
WITH ANY STOCK SPLIT, STOCK DIVIDEND, RECAPITALIZATION OR SIMILAR TRANSACTION BY
THE COMPANY FOR WHICH ADJUSTMENT IS MADE PURSUANT TO SECTION 2(F)(II).

(XXVII)      “FUNDAMENTAL TRANSACTION” MEANS THAT THE COMPANY SHALL (OR IN THE
CASE OF CLAUSE (VI) ANY “PERSON” OR “GROUP” (AS THESE TERMS ARE USED FOR
PURPOSES OF SECTIONS 13(D) AND 14(D) OF THE EXCHANGE ACT)), DIRECTLY OR
INDIRECTLY, IN ONE OR MORE RELATED TRANSACTIONS, (I) CONSOLIDATE OR MERGE WITH
OR INTO (WHETHER OR NOT THE COMPANY IS THE SURVIVING CORPORATION) ANOTHER
PERSON, OR (II) SELL, ASSIGN, TRANSFER, CONVEY OR OTHERWISE DISPOSE OF ALL OR
SUBSTANTIALLY ALL OF THE PROPERTIES OR ASSETS OF THE COMPANY TO ANOTHER PERSON,
OR (III) ALLOW ANOTHER PERSON OR PERSONS TO MAKE A PURCHASE, TENDER OR EXCHANGE
OFFER THAT IS ACCEPTED BY THE HOLDERS OF MORE THAN THE 50% OF THE OUTSTANDING
SHARES OF VOTING STOCK (NOT INCLUDING ANY SHARES OF VOTING STOCK HELD BY THE
PERSON OR PERSONS MAKING OR PARTY TO, OR ASSOCIATED OR AFFILIATED WITH THE
PERSON OR PERSONS MAKING OR PARTY TO, SUCH PURCHASE, TENDER OR EXCHANGE OFFER),
OR (IV) CONSUMMATE A STOCK PURCHASE AGREEMENT OR OTHER BUSINESS COMBINATION
(INCLUDING, WITHOUT LIMITATION, A REORGANIZATION, RECAPITALIZATION, SPIN-OFF OR
SCHEME OF ARRANGEMENT) WITH ANOTHER PERSON WHEREBY SUCH OTHER PERSON ACQUIRES
MORE THAN THE 50% OF EITHER THE OUTSTANDING SHARES OF VOTING STOCK (NOT
INCLUDING ANY SHARES OF VOTING STOCK HELD BY THE OTHER PERSON OR OTHER PERSONS
MAKING OR PARTY TO, OR ASSOCIATED OR AFFILIATED WITH THE OTHER PERSONS MAKING OR
PARTY TO, SUCH STOCK PURCHASE AGREEMENT OR OTHER BUSINESS COMBINATION), OR
(V) REORGANIZE, RECAPITALIZE OR RECLASSIFY ITS

7

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COMMON STOCK, OR (VI) IS OR SHALL BECOME THE “BENEFICIAL OWNER” (AS DEFINED IN
RULE 13D-3 UNDER THE EXCHANGE ACT), DIRECTLY OR INDIRECTLY, OF 50% OF THE
AGGREGATE ORDINARY VOTING POWER REPRESENTED BY ISSUED AND OUTSTANDING COMMON
STOCK.

(XXVIII) “INDEBTEDNESS” SHALL HAVE THE MEANING AS SET FORTH IN THE SECURITIES
PURCHASE AGREEMENT.

(XXIX) “INITIAL ISSUANCE DATE” MEANS AUGUST   , 2006.

(XXX) “LIQUIDATION EVENT” MEANS THE VOLUNTARY OR INVOLUNTARY LIQUIDATION,
DISSOLUTION OR WINDING UP OF THE COMPANY OR SUCH SUBSIDIARIES THE ASSETS OF
WHICH CONSTITUTE ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF THE BUSINESS OF THE
COMPANY AND ITS SUBSIDIARIES TAKEN AS A WHOLE, IN A SINGLE TRANSACTION OR SERIES
OF TRANSACTIONS.

(XXXI) “MARKET PRICE” MEANS, $4.79, AS ADJUSTED FOR ANY STOCK DIVIDEND, STOCK
SPLIT, STOCK COMBINATION, RECLASSIFICATION OR SIMILAR TRANSACTION.

(XXXII) “MATURITY DATE” MEANS, WITH RESPECT TO A PREFERRED SHARE, AUGUST [  ],
2011, UNLESS EXTENDED PURSUANT TO SECTION 2(D)(VII)(B).

(XXXIII) “N” MEANS (I) FOR ANY NON-ELECTING HOLDER, THE NUMBER OF DAYS FROM, BUT
EXCLUDING, THE LAST DIVIDEND DATE WITH RESPECT TO WHICH DIVIDENDS HAVE BEEN PAID
BY THE COMPANY ON THE APPLICABLE PREFERRED SHARE, OR THE INITIAL ISSUANCE DATE
IF NO DIVIDEND DATE HAS OCCURRED, AND (II) FOR ANY ELECTING HOLDER, THE NUMBER
OF DAYS FROM, BUT EXCLUDING, THE LAST CONVERSION DATE OR REDEMPTION DATE WITH
RESPECT TO WHICH DIVIDENDS HAVE BEEN PAID BY THE COMPANY ON THE APPLICABLE
PREFERRED SHARE, OR THE INITIAL ISSUANCE DATE IF NO SUCH CONVERSION DATE OR
REDEMPTION DATE HAS OCCURRED, IN EACH CASE, THROUGH AND INCLUDING THE CONVERSION
DATE OR OTHER DATE OF DETERMINATION FOR SUCH PREFERRED SHARE, AS THE CASE MAY
BE, FOR WHICH SUCH DETERMINATION IS BEING MADE.

(XXXIV) “NON-ELECTING HOLDER” MEANS ANY HOLDER OF PREFERRED SHARES THAT HAS
IRREVOCABLY ELECTED, AS SUCH ELECTION IS SET FORTH IN COLUMN (7) OF THE SCHEDULE
OF BUYERS TO THE SECURITIES PURCHASE AGREEMENT, TO RECEIVE DIVIDENDS PAID IN
CASH ON EACH DIVIDEND DATE.  THE ELECTION TO RECEIVE CASH DIVIDENDS SHALL BE
BINDING ON ANY SUBSEQUENT ASSIGNEE OR TRANSFEREE OF SUCH HOLDER’S PREFERRED
SHARES.

(XXXV) “NYSE” MEANS THE NEW YORK STOCK EXCHANGE, INC.

(XXXVI) “OPTIONS” MEANS ANY RIGHTS, WARRANTS OR OPTIONS TO SUBSCRIBE FOR OR
PURCHASE COMMON STOCK OR CONVERTIBLE SECURITIES.

8

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(XXXVII)      “PARENT ENTITY” OF A PERSON MEANS AN ENTITY THAT, DIRECTLY OR
INDIRECTLY, CONTROLS THE APPLICABLE PERSON AND WHOSE COMMON STOCK OR EQUIVALENT
EQUITY SECURITY IS QUOTED OR LISTED ON AN ELIGIBLE MARKET, OR, IF THERE IS MORE
THAN ONE SUCH PERSON OR PARENT ENTITY, THE PERSON OR PARENT ENTITY WITH THE
LARGEST PUBLIC MARKET CAPITALIZATION AS OF THE DATE OF CONSUMMATION OF THE
FUNDAMENTAL TRANSACTION.

(XXXVIII) “PERSON” MEANS AN INDIVIDUAL, A LIMITED LIABILITY COMPANY, A
PARTNERSHIP, A JOINT VENTURE, A CORPORATION, A TRUST, AN UNINCORPORATED
ORGANIZATION AND A GOVERNMENT OR ANY DEPARTMENT OR AGENCY THEREOF.

(XXXIX) “PRINCIPAL MARKET” MEANS AMEX, OR IF THE COMMON STOCK IS NOT TRADED ON
THE PRINCIPAL MARKET, AN ELIGIBLE MARKET.

(XL) “REDEMPTION DATE” MEANS ANY TRIGGERING EVENT REDEMPTION DATE, ANY ASSET
SALE REDEMPTION DATE AND ANY CHANGE OF CONTROL REDEMPTION DATE.

(XLI) “REGISTRATION RIGHTS AGREEMENT” MEANS THAT CERTAIN REGISTRATION RIGHTS
AGREEMENT BY AND AMONG THE COMPANY AND THE INITIAL HOLDERS OF THE PREFERRED
SHARES DATED AS OF THE SUBSCRIPTION DATE, AS SUCH AGREEMENT MAY BE AMENDED FROM
TIME TO TIME AS PROVIDED IN SUCH AGREEMENT.

(XLII) “REQUIRED HOLDERS” MEANS THE HOLDERS OF PREFERRED SHARES REPRESENTING AT
LEAST A MAJORITY OF THE AGGREGATE PREFERRED SHARES THEN OUTSTANDING.

(XLIII) “RICH VALLEY PROPERTIES” MEANS THOSE CERTAIN OIL, GAS AND MINERAL
LEASES, OVERRIDING ROYALTY INTERESTS, MINERAL INTERESTS, AGREEMENTS, ALL
PRODUCTION ATTRIBUTABLE THERETO, AND ALL WELLS, EQUIPMENT, PIPELINES, GATHERING
LINES, FACILITIES AND APPURTENANCES, ANY OF WHICH OF THE FOREGOING ARE
ATTRIBUTABLE TO, USED, OBTAINED OR INTENDED FOR USE IN CONNECTION WITH THE
PROPERTIES DESCRIBED AS FOLLOWS:

(A)          SECTIONS 16, 21, 22, 23, 26, 27, 28, 29, 34, AND 35, TOWNSHIP 26
NORTH, RANGE 5 WEST, GRANT COUNTY, OKLAHOMA;

(B)           SECTION 25, TOWNSHIP 26 NORTH, RANGE 6 WEST, GRANT COUNTY,
OKLAHOMA;

(C)           SECTIONS 8, 16, 19, 20, 21, 28, AND 29, TOWNSHIP 25 NORTH, RANGE 5
WEST, GRANT COUNTY, OKLAHOMA;

(D)          SECTION 22, TOWNSHIP 23 NORTH, RANGE 6 WEST, GARFIELD COUNTY,
OKLAHOMA;

9

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(E)           SECTIONS 11 AND 15, TOWNSHIP 20 NORTH, RANGE 8 WEST, GARFIELD
COUNTY, OKLAHOMA; AND

(F)           SECTION 24, TOWNSHIP 20 NORTH, RANGE 2 WEST, NOBLE COUNTY,
OKLAHOMA.

(XLIV) “SEC” MEANS THE SECURITIES AND EXCHANGE COMMISSION.

(XLV) “SECURITIES PURCHASE AGREEMENT” MEANS THAT CERTAIN SECURITIES PURCHASE
AGREEMENT BY AND AMONG THE COMPANY AND THE INITIAL HOLDERS, DATED AS OF THE
SUBSCRIPTION DATE, AS SUCH AGREEMENT FURTHER MAY BE AMENDED FROM TIME TO TIME AS
PROVIDED IN SUCH AGREEMENT.

(XLVI) “SENIOR DEBT” MEANS THE PRINCIPAL OF (AND PREMIUM, IF ANY), INTEREST ON,
AND ALL FEES AND OTHER AMOUNTS (INCLUDING, WITHOUT LIMITATION, ANY OUT-OF-POCKET
COSTS, ENFORCEMENT EXPENSES (INCLUDING OUT-OF-POCKET LEGAL FEES AND
DISBURSEMENTS), COLLATERAL PROTECTION EXPENSES AND OTHER REIMBURSEMENT OR
INDEMNITY OBLIGATIONS RELATING THERETO) WHETHER NOW OR HEREAFTER OUTSTANDING AND
PAYABLE BY COMPANY AND/OR ITS SUBSIDIARIES UNDER OR IN CONNECTION WITH THE
CREDIT AGREEMENT DATED AS OF NOVEMBER 29, 2005, AS AMENDED BY THE AMENDMENT NO.
1 DATED AS OF FEBRUARY 24, 2006, THE AMENDMENT NO. 2, ASSIGNMENT AND AGREEMENT
DATED AS OF APRIL 28, 2006,  THE AMENDMENT NO. 3 ENTERED INTO ON MAY 12, 2006
BUT MADE EFFECTIVE AS OF MARCH 31, 2006, AND THE AMENDMENT NO. 4 ENTERED INTO ON
JUNE 30, 2006  AMONG CANO PETROLEUM, INC., THE LENDERS PARTY THERETO FROM TIME
TO TIME, AND UNION BANK OF CALIFORNIA, N.A., AS ADMINISTRATIVE AGENT FOR SUCH
LENDERS AND AS ISSUING LENDER, AS THE SAME MAY BE FURTHER AMENDED, SUPPLEMENTED,
RESTATED, REFINANCED, OR OTHERWISE MODIFIED FROM TIME TO TIME.

(XLVII) “SERIES A PREFERRED STOCK” SHALL MEAN THE SERIES A CONVERTIBLE PREFERRED
STOCK OF THE COMPANY, WITHOUT PAR VALUE PER SHARE.

(XLVIII) “SERIES B PREFERRED STOCK” SHALL MEAN THE SERIES B CONVERTIBLE
PREFERRED STOCK OF THE COMPANY, WITHOUT PAR VALUE PER SHARE.

(XLIX) “SERIES C PREFERRED STOCK” SHALL MEAN THE SERIES C CONVERTIBLE PREFERRED
STOCK OF THE COMPANY, WITHOUT PAR VALUE PER SHARE.

(L) “STATED VALUE” MEANS $1,000.

(LI) “SUBSCRIPTION DATE” MEANS AUGUST 25, 2006.

(LII) “SUBSIDIARIES” SHALL HAVE THE MEANING AS SET FORTH IN THE SECURITIES
PURCHASE AGREEMENT.

(LIII) “SUCCESSOR ENTITY” MEANS THE PERSON, WHICH MAY BE THE COMPANY, FORMED BY,
RESULTING FROM OR SURVIVING ANY FUNDAMENTAL

10

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TRANSACTION OR THE PERSON WITH WHICH SUCH FUNDAMENTAL TRANSACTION SHALL HAVE
BEEN MADE, PROVIDED THAT IF SUCH PERSON IS NOT A PUBLICLY TRADED ENTITY WHOSE
COMMON STOCK OR EQUIVALENT EQUITY SECURITY IS QUOTED OR LISTED FOR TRADING ON AN
ELIGIBLE MARKET, SUCCESSOR ENTITY SHALL MEAN SUCH PERSON’S PARENT ENTITY.

(LIV) “TAX” MEANS ANY TAX, LEVY, IMPOST, DUTY OR OTHER CHARGE OR WITHHOLDING OF
A SIMILAR NATURE (INCLUDING ANY RELATED PENALTY OR INTEREST).

(LV) “TAX DEDUCTION” MEANS A DEDUCTION OR WITHHOLDING FOR OR ON ACCOUNT OF TAX
FROM A PAYMENT UNDER THIS CERTIFICATE OF DESIGNATIONS.

(LVI) “TRADING DAY” MEANS ANY DAY ON WHICH THE COMMON STOCK ARE TRADED ON THE
PRINCIPAL MARKET, OR, IF THE PRINCIPAL MARKET IS NOT THE PRINCIPAL TRADING
MARKET FOR THE COMMON STOCK, THEN ON THE PRINCIPAL SECURITIES EXCHANGE OR
SECURITIES MARKET ON WHICH THE SHARES OF COMMON STOCK ARE THEN TRADED; PROVIDED
THAT “TRADING DAY” SHALL NOT INCLUDE ANY DAY ON WHICH THE SHARES OF COMMON STOCK
ARE SCHEDULED TO TRADE ON SUCH EXCHANGE OR MARKET FOR LESS THAN 4.5 HOURS OR ANY
DAY THAT THE SHARES OF COMMON STOCK ARE SUSPENDED FROM TRADING DURING THE FINAL
HOUR OF TRADING ON SUCH EXCHANGE OR MARKET (OR IF SUCH EXCHANGE OR MARKET DOES
NOT DESIGNATE IN ADVANCE THE CLOSING TIME OF TRADING ON SUCH EXCHANGE OR MARKET,
THEN DURING THE HOUR ENDING AT 4:00:00 P.M., NEW YORK TIME).

(LVII) “VOTING STOCK” OF A PERSON MEANS CAPITAL STOCK OF SUCH PERSON OF THE
CLASS OR CLASSES PURSUANT TO WHICH THE HOLDERS THEREOF HAVE THE GENERAL VOTING
POWER TO ELECT, OR THE GENERAL POWER TO APPOINT, AT LEAST A MAJORITY OF THE
BOARD OF DIRECTORS, MANAGERS OR TRUSTEES OF SUCH PERSON (IRRESPECTIVE OF WHETHER
OR NOT AT THE TIME CAPITAL STOCK OF ANY OTHER CLASS OR CLASSES SHALL HAVE OR
MIGHT HAVE VOTING POWER BY REASON OF THE HAPPENING OF ANY CONTINGENCY).

(LVIII) “WEIGHTED AVERAGE PRICE” MEANS, FOR ANY SECURITY AS OF ANY DATE, THE
DOLLAR VOLUME-WEIGHTED AVERAGE PRICE FOR SUCH SECURITY ON THE PRINCIPAL MARKET
DURING THE PERIOD BEGINNING AT 9:30:01 A.M., NEW YORK CITY TIME, AND ENDING AT
4:00:00 P.M., NEW YORK CITY TIME, AS REPORTED BY BLOOMBERG THROUGH ITS “VOLUME
AT PRICE” FUNCTION OR, IF THE FOREGOING DOES NOT APPLY, THE DOLLAR
VOLUME-WEIGHTED AVERAGE PRICE OF SUCH SECURITY IN THE OVER-THE-COUNTER MARKET ON
THE ELECTRONIC BULLETIN BOARD FOR SUCH SECURITY DURING THE PERIOD BEGINNING AT
9:30:01 A.M., NEW YORK CITY TIME, AND ENDING AT 4:00:00 P.M., NEW YORK CITY
TIME, AS REPORTED BY BLOOMBERG, OR, IF NO DOLLAR VOLUME-WEIGHTED AVERAGE PRICE
IS REPORTED FOR SUCH SECURITY BY BLOOMBERG FOR SUCH HOURS, THE AVERAGE OF THE
HIGHEST CLOSING BID PRICE AND THE LOWEST CLOSING ASK PRICE OF ANY OF THE MARKET
MAKERS FOR SUCH SECURITY AS REPORTED IN THE “PINK SHEETS” BY PINK SHEETS LLC
(FORMERLY THE NATIONAL QUOTATION BUREAU, INC.).  IF THE WEIGHTED AVERAGE PRICE
CANNOT BE CALCULATED FOR SUCH SECURITY ON SUCH

11

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DATE ON ANY OF THE FOREGOING BASES, THE WEIGHTED AVERAGE PRICE OF SUCH SECURITY
ON SUCH DATE SHALL BE THE FAIR MARKET VALUE AS MUTUALLY DETERMINED BY THE
COMPANY AND THE REQUIRED HOLDERS.  IF THE COMPANY AND THE REQUIRED HOLDERS ARE
UNABLE TO AGREE UPON THE FAIR MARKET VALUE OF THE COMMON STOCK, THEN SUCH
DISPUTE SHALL BE RESOLVED PURSUANT TO SECTION 2(D)(III) BELOW WITH THE TERM
“WEIGHTED AVERAGE PRICE” BEING SUBSTITUTED FOR THE TERM “CLOSING SALE PRICE.”
ALL SUCH DETERMINATIONS SHALL BE APPROPRIATELY ADJUSTED FOR ANY STOCK DIVIDEND,
STOCK SPLIT OR OTHER SIMILAR TRANSACTION DURING SUCH PERIOD.

(B)   HOLDER’S CONVERSION RIGHT.  SUBJECT TO THE PROVISIONS OF SECTION 7 AND
SECTION 10, AT ANY TIME OR TIMES ON OR AFTER THE INITIAL ISSUANCE DATE, ANY
HOLDER SHALL BE ENTITLED TO CONVERT ANY WHOLE NUMBER OF PREFERRED SHARES, PLUS
THE AMOUNT OF ANY ACCRUED BUT UNPAID DIVIDENDS PER PREFERRED SHARE THEN
REMAINING, INTO FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK IN
ACCORDANCE WITH SECTION 2(D) AT THE CONVERSION RATE (AS DEFINED BELOW).

(C)   CONVERSION.  THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
OF EACH PREFERRED SHARE PURSUANT TO SECTION 2(B) SHALL BE DETERMINED ACCORDING
TO THE FOLLOWING FORMULA (THE “CONVERSION RATE”):

Conversion Amount

Conversion Price

 

No fractional shares of Common Stock are to be issued upon the conversion of any
Preferred Share, but rather the number of shares of Common Stock to be issued
shall be rounded to the nearest whole number.

(D)   MECHANICS OF CONVERSION.  THE CONVERSION OF PREFERRED SHARES SHALL BE
CONDUCTED IN THE FOLLOWING MANNER:

(I)            HOLDER’S DELIVERY REQUIREMENTS.  TO CONVERT PREFERRED SHARES INTO
SHARES OF COMMON STOCK ON ANY DATE (A “CONVERSION DATE”), THE HOLDER SHALL (A)
TRANSMIT BY FACSIMILE (OR OTHERWISE DELIVER), FOR RECEIPT ON OR PRIOR TO 11:59
P.M., NEW YORK CITY TIME, ON SUCH DATE, A COPY OF A PROPERLY COMPLETED NOTICE OF
CONVERSION EXECUTED BY THE REGISTERED HOLDER OF THE PREFERRED SHARES SUBJECT TO
SUCH CONVERSION IN THE FORM ATTACHED HERETO AS EXHIBIT I (THE “CONVERSION
NOTICE”) TO THE COMPANY AND THE COMPANY’S DESIGNATED TRANSFER AGENT (THE
“TRANSFER AGENT”) AND (B) IF REQUIRED BY SECTION 2(D)(VIII), SURRENDER TO A
COMMON CARRIER FOR DELIVERY TO THE COMPANY AS SOON AS PRACTICABLE FOLLOWING SUCH
DATE THE ORIGINAL CERTIFICATES REPRESENTING THE PREFERRED SHARES BEING CONVERTED
(OR COMPLIANCE WITH THE PROCEDURES SET FORTH IN SECTION 13) (THE “PREFERRED
STOCK CERTIFICATES”).

(II)           COMPANY’S RESPONSE.  UPON RECEIPT BY THE COMPANY OF COPY OF A
CONVERSION NOTICE, THE COMPANY SHALL (I) AS SOON AS PRACTICABLE,

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BUT IN ANY EVENT WITHIN TWO (2) TRADING DAYS, SEND, VIA FACSIMILE, A
CONFIRMATION OF RECEIPT OF SUCH CONVERSION NOTICE TO SUCH HOLDER AND THE
TRANSFER AGENT, WHICH CONFIRMATION SHALL CONSTITUTE AN INSTRUCTION TO THE
TRANSFER AGENT TO PROCESS SUCH CONVERSION NOTICE IN ACCORDANCE WITH THE TERMS
HEREIN AND (II) ON OR BEFORE THE THIRD (3RD) TRADING DAY FOLLOWING THE DATE OF
RECEIPT BY THE COMPANY OF SUCH CONVERSION NOTICE (THE “SHARE DELIVERY DATE”),
(A) PROVIDED THE TRANSFER AGENT IS PARTICIPATING IN THE DTC FAST AUTOMATED
SECURITIES TRANSFER PROGRAM, CREDIT SUCH AGGREGATE NUMBER OF SHARES OF COMMON
STOCK TO WHICH THE HOLDER SHALL BE ENTITLED TO THE HOLDER’S OR ITS DESIGNEE’S
BALANCE ACCOUNT WITH DTC THROUGH ITS DEPOSIT WITHDRAWAL AGENT COMMISSION SYSTEM,
OR (B) IF THE TRANSFER AGENT IS NOT PARTICIPATING IN THE DTC FAST AUTOMATED
SECURITIES TRANSFER PROGRAM, ISSUE AND DELIVER TO THE ADDRESS AS SPECIFIED IN
THE CONVERSION NOTICE, A CERTIFICATE, REGISTERED IN THE NAME OF THE HOLDER OR
ITS DESIGNEE, FOR THE NUMBER OF SHARES OF COMMON STOCK TO WHICH THE HOLDER SHALL
BE ENTITLED.  IF THE NUMBER OF PREFERRED SHARES REPRESENTED BY THE PREFERRED
STOCK CERTIFICATE(S) SUBMITTED FOR CONVERSION, AS MAY BE REQUIRED PURSUANT TO
SECTION 2(D)(VIII), IS GREATER THAN THE NUMBER OF PREFERRED SHARES BEING
CONVERTED, THEN THE COMPANY SHALL, AS SOON AS PRACTICABLE AND IN NO EVENT LATER
THAN THREE (3) BUSINESS DAYS AFTER RECEIPT OF THE PREFERRED STOCK CERTIFICATE(S)
(THE “PREFERRED STOCK DELIVERY DATE”) AND AT ITS OWN EXPENSE, ISSUE AND DELIVER
TO THE HOLDER A NEW PREFERRED STOCK CERTIFICATE REPRESENTING THE NUMBER OF
PREFERRED SHARES NOT CONVERTED.  THE PERSON OR PERSONS ENTITLED TO RECEIVE THE
SHARES OF COMMON STOCK ISSUABLE UPON A CONVERSION OF PREFERRED SHARES SHALL BE
TREATED FOR ALL PURPOSES AS THE RECORD HOLDER OR HOLDERS OF SUCH SHARES OF
COMMON STOCK ON THE CONVERSION DATE.

(III)          DISPUTE RESOLUTION.  IN THE CASE OF A DISPUTE AS TO THE
DETERMINATION OF THE CLOSING SALE PRICE OR THE ARITHMETIC CALCULATION OF THE
CONVERSION RATE, THE COMPANY SHALL INSTRUCT THE TRANSFER AGENT TO ISSUE TO THE
HOLDER THE NUMBER OF SHARES OF COMMON STOCK THAT IS NOT DISPUTED AND SHALL
TRANSMIT AN EXPLANATION OF THE DISPUTED DETERMINATIONS OR ARITHMETIC
CALCULATIONS TO THE HOLDER VIA FACSIMILE WITHIN TWO (2) BUSINESS DAYS OF RECEIPT
OF SUCH HOLDER’S CONVERSION NOTICE OR OTHER DATE OF DETERMINATION.  IF SUCH
HOLDER AND THE COMPANY ARE UNABLE TO AGREE UPON THE DETERMINATION OF THE CLOSING
SALE PRICE OR ARITHMETIC CALCULATION OF THE CONVERSION RATE WITHIN TWO (2)
BUSINESS DAYS OF SUCH DISPUTED DETERMINATION OR ARITHMETIC CALCULATION BEING
TRANSMITTED TO THE HOLDER, THEN THE COMPANY SHALL WITHIN TWO (2) BUSINESS DAYS
SUBMIT VIA FACSIMILE (A) THE DISPUTED DETERMINATION OF THE CLOSING SALE PRICE TO
AN INDEPENDENT, REPUTABLE INVESTMENT BANK SELECTED BY THE COMPANY AND APPROVED
BY THE REQUIRED HOLDERS OR (B) THE DISPUTED ARITHMETIC CALCULATION OF THE
CONVERSION RATE TO THE COMPANY’S INDEPENDENT, OUTSIDE ACCOUNTANT.  THE COMPANY
SHALL CAUSE, AT THE COMPANY’S EXPENSE, THE INVESTMENT BANK OR THE ACCOUNTANT, AS
THE CASE MAY BE, TO PERFORM THE DETERMINATIONS OR CALCULATIONS AND NOTIFY THE
COMPANY AND THE HOLDERS OF

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THE RESULTS NO LATER THAN TWO (2) BUSINESS DAYS FROM THE TIME IT RECEIVES THE
DISPUTED DETERMINATIONS OR CALCULATIONS.  SUCH INVESTMENT BANK’S OR ACCOUNTANT’S
DETERMINATION OR CALCULATION, AS THE CASE MAY BE, SHALL BE BINDING UPON ALL
PARTIES ABSENT ERROR.

(IV)          RECORD HOLDER.  THE PERSON OR PERSONS ENTITLED TO RECEIVE THE
SHARES OF COMMON STOCK ISSUABLE UPON A CONVERSION OF PREFERRED SHARES SHALL BE
TREATED FOR ALL PURPOSES AS THE RECORD HOLDER OR HOLDERS OF SUCH SHARES OF
COMMON STOCK ON THE CONVERSION DATE.

(V)           COMPANY’S FAILURE TO TIMELY CONVERT.

(A)  CASH DAMAGES.  IF (X) (I) WITHIN THREE (3) TRADING DAYS AFTER THE COMPANY’S
RECEIPT OF THE FACSIMILE COPY OF A CONVERSION NOTICE OR (II) ON ANY COMPANY
DELIVERY DATE, THE COMPANY SHALL FAIL TO CREDIT A HOLDER’S BALANCE ACCOUNT WITH
DTC OR ISSUE AND DELIVER A CERTIFICATE TO SUCH HOLDER FOR THE NUMBER OF SHARES
OF COMMON STOCK TO WHICH SUCH HOLDER IS ENTITLED UPON SUCH HOLDER’S CONVERSION
OR THE COMPANY’S CONVERSION, AS APPLICABLE, OF PREFERRED SHARES OR (Y) WITHIN
THREE (3) TRADING DAYS OF THE COMPANY’S RECEIPT OF A PREFERRED STOCK CERTIFICATE
THE COMPANY SHALL FAIL TO ISSUE AND DELIVER A NEW PREFERRED STOCK CERTIFICATE
REPRESENTING THE NUMBER OF PREFERRED SHARES  TO WHICH SUCH HOLDER IS ENTITLED
PURSUANT TO SECTION 2(D)(II), THEN DUE TO THE UNCERTAINTY AND DIFFICULTY OF
ESTIMATING A HOLDER’S DAMAGES FOR SUCH DELAY AND AS A REASONABLE ESTIMATE OF
SUCH HOLDER’S ACTUAL LOSS DUE TO THE DELAY AND NOT AS A PENALTY, THE COMPANY
SHALL PAY ADDITIONAL DAMAGES TO SUCH HOLDER FOR EACH DAY AFTER THE SHARE
DELIVERY DATE OR THE COMPANY DELIVERY DATE, AS APPLICABLE, THAT SUCH CONVERSION
IS NOT TIMELY EFFECTED AND/OR EACH DAY AFTER THE PREFERRED STOCK DELIVERY DATE
THAT SUCH PREFERRED STOCK CERTIFICATE IS NOT DELIVERED IN AN AMOUNT EQUAL TO ONE
AND ONE HALF PERCENT (1.5%) OF THE PRODUCT OF (I) THE SUM OF THE NUMBER OF
SHARES OF COMMON STOCK NOT ISSUED TO THE HOLDER ON OR PRIOR TO THE SHARE
DELIVERY DATE OR COMPANY DELIVERY DATE, AS APPLICABLE, AND TO WHICH SUCH HOLDER
IS ENTITLED AS SET FORTH IN THE APPLICABLE CONVERSION NOTICE OR IN ANY COMPANY
CONVERSION NOTICE AND, IN THE EVENT THE COMPANY HAS FAILED TO DELIVER A
PREFERRED STOCK CERTIFICATE TO THE HOLDER ON OR PRIOR TO THE PREFERRED STOCK
DELIVERY DATE, THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
THE PREFERRED SHARES REPRESENTED BY SUCH PREFERRED STOCK CERTIFICATE AS OF THE
PREFERRED STOCK DELIVERY DATE AND (II) THE CLOSING SALE PRICE OF THE COMMON
STOCK ON THE SHARE DELIVERY DATE OR COMPANY DELIVERY DATE, AS APPLICABLE, IN THE
CASE OF THE FAILURE TO DELIVER COMMON STOCK, OR THE PREFERRED STOCK DELIVERY
DATE, IN THE CASE OF FAILURE TO DELIVER A PREFERRED STOCK CERTIFICATE.  IF THE
COMPANY FAILS TO PAY THE ADDITIONAL DAMAGES SET FORTH IN THIS SECTION 2(D)(V)(A)

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WITHIN FIVE (5) TRADING DAYS OF THE DATE INCURRED, THEN THE HOLDER ENTITLED TO
SUCH PAYMENTS SHALL HAVE THE RIGHT AT ANY TIME, SO LONG AS THE COMPANY CONTINUES
TO FAIL TO MAKE SUCH PAYMENTS, TO REQUIRE THE COMPANY, UPON WRITTEN NOTICE, TO
IMMEDIATELY ISSUE, IN LIEU OF SUCH CASH DAMAGES, THE NUMBER OF SHARES OF COMMON
STOCK EQUAL TO THE QUOTIENT OF (X) THE AGGREGATE AMOUNT OF THE DAMAGES PAYMENTS
DESCRIBED HEREIN DIVIDED BY (Y) THE CONVERSION PRICE IN EFFECT ON SUCH
CONVERSION DATE AS SPECIFIED BY THE HOLDER IN THE CONVERSION NOTICE OR IN EFFECT
ON THE COMPANY DELIVERY DATE. IN ADDITION TO THE FOREGOING, IF (I) ON THE SHARE
DELIVERY DATE OR (II) ON ANY COMPANY DELIVERY DATE, THE COMPANY SHALL FAIL TO
ISSUE AND DELIVER A CERTIFICATE TO A HOLDER OR CREDIT SUCH HOLDER’S BALANCE
ACCOUNT WITH DTC FOR THE NUMBER OF SHARES OF COMMON STOCK TO WHICH SUCH HOLDER
IS ENTITLED UPON SUCH HOLDER’S CONVERSION OR THE COMPANY’S CONVERSION, AS
APPLICABLE, OF PREFERRED SHARES, AND IF ON OR AFTER SUCH TRADING DAY THE HOLDER
PURCHASES (IN AN OPEN MARKET TRANSACTION OR OTHERWISE) SHARES OF COMMON STOCK TO
DELIVER IN SATISFACTION OF A SALE BY THE HOLDER OF THE SHARES OF COMMON STOCK
ISSUABLE UPON SUCH CONVERSION THAT THE HOLDER ANTICIPATED RECEIVING FROM THE
COMPANY (A “BUY-IN”), THEN THE COMPANY SHALL, WITHIN THREE (3) TRADING DAYS
AFTER THE HOLDER’S REQUEST AND IN THE HOLDER’S DISCRETION, EITHER (I) PAY CASH
TO THE HOLDER IN AN AMOUNT EQUAL TO THE HOLDER’S TOTAL PURCHASE PRICE (INCLUDING
BROKERAGE COMMISSIONS AND OUT-OF-POCKET EXPENSES, IF ANY) FOR THE SHARES OF
COMMON STOCK SO PURCHASED (THE “BUY-IN PRICE”), AT WHICH POINT THE COMPANY’S
OBLIGATION TO DELIVER SUCH CERTIFICATE (AND TO ISSUE SUCH COMMON STOCK) SHALL
TERMINATE, OR (II) PROMPTLY HONOR ITS OBLIGATION TO DELIVER TO THE HOLDER A
CERTIFICATE OR CERTIFICATES REPRESENTING SUCH COMMON STOCK AND PAY CASH TO THE
HOLDER IN AN AMOUNT EQUAL TO THE EXCESS (IF ANY) OF THE BUY-IN PRICE OVER THE
PRODUCT OF (A) SUCH NUMBER OF SHARES OF COMMON STOCK, TIMES (B) THE CLOSING SALE
PRICE ON THE CONVERSION DATE OR THE COMPANY DELIVERY DATE, AS APPLICABLE.

(B)   VOID CONVERSION NOTICE; ADJUSTMENT OF CONVERSION PRICE.  IF FOR ANY REASON
A HOLDER HAS NOT RECEIVED ALL OF THE SHARES OF COMMON STOCK TO WHICH SUCH HOLDER
IS ENTITLED PRIOR TO THE SIXTH (6TH) TRADING DAY AFTER THE SHARE DELIVERY DATE
OR COMPANY DELIVERY DATE, AS APPLICABLE, WITH RESPECT TO A CONVERSION OF
PREFERRED SHARES, THEN THE HOLDER, UPON WRITTEN NOTICE TO THE COMPANY, WITH A
COPY TO THE TRANSFER AGENT, MAY VOID ITS CONVERSION NOTICE OR ANY APPLICABLE
COMPANY CONVERSION NOTICE, WITH RESPECT TO, AND RETAIN OR HAVE RETURNED, AS THE
CASE MAY BE, ANY PREFERRED SHARES THAT HAVE NOT BEEN CONVERTED PURSUANT TO SUCH
HOLDER’S CONVERSION NOTICE OR COMPANY CONVERSION NOTICE; PROVIDED THAT THE
VOIDING OF A HOLDER’S CONVERSION NOTICE OR COMPANY CONVERSION NOTICE, AS
APPLICABLE, SHALL NOT EFFECT THE

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COMPANY’S OBLIGATIONS TO MAKE ANY PAYMENTS WHICH HAVE ACCRUED PRIOR TO THE DATE
OF SUCH NOTICE PURSUANT TO SECTION 2(D)(V)(A) OR OTHERWISE.  THEREAFTER, THE
CONVERSION PRICE OF ANY PREFERRED SHARES RETURNED OR RETAINED BY THE HOLDER FOR
FAILURE TO TIMELY CONVERT SHALL BE ADJUSTED TO THE LESSER OF (I) THE CONVERSION
PRICE  RELATING TO THE VOIDED CONVERSION NOTICE OR VOIDED COMPANY CONVERSION
NOTICE, AS APPLICABLE, AND (II) THE LOWEST WEIGHTED AVERAGE PRICE OF THE COMMON
STOCK DURING THE PERIOD BEGINNING ON THE CONVERSION DATE OR COMPANY DELIVERY
DATE, AS APPLICABLE, AND ENDING ON THE DATE SUCH HOLDER VOIDED THE CONVERSION
NOTICE OR COMPANY CONVERSION NOTICE, AS APPLICABLE, SUBJECT TO FURTHER
ADJUSTMENT AS PROVIDED IN THIS CERTIFICATE OF DESIGNATIONS.

(C)   CONVERSION FAILURE.  IF FOR ANY REASON A HOLDER HAS NOT RECEIVED ALL OF
THE SHARES OF COMMON STOCK TO WHICH SUCH HOLDER IS ENTITLED PRIOR TO THE TENTH
(10TH) TRADING DAY AFTER THE SHARE DELIVERY DATE OR THE COMPANY DELIVERY DATE,
AS APPLICABLE, WITH RESPECT TO A CONVERSION OF PREFERRED SHARES (A “CONVERSION
FAILURE”), THEN THE HOLDER, UPON WRITTEN NOTICE TO THE COMPANY, MAY REQUIRE THAT
THE COMPANY REDEEM ALL PREFERRED SHARES HELD BY SUCH HOLDER, INCLUDING THE
PREFERRED SHARES PREVIOUSLY SUBMITTED FOR CONVERSION AND WITH RESPECT TO WHICH
THE COMPANY HAS NOT DELIVERED SHARES OF COMMON STOCK, IN ACCORDANCE WITH SECTION
3.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS CERTIFICATE OF
DESIGNATIONS, A HOLDER’S EXCLUSIVE REMEDIES FOR THE COMPANY’S FAILURE TO DELIVER
SHARES OF COMMON STOCK ON ANY SHARE DELIVERY DATE OR ANY COMPANY DELIVERY DATE
SHALL BE AS SET FORTH IN SECTION 2(D)(V) AND SECTION 3.

(VI)          PRO RATA CONVERSION; DISPUTES.  SUBJECT TO SECTION 10, IN THE
EVENT THE COMPANY RECEIVES A CONVERSION NOTICE FROM MORE THAN ONE HOLDER FOR THE
SAME CONVERSION DATE AND THE COMPANY CAN CONVERT SOME, BUT NOT ALL, OF SUCH
PREFERRED SHARES, THE COMPANY SHALL CONVERT FROM EACH HOLDER ELECTING TO HAVE
PREFERRED SHARES CONVERTED AT SUCH TIME A PRO RATA AMOUNT OF SUCH HOLDER’S
PREFERRED SHARES SUBMITTED FOR CONVERSION BASED ON THE NUMBER OF PREFERRED
SHARES SUBMITTED FOR CONVERSION ON SUCH DATE BY SUCH HOLDER RELATIVE TO THE
NUMBER OF PREFERRED SHARES SUBMITTED FOR CONVERSION ON SUCH DATE.  IN THE EVENT
OF A DISPUTE AS TO THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE TO A HOLDER IN
CONNECTION WITH A CONVERSION OF PREFERRED SHARES, THE COMPANY SHALL ISSUE TO
SUCH HOLDER THE NUMBER OF SHARES OF COMMON STOCK NOT IN DISPUTE AND RESOLVE SUCH
DISPUTE IN ACCORDANCE WITH SECTION 2(D)(III).

(VII)         MANDATORY REDEMPTION AT MATURITY.

(A)  IF ANY PREFERRED SHARE REMAINS OUTSTANDING ON THE MATURITY DATE, THE
COMPANY SHALL REDEEM SUCH PREFERRED SHARE FOR

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AN AMOUNT IN CASH PER PREFERRED SHARE (THE “MATURITY DATE REDEMPTION PRICE”)
EQUAL TO THE CONVERSION AMOUNT BY WIRE TRANSFER OF IMMEDIATELY AVAILABLE FUNDS
TO AN ACCOUNT DESIGNATED IN WRITING BY SUCH HOLDER.

(B)   IF THE COMPANY FAILS TO REDEEM ALL OF THE PREFERRED SHARES OUTSTANDING ON
THE MATURITY DATE BY PAYMENT OF THE MATURITY DATE REDEMPTION PRICE FOR EACH SUCH
PREFERRED SHARE, THEN IN ADDITION TO ANY REMEDY SUCH HOLDER MAY HAVE UNDER ANY
TRANSACTION DOCUMENT, (1) THE APPLICABLE MATURITY DATE REDEMPTION PRICE PAYABLE
IN RESPECT OF SUCH UNREDEEMED PREFERRED SHARES SHALL BEAR INTEREST AT THE RATE
OF 1.5% PER MONTH, PRORATED FOR PARTIAL MONTHS, UNTIL PAID IN FULL, AND (2) ANY
HOLDER SHALL HAVE THE OPTION TO REQUIRE THE COMPANY TO CONVERT ANY OR ALL OF
SUCH HOLDER’S PREFERRED SHARES AND FOR WHICH THE MATURITY DATE REDEMPTION PRICE
HAS NOT BEEN PAID INTO (ON A PER PREFERRED SHARE BASIS) SHARES OF COMMON STOCK
EQUAL TO THE NUMBER WHICH RESULTS FROM DIVIDING THE MATURITY DATE REDEMPTION
PRICE BY THE DEFAULT CONVERSION PRICE.  IF THE COMPANY HAS FAILED TO PAY THE
MATURITY DATE REDEMPTION PRICE IN A TIMELY MANNER AS DESCRIBED ABOVE, THEN THE
MATURITY DATE SHALL BE AUTOMATICALLY EXTENDED FOR ANY PREFERRED SHARES UNTIL THE
DATE THE HOLDERS RECEIVE SUCH SHARES OF COMMON STOCK OR MATURITY DATE REDEMPTION
PRICE AND SHALL BE FURTHER EXTENDED FOR ANY PREFERRED SHARES FOR AS LONG AS (X)
THE CONVERSION OF SUCH PREFERRED SHARES WOULD VIOLATE THE PROVISIONS OF SECTION
7 OR (Y) A TRIGGERING EVENT OR AN EVENT THAT WITH THE PASSAGE OF TIME OR GIVING
OF NOTICE WOULD CONSTITUTE A TRIGGERING EVENT SHALL HAVE OCCURRED AND BE
CONTINUING.

(C)   OTHER THAN AS SPECIFICALLY PERMITTED BY THIS CERTIFICATE OF DESIGNATIONS,
THE COMPANY MAY NOT REDEEM ANY OF THE OUTSTANDING PREFERRED SHARES AND ANY
UNPAID DIVIDENDS THEREON.

(VIII)        BOOK-ENTRY.  NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH
HEREIN, UPON CONVERSION OF PREFERRED SHARES IN ACCORDANCE WITH THE TERMS HEREOF,
THE HOLDER THEREOF SHALL NOT BE REQUIRED TO PHYSICALLY SURRENDER THE CERTIFICATE
REPRESENTING THE PREFERRED SHARES TO THE COMPANY UNLESS (A) THE FULL OR
REMAINING NUMBER OF PREFERRED SHARES REPRESENTED BY THE CERTIFICATE ARE BEING
CONVERTED OR (B) A HOLDER HAS PROVIDED THE COMPANY WITH PRIOR WRITTEN NOTICE
(WHICH NOTICE MAY BE INCLUDED IN A CONVERSION NOTICE) REQUESTING REISSUANCE OF
PREFERRED SHARES UPON PHYSICAL SURRENDER OF ANY PREFERRED SHARES.  THE HOLDER
AND THE COMPANY SHALL MAINTAIN RECORDS SHOWING THE NUMBER OF PREFERRED SHARES SO
CONVERTED AND THE DATES OF SUCH CONVERSIONS OR SHALL USE SUCH OTHER METHOD,
REASONABLY SATISFACTORY TO THE HOLDER AND THE COMPANY, SO AS NOT TO REQUIRE
PHYSICAL SURRENDER OF THE CERTIFICATE REPRESENTING THE PREFERRED SHARES UPON
EACH SUCH CONVERSION.  IN THE EVENT OF ANY DISPUTE OR

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DISCREPANCY, SUCH RECORDS OF THE COMPANY ESTABLISHING THE NUMBER OF PREFERRED
SHARES TO WHICH THE RECORD HOLDER IS ENTITLED SHALL BE CONTROLLING AND
DETERMINATIVE IN THE ABSENCE OF MANIFEST ERROR.  IN CONNECTION WITH ANY TRANSFER
OF ALL OR ANY PORTION OF PREFERRED SHARES HELD BY ANY HOLDER, SUCH HOLDER MAY
PHYSICALLY SURRENDER THE CERTIFICATE REPRESENTING THE PREFERRED SHARES TO THE
COMPANY, WHEREUPON THE COMPANY WILL FORTHWITH ISSUE AND DELIVER UPON THE ORDER
OF SUCH HOLDER A NEW CERTIFICATE OR CERTIFICATES OF LIKE TENOR, REGISTERED AS
SUCH HOLDER MAY REQUEST, REPRESENTING IN THE AGGREGATE THE REMAINING NUMBER OF
PREFERRED SHARES REPRESENTED BY SUCH CERTIFICATE.  A HOLDER AND ANY ASSIGNEE, BY
ACCEPTANCE OF A CERTIFICATE, ACKNOWLEDGE AND AGREE THAT, BY REASON OF THE
PROVISIONS OF THIS PARAGRAPH, FOLLOWING CONVERSION OF ANY PREFERRED SHARES, THE
NUMBER OF PREFERRED SHARES REPRESENTED BY SUCH CERTIFICATE MAY BE LESS THAN THE
NUMBER OF PREFERRED SHARES STATED ON THE FACE THEREOF.  EACH CERTIFICATE FOR
PREFERRED SHARES SHALL BEAR THE FOLLOWING LEGEND:

ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE
COMPANY’S CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(viii) THEREOF.  THE
NUMBER OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE
NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION
2(d)(viii) OF THE CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE.

(IX)           CONVERSION AT THE COMPANY’S ELECTION.  ON ANY DATE (THE
“CONVERSION ELECTION DATE”) AFTER THE EIGHTEEN (18) MONTH ANNIVERSARY OF THE
INITIAL ISSUANCE DATE, SO LONG AS (A) THE EQUITY CONDITIONS SHALL HAVE BEEN
SATISFIED OR WAIVED IN WRITING BY THE APPLICABLE HOLDER FROM AND INCLUDING THE
DATE OF THE COMPANY CONVERSION ELECTION NOTICE (AS DEFINED BELOW) THROUGH AND
INCLUDING THE COMPANY ELECTION CONVERSION DATE (AS DEFINED BELOW) AND (B) ON ANY
TWENTY (20) OUT OF THIRTY (30) CONSECUTIVE TRADING DAYS IMMEDIATELY PRECEDING
THE DATE OF THE COMPANY CONVERSION ELECTION NOTICE, THE WEIGHTED AVERAGE PRICE
OF THE COMMON STOCK EXCEEDS 175% OF THE CONVERSION PRICE (AS ADJUSTED FOR ANY
STOCK DIVIDEND, STOCK SPLIT, STOCK COMBINATION OR OTHER SIMILAR TRANSACTION
DURING SUCH PERIOD), THE COMPANY SHALL HAVE THE RIGHT, IN ITS SOLE DISCRETION,
TO REQUIRE THAT SOME OR ALL OF THE OUTSTANDING PREFERRED SHARES BE CONVERTED
(THE “COMPANY CONVERSION ELECTION”) AT THE APPLICABLE CONVERSION RATE; PROVIDED,
HOWEVER, THAT THE COMPANY MAY NOT CONSUMMATE MORE THAN ONE

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(1) COMPANY CONVERSION IN ANY THIRTY (30) TRADING DAY PERIOD. THE COMPANY SHALL
EXERCISE ITS RIGHT TO COMPANY CONVERSION ELECTION BY PROVIDING EACH HOLDER
WRITTEN NOTICE (“COMPANY CONVERSION NOTICE”) BY FACSIMILE AND OVERNIGHT COURIER
ON THE CONVERSION ELECTION DATE. THE DATE ON WHICH EACH OF SUCH HOLDERS ACTUALLY
RECEIVES THE COMPANY CONVERSION ELECTION NOTICE IS REFERRED TO HEREIN AS THE
“COMPANY CONVERSION ELECTION NOTICE DATE.”  IF THE COMPANY ELECTS TO REQUIRE
CONVERSION OF SOME, BUT NOT ALL, OF SUCH PREFERRED SHARES THEN OUTSTANDING, THE
COMPANY SHALL REQUIRE CONVERSION OF AN AMOUNT FROM EACH HOLDER EQUAL TO THE
PRODUCT OF (I) THE TOTAL NUMBER OF PREFERRED SHARES WHICH THE COMPANY HAS
ELECTED TO CONVERT MULTIPLIED BY (II) SUCH HOLDER’S ALLOCATION PERCENTAGE (SUCH
AMOUNT WITH RESPECT TO EACH HOLDER OF SUCH PREFERRED SHARES BEING REFERRED TO
HEREIN AS ITS “PRO RATA CONVERSION AMOUNT”). IN THE EVENT THAT ANY INITIAL
HOLDER OF THE PREFERRED SHARES SHALL SELL OR OTHERWISE TRANSFER ANY OF SUCH
HOLDER’S PREFERRED SHARES, THE TRANSFEREE SHALL BE ALLOCATED A PRO RATA PORTION
OF SUCH HOLDER’S ALLOCATION PERCENTAGE. THE COMPANY CONVERSION ELECTION NOTICE
SHALL INDICATE (X) THE AGGREGATE NUMBER OF SUCH PREFERRED SHARES THE COMPANY HAS
SELECTED FOR CONVERSION, (Y) THE DATE SELECTED BY THE COMPANY FOR CONVERSION
(THE “COMPANY DELIVERY DATE”), WHICH DATE SHALL BE NOT LESS THAN TWENTY (20)
TRADING DAYS OR MORE THAN SIXTY (60) TRADING DAYS AFTER THE COMPANY CONVERSION
ELECTION NOTICE DATE, AND (Z) EACH HOLDER’S PRO RATA CONVERSION AMOUNT. SUBJECT
TO THE SATISFACTION OF ALL THE CONDITIONS OF THIS SECTION 2(D)(IX), ON THE
COMPANY ELECTION CONVERSION DATE EACH HOLDER OF PREFERRED SHARES SELECTED FOR
CONVERSION WILL BE DEEMED TO HAVE SUBMITTED A CONVERSION NOTICE IN ACCORDANCE
WITH SECTION 2(D)(I) FOR A NUMBER OF PREFERRED SHARES EQUAL TO SUCH HOLDER’S PRO
RATA CONVERSION AMOUNT. NOTWITHSTANDING THE ABOVE, ANY HOLDER MAY CONVERT SUCH
SHARES (INCLUDING PREFERRED SHARES SELECTED FOR CONVERSION HEREUNDER WHICH SHALL
REDUCE SUCH HOLDER’S PRO RATA CONVERSION AMOUNT) INTO COMMON STOCK PURSUANT TO
SECTION 2(B) ON OR PRIOR TO THE DATE IMMEDIATELY PRECEDING THE COMPANY ELECTION
CONVERSION DATE. IF THE COMPANY FAILS TO CONVERT ANY CONVERSION AMOUNT ON THE
APPLICABLE COMPANY ELECTION CONVERSION DATE, THEN EACH HOLDER SHALL BE ENTITLED
TO THE REMEDIES SET FORTH IN SECTION 2(D)(V).

(E)   TAXES.

(I) ANY AND ALL PAYMENTS MADE BY THE COMPANY HEREUNDER, INCLUDING ANY AMOUNTS
RECEIVED ON A CONVERSION OR REDEMPTION OF THE PREFERRED SHARES AND ANY AMOUNTS
ON ACCOUNT OF DIVIDENDS OR DEEMED DIVIDENDS, MUST BE MADE BY IT WITHOUT ANY TAX
DEDUCTION, UNLESS A TAX DEDUCTION IS REQUIRED BY LAW. IF THE COMPANY IS AWARE
THAT IT MUST MAKE A TAX DEDUCTION (OR THAT THERE IS A CHANGE IN THE RATE OR THE
BASIS OF A TAX DEDUCTION), IT MUST NOTIFY THE AFFECTED HOLDERS PROMPTLY.

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(II) IF A TAX DEDUCTION IS REQUIRED BY LAW TO BE MADE BY THE COMPANY, SUBJECT TO
SECTION 2(E)(I) ABOVE, THE AMOUNT OF THE PAYMENT DUE FROM THE COMPANY WILL BE
INCREASED TO AN AMOUNT WHICH (AFTER MAKING THE TAX DEDUCTION INCLUDING A TAX
DEDUCTION APPLICABLE TO ADDITIONAL SUMS PAYABLE PURSUANT TO THIS SECTION 2(E))
LEAVES AN AMOUNT EQUAL TO THE PAYMENT WHICH WOULD HAVE BEEN DUE IF NO TAX
DEDUCTION HAD BEEN REQUIRED. IF THE COMPANY IS REQUIRED TO MAKE A TAX DEDUCTION,
IT MUST MAKE THE MINIMUM TAX DEDUCTION ALLOWED BY LAW AND MUST MAKE ANY PAYMENT
REQUIRED IN CONNECTION WITH THAT TAX DEDUCTION WITHIN THE TIME ALLOWED BY LAW.

As soon as practicable after making a Tax Deduction or a payment required in
connection with a Tax Deduction, the Company must deliver to the Holder any
official receipt or form, if any, provided by or required by the taxing
authority to whom the Tax Deduction was paid.

(III) IN ADDITION, THE COMPANY AGREES TO PAY IN ACCORDANCE WITH APPLICABLE LAW
ANY PRESENT OR FUTURE STAMP OR DOCUMENTARY TAXES OR ANY OTHER EXCISE OR PROPERTY
TAXES, CHARGES OR SIMILAR LEVIES THAT ARISE FROM ANY PAYMENT MADE HEREUNDER OR
IN CONNECTION WITH THE EXECUTION, DELIVERY, REGISTRATION OR PERFORMANCE OF, OR
OTHERWISE WITH RESPECT TO, THE PREFERRED SHARES (“OTHER TAXES”). AS SOON AS
PRACTICABLE AFTER MAKING A PAYMENT OF OTHER TAXES, THE COMPANY MUST DELIVER TO
SUCH HOLDER ANY OFFICIAL RECEIPT OR FORM, IF ANY, PROVIDED BY OR REQUIRED BY THE
TAXING AUTHORITY TO WHOM THE TAX DEDUCTION WAS PAID.

(IV) THE OBLIGATIONS OF THE COMPANY UNDER THIS SECTION 2(E) SHALL SURVIVE THE
MATURITY DATE OF THE PREFERRED SHARES AND THE PAYMENT FOR THE PREFERRED SHARES
AND ALL OTHER AMOUNTS PAYABLE HEREUNDER.

(F)    ADJUSTMENTS TO CONVERSION PRICE. THE CONVERSION PRICE WILL BE SUBJECT TO
ADJUSTMENT FROM TIME TO TIME AS PROVIDED IN THIS SECTION 2(F).

(I) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF COMMON STOCK. IF AND
WHENEVER ON OR AFTER THE SUBSCRIPTION DATE AND PRIOR TO THE NINE (9) MONTH
ANNIVERSARY OF THE INITIAL ISSUANCE DATE, THE COMPANY ISSUES OR SELLS, OR IN
ACCORDANCE WITH THIS SECTION 2(F)(I) IS DEEMED TO HAVE ISSUED OR SOLD, ANY
SHARES OF COMMON STOCK (INCLUDING THE ISSUANCE OR SALE OF SHARES OF COMMON STOCK
OWNED OR HELD BY OR FOR THE ACCOUNT OF THE COMPANY, BUT EXCLUDING SHARES OF
COMMON STOCK DEEMED TO HAVE BEEN ISSUED OR SOLD BY THE COMPANY IN CONNECTION
WITH ANY EXCLUDED SECURITY) FOR A CONSIDERATION PER SHARE (THE “NEW ISSUANCE
PRICE”) LESS THAN A PRICE (THE “APPLICABLE PRICE”) EQUAL TO THE CONVERSION PRICE
IN EFFECT IMMEDIATELY PRIOR TO SUCH ISSUE OR SALE (THE FOREGOING A “DILUTIVE
ISSUANCE”), THEN IMMEDIATELY AFTER SUCH DILUTIVE ISSUANCE, THE CONVERSION PRICE
THEN IN EFFECT SHALL BE REDUCED TO AN AMOUNT EQUAL TO THE QUOTIENT OF (A) THE
SUM OF (1) THE ADJUSTED PRICE AND (2) THE NEW ISSUANCE PRICE

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DIVIDED BY (B) TWO (2). IF AND WHENEVER AFTER THE NINE (9) MONTH ANNIVERSARY OF
THE INITIAL ISSUANCE DATE, THE COMPANY ISSUES OR SELLS, OR IN ACCORDANCE WITH
THIS SECTION 2(F)(I) IS DEEMED TO HAVE ISSUED OR SOLD, ANY SHARES OF COMMON
STOCK (INCLUDING THE ISSUANCE OR SALE OF SHARES OF COMMON STOCK OWNED OR HELD BY
OR FOR THE ACCOUNT OF THE COMPANY, BUT EXCLUDING SHARES OF COMMON STOCK DEEMED
TO HAVE BEEN ISSUED OR SOLD BY THE COMPANY IN CONNECTION WITH ANY EXCLUDED
SECURITY) IN A DILUTIVE ISSUANCE, THEN IMMEDIATELY AFTER SUCH DILUTIVE ISSUANCE,
THE CONVERSION PRICE THEN IN EFFECT SHALL BE REDUCED TO AN AMOUNT EQUAL TO THE
ADJUSTED PRICE. FOR PURPOSES OF DETERMINING THE ADJUSTED CONVERSION PRICE UNDER
THIS SECTION 2(F)(I), THE FOLLOWING SHALL BE APPLICABLE:

(A)  ISSUANCE OF OPTIONS. IF THE COMPANY IN ANY MANNER GRANTS OR SELLS ANY
OPTIONS AND THE LOWEST PRICE PER SHARE FOR WHICH ONE SHARE OF COMMON STOCK IS
ISSUABLE UPON THE EXERCISE OF ANY SUCH OPTION OR UPON CONVERSION OR EXCHANGE OR
EXERCISE OF ANY CONVERTIBLE SECURITIES ISSUABLE UPON EXERCISE OF SUCH OPTION IS
LESS THAN THE APPLICABLE PRICE, THEN EACH SUCH SHARE OF COMMON STOCK UNDERLYING
SUCH OPTION SHALL BE DEEMED TO BE OUTSTANDING AND TO HAVE BEEN ISSUED AND SOLD
BY THE COMPANY AT THE TIME OF THE GRANTING OR SALE OF SUCH OPTION FOR SUCH PRICE
PER SHARE. FOR PURPOSES OF THIS SECTION 2(F)(I)(A), THE “LOWEST PRICE PER SHARE
FOR WHICH ONE SHARE OF COMMON STOCK IS ISSUABLE UPON THE EXERCISE OF ANY SUCH
OPTION OR UPON CONVERSION OR EXCHANGE OR EXERCISE OF ANY CONVERTIBLE SECURITIES
ISSUABLE UPON EXERCISE OF SUCH OPTION” SHALL BE EQUAL TO THE SUM OF THE LOWEST
AMOUNTS OF CONSIDERATION (IF ANY) RECEIVED OR RECEIVABLE BY THE COMPANY WITH
RESPECT TO ANY ONE SHARE OF COMMON STOCK UPON GRANTING OR SALE OF THE OPTION,
UPON EXERCISE OF THE OPTION AND UPON CONVERSION OR EXCHANGE OR EXERCISE OF ANY
CONVERTIBLE SECURITY ISSUABLE UPON EXERCISE OF SUCH OPTION. NO FURTHER
ADJUSTMENT OF THE CONVERSION PRICE SHALL BE MADE UPON THE ACTUAL ISSUANCE OF
SUCH SHARE OF COMMON STOCK OR OF SUCH CONVERTIBLE SECURITIES UPON THE EXERCISE
OF SUCH OPTIONS OR UPON THE ACTUAL ISSUANCE OF SUCH COMMON STOCK UPON CONVERSION
OR EXCHANGE OR EXERCISE OF SUCH CONVERTIBLE SECURITIES.

(B)   ISSUANCE OF CONVERTIBLE SECURITIES. IF THE COMPANY IN ANY MANNER ISSUES OR
SELLS ANY CONVERTIBLE SECURITIES AND THE LOWEST PRICE PER SHARE FOR WHICH ONE
SHARE OF COMMON STOCK IS ISSUABLE UPON SUCH CONVERSION OR EXCHANGE OR EXERCISE
THEREOF IS LESS THAN THE APPLICABLE PRICE, THEN EACH SUCH SHARE OF COMMON STOCK
UNDERLYING SUCH CONVERTIBLE SECURITIES SHALL BE DEEMED TO BE OUTSTANDING AND TO
HAVE BEEN ISSUED AND SOLD BY THE COMPANY AT THE TIME OF THE ISSUANCE OR SALE OF
SUCH CONVERTIBLE SECURITIES FOR SUCH PRICE PER SHARE. FOR THE PURPOSES OF THIS
SECTION 2(F)(I)(B), THE “LOWEST PRICE PER SHARE FOR WHICH ONE SHARE OF COMMON
STOCK IS ISSUABLE UPON SUCH CONVERSION OR EXCHANGE OR

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EXERCISE” SHALL BE EQUAL TO THE SUM OF THE LOWEST AMOUNTS OF CONSIDERATION (IF
ANY) RECEIVED OR RECEIVABLE BY THE COMPANY WITH RESPECT TO ANY ONE SHARE OF
COMMON STOCK UPON THE ISSUANCE OR SALE OF THE CONVERTIBLE SECURITY AND UPON THE
CONVERSION OR EXCHANGE OR EXERCISE OF SUCH CONVERTIBLE SECURITY. NO FURTHER
ADJUSTMENT OF THE CONVERSION PRICE SHALL BE MADE UPON THE ACTUAL ISSUANCE OF
SUCH SHARE OF COMMON STOCK UPON CONVERSION OR EXCHANGE OR EXERCISE OF SUCH
CONVERTIBLE SECURITIES, AND IF ANY SUCH ISSUE OR SALE OF SUCH CONVERTIBLE
SECURITIES IS MADE UPON EXERCISE OF ANY OPTIONS FOR WHICH ADJUSTMENT OF THE
CONVERSION PRICE HAD BEEN OR ARE TO BE MADE PURSUANT TO OTHER PROVISIONS OF THIS
SECTION 2(F)(I), NO FURTHER ADJUSTMENT OF THE CONVERSION PRICE SHALL BE MADE BY
REASON OF SUCH ISSUE OR SALE.

(C)   CHANGE IN OPTION PRICE OR RATE OF CONVERSION. IF THE PURCHASE PRICE
PROVIDED FOR IN ANY OPTIONS, THE ADDITIONAL CONSIDERATION, IF ANY, PAYABLE UPON
THE ISSUE, CONVERSION,  EXCHANGE OR EXERCISE OF ANY CONVERTIBLE SECURITIES, OR
THE RATE AT WHICH ANY CONVERTIBLE SECURITIES ARE CONVERTIBLE INTO OR
EXCHANGEABLE OR EXERCISABLE FOR COMMON STOCK CHANGES AT ANY TIME, THE CONVERSION
PRICE IN EFFECT AT THE TIME OF SUCH CHANGE SHALL BE ADJUSTED TO THE CONVERSION
PRICE WHICH WOULD HAVE BEEN IN EFFECT AT SUCH TIME HAD SUCH OPTIONS OR
CONVERTIBLE SECURITIES 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. FOR PURPOSES OF THIS SECTION 2(F)(I)(C), IF
THE TERMS OF ANY OPTION OR CONVERTIBLE SECURITY THAT WAS OUTSTANDING AS OF THE
SUBSCRIPTION DATE ARE CHANGED IN THE MANNER DESCRIBED IN THE IMMEDIATELY
PRECEDING SENTENCE, THEN SUCH OPTION OR CONVERTIBLE SECURITY AND THE COMMON
STOCK DEEMED ISSUABLE UPON EXERCISE, CONVERSION OR EXCHANGE THEREOF SHALL BE
DEEMED TO HAVE BEEN ISSUED AS OF THE DATE OF SUCH CHANGE. NO ADJUSTMENT SHALL BE
MADE IF SUCH ADJUSTMENT WOULD RESULT IN AN INCREASE OF THE CONVERSION PRICE THEN
IN EFFECT.

(D)  CALCULATION OF CONSIDERATION RECEIVED. IN CASE ANY OPTION IS ISSUED IN
CONNECTION WITH THE ISSUE OR SALE OF OTHER SECURITIES OF THE COMPANY, TOGETHER
COMPRISING ONE INTEGRATED TRANSACTION IN WHICH NO SPECIFIC CONSIDERATION IS
ALLOCATED TO SUCH OPTIONS BY THE PARTIES THERETO, THE OPTIONS WILL BE DEEMED TO
HAVE BEEN ISSUED FOR A CONSIDERATION OF $0.01. IF ANY 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 NET
AMOUNT RECEIVED BY THE COMPANY THEREFOR. IF ANY COMMON STOCK, OPTIONS OR
CONVERTIBLE SECURITIES ARE ISSUED OR SOLD FOR A CONSIDERATION OTHER THAN CASH,
THE AMOUNT OF THE CONSIDERATION OTHER THAN CASH RECEIVED BY THE

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COMPANY WILL BE THE FAIR VALUE OF SUCH CONSIDERATION, EXCEPT WHERE SUCH
CONSIDERATION CONSISTS OF PUBLICLY TRADED SECURITIES, IN WHICH CASE THE AMOUNT
OF CONSIDERATION RECEIVED BY THE COMPANY WILL BE THE CLOSING SALE PRICE OF SUCH
SECURITIES ON THE DATE OF RECEIPT OF SUCH SECURITIES. IF ANY COMMON STOCK,
OPTIONS OR CONVERTIBLE SECURITIES ARE ISSUED TO THE OWNERS OF THE NON-SURVIVING
ENTITY IN CONNECTION WITH ANY MERGER IN WHICH THE COMPANY 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 COMMON STOCK, OPTIONS OR CONVERTIBLE SECURITIES, AS THE
CASE MAY BE. THE FAIR VALUE OF ANY CONSIDERATION OTHER THAN CASH OR PUBLICLY
TRADED SECURITIES WILL BE DETERMINED JOINTLY BY THE COMPANY AND THE REQUIRED
HOLDERS. IF SUCH PARTIES ARE UNABLE TO REACH AGREEMENT WITHIN TEN (10) DAYS
AFTER THE OCCURRENCE OF AN EVENT REQUIRING VALUATION (THE “VALUATION EVENT”),
THE FAIR VALUE OF SUCH CONSIDERATION WILL BE DETERMINED WITHIN TEN (10) BUSINESS
DAYS AFTER THE TENTH (10TH) DAY FOLLOWING THE VALUATION EVENT BY AN INDEPENDENT,
REPUTABLE APPRAISER JOINTLY SELECTED BY THE COMPANY AND THE REQUIRED HOLDERS.
THE DETERMINATION OF SUCH APPRAISER SHALL BE DEEMED BINDING UPON ALL PARTIES
ABSENT MANIFEST ERROR AND THE FEES AND EXPENSES OF SUCH APPRAISER SHALL BE BORNE
BY THE COMPANY.

(E)   RECORD DATE. IF THE COMPANY TAKES A RECORD OF THE HOLDERS OF COMMON STOCK
FOR THE PURPOSE OF ENTITLING THEM (I) TO RECEIVE A DIVIDEND OR OTHER
DISTRIBUTION PAYABLE IN COMMON STOCK, OPTIONS OR IN CONVERTIBLE SECURITIES OR
(II) TO SUBSCRIBE FOR OR PURCHASE 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 UPON 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.

(II) ADJUSTMENT OF CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF COMMON
STOCK. IF THE COMPANY AT ANY TIME AFTER THE SUBSCRIPTION DATE SUBDIVIDES (BY ANY
STOCK SPLIT, STOCK DIVIDEND, RECAPITALIZATION OR OTHERWISE) ITS OUTSTANDING
SHARES OF COMMON STOCK INTO A GREATER NUMBER OF SHARES, THE CONVERSION PRICE IN
EFFECT IMMEDIATELY PRIOR TO SUCH SUBDIVISION WILL BE PROPORTIONATELY REDUCED. IF
THE COMPANY AT ANY TIME AFTER THE SUBSCRIPTION DATE COMBINES (BY COMBINATION,
REVERSE STOCK SPLIT OR OTHERWISE) ITS OUTSTANDING SHARES OF COMMON STOCK INTO A
SMALLER NUMBER OF SHARES AND THE CONVERSION PRICE IN EFFECT IMMEDIATELY PRIOR TO
SUCH COMBINATION WILL BE PROPORTIONATELY INCREASED.

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(III) OTHER EVENTS. IF ANY EVENT OCCURS OF THE TYPE CONTEMPLATED BY THE
PROVISIONS OF THIS SECTION 2(F) 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), THEN THE
COMPANY’S BOARD OF DIRECTORS WILL MAKE AN APPROPRIATE ADJUSTMENT IN THE
CONVERSION PRICE SO AS TO PROTECT THE RIGHTS OF THE HOLDERS; PROVIDED THAT NO
SUCH ADJUSTMENT WILL INCREASE THE CONVERSION PRICE AS OTHERWISE DETERMINED
PURSUANT TO THIS SECTION 2(F).

(IV) FLOOR PRICE. UNTIL SUCH TIME AS THE COMPANY RECEIVES THE STOCKHOLDER
APPROVAL, NO ADJUSTMENT PURSUANT TO SECTION 2(F) SHALL CAUSE THE CONVERSION
PRICE TO BE LESS THAN THE MARKET PRICE.

(G)   NOTICES.

(I) IMMEDIATELY UPON ANY ADJUSTMENT OF THE CONVERSION PRICE PURSUANT TO SECTION
2(F), THE COMPANY WILL GIVE WRITTEN NOTICE THEREOF TO EACH HOLDER, SETTING FORTH
IN REASONABLE DETAIL, AND CERTIFYING, THE CALCULATION OF SUCH ADJUSTMENT. IN THE
CASE OF A DISPUTE AS TO THE DETERMINATION OF SUCH ADJUSTMENT, THEN SUCH DISPUTE
SHALL BE RESOLVED IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN SECTION
2(D)(III).

(II) THE COMPANY WILL GIVE WRITTEN NOTICE TO EACH HOLDER AT LEAST TEN (10)
BUSINESS DAYS PRIOR TO THE DATE ON WHICH THE COMPANY CLOSES ITS BOOKS OR TAKES A
RECORD (I) WITH RESPECT TO ANY DIVIDEND OR DISTRIBUTION UPON THE COMMON STOCK,
(II) WITH RESPECT TO ANY PRO RATA SUBSCRIPTION OFFER TO HOLDERS OF COMMON STOCK
OR (III) FOR DETERMINING RIGHTS TO VOTE WITH RESPECT TO ANY FUNDAMENTAL
TRANSACTION OR LIQUIDATION EVENT, PROVIDED THAT SUCH INFORMATION SHALL BE MADE
KNOWN TO THE PUBLIC PRIOR TO OR IN CONJUNCTION WITH SUCH NOTICE BEING PROVIDED
TO SUCH HOLDER.

(III) THE COMPANY WILL ALSO GIVE WRITTEN NOTICE TO EACH HOLDER AT LEAST TEN (10)
BUSINESS DAYS PRIOR TO THE DATE ON WHICH ANY FUNDAMENTAL TRANSACTION OR
LIQUIDATION EVENT WILL TAKE PLACE, PROVIDED THAT SUCH INFORMATION SHALL BE MADE
KNOWN TO THE PUBLIC PRIOR TO OR IN CONJUNCTION WITH SUCH NOTICE BEING PROVIDED
TO SUCH HOLDER.

(H)   ADDITIONAL PREFERRED SHARES; VARIABLE SECURITIES; DILUTIVE ISSUANCES. FOR
SO LONG AS ANY PREFERRED SHARES ARE OUTSTANDING, THE COMPANY WILL NOT, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE REQUIRED HOLDERS, ISSUE ANY PREFERRED SHARES
AND THE COMPANY SHALL NOT ISSUE ANY OTHER SECURITIES THAT WOULD CAUSE A BREACH
OR DEFAULT UNDER THIS CERTIFICATE OF DESIGNATIONS OTHER THAN THOSE ISSUED
PURSUANT TO THE SECURITIES PURCHASE AGREEMENT. FOR SO LONG AS ANY PREFERRED
SHARES REMAIN OUTSTANDING, THE COMPANY SHALL NOT, IN ANY MANNER, ISSUE OR SELL
ANY RIGHTS, WARRANTS OR OPTIONS TO SUBSCRIBE FOR OR PURCHASE COMMON STOCK OR
DIRECTLY OR INDIRECTLY CONVERTIBLE INTO OR EXCHANGEABLE OR EXERCISABLE FOR
COMMON STOCK AT A CONVERSION, EXCHANGE OR EXERCISE PRICE WHICH VARIES OR MAY
VARY AFTER

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ISSUANCE WITH THE MARKET PRICE OF THE COMMON STOCK, INCLUDING BY WAY OF ONE OR
MORE RESET(S) TO ANY FIXED PRICE UNLESS THE CONVERSION, EXCHANGE OR EXERCISE
PRICE OF ANY SUCH SECURITY CANNOT BE LESS THAN THE THEN APPLICABLE CONVERSION
PRICE WITH RESPECT TO THE COMMON STOCK INTO WHICH ANY PREFERRED SHARES ARE
CONVERTIBLE. FOR SO LONG AS ANY PREFERRED SHARES REMAIN OUTSTANDING AND THE
STOCKHOLDER APPROVAL HAS NOT YET BEEN OBTAINED, THE COMPANY SHALL NOT, IN ANY
MANNER, ENTER INTO OR AFFECT ANY DILUTIVE ISSUANCE.

(3)        REDEMPTION AT OPTION OF HOLDERS.

(A)   TRIGGERING EVENT. A “TRIGGERING EVENT” SHALL BE DEEMED TO HAVE OCCURRED AT
SUCH TIME AS ANY OF THE FOLLOWING EVENTS:

(I) THE SUSPENSION FROM TRADING OR FAILURE OF THE COMMON STOCK TO BE LISTED ON A
PRINCIPAL MARKET FOR A PERIOD OF TEN (10) CONSECUTIVE TRADING DAYS OR FOR MORE
THAN AN AGGREGATE OF TWENTY (20) TRADING DAYS IN ANY 365-DAY PERIOD;

(II) THE COMPANY’S (A) FAILURE TO CURE A CONVERSION FAILURE BY DELIVERY OF THE
REQUIRED NUMBER OF SHARES OF COMMON STOCK WITHIN TEN (10) BUSINESS DAYS AFTER
THE APPLICABLE CONVERSION DATE OR (B) NOTICE, WRITTEN OR ORAL, TO ANY HOLDER,
INCLUDING BY WAY OF PUBLIC ANNOUNCEMENT, OR THROUGH ANY OF ITS AGENTS, AT ANY
TIME, OF ITS INTENTION NOT TO COMPLY, AS REQUIRED, WITH A REQUEST FOR CONVERSION
OF ANY PREFERRED SHARES INTO SHARES OF COMMON STOCK THAT IS TENDERED IN
ACCORDANCE WITH THE PROVISIONS OF THIS CERTIFICATE OF DESIGNATIONS;

(III) THE COMPANY’S FAILURE TO PAY TO THE HOLDER ANY AMOUNTS WHEN AND AS DUE
PURSUANT TO THIS CERTIFICATE OF DESIGNATIONS OR ANY OTHER TRANSACTION DOCUMENT
(AS DEFINED IN THE SECURITIES PURCHASE AGREEMENT), ONLY IF SUCH FAILURE
CONTINUES FOR A PERIOD OF AT LEAST FIVE (5) BUSINESS DAYS;

(IV) THE ENTRY BY A COURT HAVING JURISDICTION IN THE PREMISES OF (I) A DECREE OR
ORDER FOR RELIEF IN RESPECT OF THE COMPANY OR ANY SUBSIDIARY OF A VOLUNTARY CASE
OR PROCEEDING UNDER ANY APPLICABLE FEDERAL OR STATE BANKRUPTCY, INSOLVENCY,
REORGANIZATION OR OTHER SIMILAR LAW OR (II) A DECREE OR ORDER ADJUDGING THE
COMPANY OR ANY SUBSIDIARY AS BANKRUPT OR INSOLVENT, OR APPROVING AS PROPERLY
FILED A PETITION SEEKING REORGANIZATION, ARRANGEMENT, ADJUSTMENT OR COMPOSITION
OF OR IN RESPECT OF THE COMPANY OR ANY SUBSIDIARY UNDER ANY APPLICABLE FEDERAL
OR STATE LAW OR (III) APPOINTING A CUSTODIAN, RECEIVER, LIQUIDATOR, ASSIGNEE,
TRUSTEE, SEQUESTRATOR OR OTHER SIMILAR OFFICIAL OF THE COMPANY OR ANY SUBSIDIARY
OR OF ANY SUBSTANTIAL PART OF ITS PROPERTY, OR ORDERING THE WINDING UP OR
LIQUIDATION OF ITS AFFAIRS, AND THE CONTINUANCE OF ANY SUCH DECREE OR ORDER FOR
RELIEF OR ANY SUCH OTHER DECREE OR ORDER UNSTAYED AND IN EFFECT FOR A PERIOD OF
60 CONSECUTIVE DAYS;

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(V) THE COMMENCEMENT BY THE COMPANY OR ANY SUBSIDIARY OF A VOLUNTARY CASE OR
PROCEEDING UNDER ANY APPLICABLE FEDERAL OR STATE BANKRUPTCY, INSOLVENCY,
REORGANIZATION OR OTHER SIMILAR LAW OR OF ANY OTHER CASE OR PROCEEDING TO BE
ADJUDICATED A BANKRUPT OR INSOLVENT, OR THE CONSENT BY IT TO THE ENTRY OF A
DECREE OR ORDER FOR RELIEF IN RESPECT OF THE COMPANY OR ANY SUBSIDIARY IN AN
INVOLUNTARY CASE OR PROCEEDING UNDER ANY APPLICABLE FEDERAL OR STATE BANKRUPTCY,
INSOLVENCY, REORGANIZATION OR OTHER SIMILAR LAW OR TO THE COMMENCEMENT OF ANY
BANKRUPTCY OR INSOLVENCY CASE OR PROCEEDING AGAINST IT, OR THE FILING BY IT OF A
PETITION OR ANSWER OR CONSENT SEEKING REORGANIZATION OR RELIEF UNDER ANY
APPLICABLE FEDERAL OR STATE LAW, OR THE CONSENT BY IT TO THE FILING OF SUCH
PETITION OR TO THE APPOINTMENT OF OR TAKING POSSESSION BY A CUSTODIAN, RECEIVER,
LIQUIDATOR, ASSIGNEE, TRUSTEE, SEQUESTRATOR OR OTHER SIMILAR OFFICIAL OF THE
COMPANY OR ANY SUBSIDIARY OR OF ANY SUBSTANTIAL PART OF ITS PROPERTY, OR THE
MAKING BY IT OF AN ASSIGNMENT FOR THE BENEFIT OF CREDITORS, OR THE ADMISSION BY
IT IN WRITING OF ITS INABILITY TO PAY ITS DEBTS GENERALLY AS THEY BECOME DUE, OR
THE TAKING OF CORPORATE ACTION BY THE COMPANY OR ANY SUBSIDIARY IN FURTHERANCE
OF ANY SUCH ACTION;

(VI) ANY EVENT OF DEFAULT OCCURS WITH RESPECT TO ANY INDEBTEDNESS, AND ANY
APPLICABLE GRACE PERIODS IN SUCH INDEBTEDNESS WITH RESPECT TO SUCH EVENT OF
DEFAULT SHALL HAVE EXPIRED; PROVIDED THAT IF SUCH EVENT OF DEFAULT IS WAIVED BY
THE HOLDERS OF SUCH INDEBTEDNESS PRIOR TO ANY HOLDER TAKING ANY ACTION PURSUANT
TO THIS CERTIFICATE OF DESIGNATIONS, NO TRIGGERING EVENT UNDER THIS CLAUSE (VI)
SHALL BE DEEMED TO HAVE OCCURRED; OR

(VII) THE COMPANY BREACHES ANY REPRESENTATION, WARRANTY, COVENANT OR OTHER TERM
OR CONDITION OF ANY TRANSACTION DOCUMENT, EXCEPT, IN THE CASE OF A BREACH OF A
COVENANT WHICH IS CURABLE, ONLY IF SUCH BREACH REMAINS UNCURED FOR A PERIOD OF
AT LEAST SEVEN (7) BUSINESS DAYS.

(B)   REDEMPTION OPTION UPON TRIGGERING EVENT. IN ADDITION TO ALL OTHER RIGHTS
OF THE HOLDERS CONTAINED HEREIN, AFTER A TRIGGERING EVENT, EACH HOLDER SHALL
HAVE THE RIGHT, AT SUCH HOLDER’S OPTION, TO REQUIRE THE COMPANY TO REDEEM ALL OR
A PORTION OF SUCH HOLDER’S PREFERRED SHARES AT A PRICE PER PREFERRED SHARE EQUAL
TO THE GREATER OF (I) 125% OF THE CONVERSION AMOUNT AND (II) THE PRODUCT OF (A)
THE CONVERSION RATE IN EFFECT AT SUCH TIME AS SUCH HOLDER DELIVERS A NOTICE OF
REDEMPTION AT OPTION OF HOLDER (AS DEFINED BELOW) AND (B) THE GREATER OF THE
CLOSING SALE PRICE OF THE COMMON STOCK ON THE TRADING DAY IMMEDIATELY PRECEDING
SUCH TRIGGERING EVENT, THE CLOSING SALE PRICE OF THE COMMON STOCK ON THE DAY
IMMEDIATELY FOLLOWING SUCH TRIGGERING EVENT AND THE CLOSING SALE PRICE OF THE
COMMON STOCK ON THE DATE THE HOLDER DELIVERS THE NOTICE OF REDEMPTION AT OPTION
OF HOLDER (THE “REDEMPTION PRICE”).

(C)   MECHANICS OF REDEMPTION AT OPTION OF BUYER. WITHIN ONE (1) BUSINESS DAY
AFTER THE OCCURRENCE OF A QUALIFYING TRIGGERING EVENT, THE COMPANY SHALL DELIVER
WRITTEN NOTICE THEREOF VIA FACSIMILE AND OVERNIGHT COURIER (“NOTICE OF

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TRIGGERING EVENT”) TO EACH HOLDER. AT ANY TIME AFTER THE EARLIER OF A HOLDER’S
RECEIPT OF A NOTICE OF TRIGGERING EVENT AND SUCH HOLDER BECOMING AWARE OF A
TRIGGERING EVENT, ANY HOLDER OF PREFERRED SHARES THEN OUTSTANDING MAY REQUIRE
THE COMPANY TO REDEEM UP TO ALL OF SUCH HOLDER’S PREFERRED SHARES BY DELIVERING
WRITTEN NOTICE THEREOF VIA FACSIMILE AND OVERNIGHT COURIER (“NOTICE OF
REDEMPTION AT OPTION OF HOLDER”) TO THE COMPANY, WHICH NOTICE OF REDEMPTION AT
OPTION OF HOLDER SHALL INDICATE THE NUMBER OF PREFERRED SHARES THAT SUCH HOLDER
IS ELECTING TO REDEEM.

(D)   PAYMENT OF REDEMPTION PRICE. UPON THE COMPANY’S RECEIPT OF A NOTICE(S) OF
REDEMPTION AT OPTION OF BUYER FROM ANY HOLDER, THE COMPANY SHALL WITHIN ONE (1)
BUSINESS DAY OF SUCH RECEIPT NOTIFY EACH OTHER HOLDER BY FACSIMILE OF THE
COMPANY’S RECEIPT OF SUCH NOTICE(S). THE COMPANY SHALL DELIVER ON THE FIFTH
(5TH) BUSINESS DAY AFTER THE COMPANY’S RECEIPT OF THE FIRST NOTICE OF REDEMPTION
AT OPTION OF HOLDER THE APPLICABLE REDEMPTION PRICE (THE “TRIGGERING EVENT
REDEMPTION DATE”) TO ALL HOLDERS THAT DELIVER A NOTICE OF REDEMPTION AT OPTION
OF HOLDER PRIOR TO THE FIFTH (5TH) BUSINESS DAY AFTER THE COMPANY’S RECEIPT OF
THE FIRST NOTICE OF REDEMPTION AT OPTION OF HOLDER. TO THE EXTENT REDEMPTIONS
REQUIRED BY THIS SECTION 3 ARE DEEMED OR DETERMINED BY A COURT OF COMPETENT
JURISDICTION TO BE PREPAYMENTS OF THE PREFERRED SHARES BY THE COMPANY, SUCH
REDEMPTIONS SHALL BE DEEMED TO BE VOLUNTARY PREPAYMENTS. IF THE COMPANY IS
UNABLE TO REDEEM ALL OF THE PREFERRED SHARES SUBMITTED FOR REDEMPTION, THE
COMPANY SHALL (I) REDEEM A PRO RATA AMOUNT FROM EACH HOLDER BASED ON THE NUMBER
OF PREFERRED SHARES SUBMITTED FOR REDEMPTION BY SUCH HOLDER RELATIVE TO THE
TOTAL NUMBER OF PREFERRED SHARES SUBMITTED FOR REDEMPTION BY ALL HOLDERS AND
(II) IN ADDITION TO ANY REMEDY SUCH HOLDER MAY HAVE UNDER THIS CERTIFICATE OF
DESIGNATIONS AND THE SECURITIES PURCHASE AGREEMENT, PAY TO EACH HOLDER INTEREST
AT THE RATE OF ONE AND ONE-HALF PERCENT (1.5%) PER MONTH (PRORATED FOR PARTIAL
MONTHS) IN RESPECT OF EACH UNREDEEMED PREFERRED SHARE UNTIL PAID IN FULL. THE
HOLDERS AND COMPANY AGREE THAT IN THE EVENT OF THE COMPANY’S REDEMPTION OF ANY
PREFERRED SHARES UNDER THIS SECTION 3, THE HOLDERS’ DAMAGES WOULD BE UNCERTAIN
AND DIFFICULT TO ESTIMATE BECAUSE OF THE PARTIES’ INABILITY TO PREDICT FUTURE
INTEREST RATES AND THE UNCERTAINTY OF THE AVAILABILITY OF A SUITABLE SUBSTITUTE
INVESTMENT OPPORTUNITY FOR THE HOLDERS. ACCORDINGLY, ANY REDEMPTION PREMIUM DUE
UNDER THIS SECTION 3 IS INTENDED BY THE PARTIES TO BE, AND SHALL BE DEEMED, A
REASONABLE ESTIMATE OF THE HOLDERS’ ACTUAL LOSS OF ITS INVESTMENT OPPORTUNITY
AND NOT AS A PENALTY.

(E)   VOID REDEMPTION. IN THE EVENT THAT THE COMPANY DOES NOT PAY THE REDEMPTION
PRICE WITHIN THE TIME PERIOD SET FORTH IN SECTION 3(D), AT ANY TIME THEREAFTER
AND UNTIL THE COMPANY PAYS SUCH UNPAID APPLICABLE REDEMPTION PRICE IN FULL, A
HOLDER SHALL HAVE THE OPTION TO, IN LIEU OF REDEMPTION, REQUIRE THE COMPANY TO
PROMPTLY RETURN TO SUCH HOLDER ANY OR ALL OF THE PREFERRED SHARES THAT WERE
SUBMITTED FOR REDEMPTION BY SUCH HOLDER UNDER THIS SECTION 3 AND FOR WHICH THE
APPLICABLE REDEMPTION PRICE HAS NOT BEEN PAID, BY SENDING WRITTEN NOTICE THEREOF
TO THE COMPANY VIA FACSIMILE (THE “VOID OPTIONAL REDEMPTION NOTICE”). UPON THE
COMPANY’S RECEIPT OF SUCH VOID OPTIONAL REDEMPTION NOTICE, (I) THE

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NOTICE OF REDEMPTION AT OPTION OF HOLDER SHALL BE NULL AND VOID WITH RESPECT TO
THOSE PREFERRED SHARES SUBJECT TO THE VOID OPTIONAL REDEMPTION NOTICE, (II) THE
COMPANY SHALL IMMEDIATELY RETURN ANY PREFERRED SHARES SUBJECT TO THE VOID
OPTIONAL REDEMPTION NOTICE, AND (III) THE CONVERSION PRICE OF SUCH RETURNED
PREFERRED SHARES SHALL BE ADJUSTED TO THE LESSER OF (A) THE CONVERSION PRICE AS
IN EFFECT ON THE DATE ON WHICH THE VOID OPTIONAL REDEMPTION NOTICE IS DELIVERED
TO THE COMPANY AND (B) THE LOWEST WEIGHTED AVERAGE PRICE OF THE COMMON STOCK
DURING THE PERIOD BEGINNING ON THE DATE ON WHICH THE NOTICE OF REDEMPTION AT
OPTION OF HOLDER IS DELIVERED TO THE COMPANY AND ENDING ON THE DATE ON WHICH THE
VOID OPTIONAL REDEMPTION NOTICE IS DELIVERED TO THE COMPANY.

(F)    DISPUTES; MISCELLANEOUS. IN THE EVENT OF A DISPUTE AS TO THE
DETERMINATION OF THE ARITHMETIC CALCULATION OF THE REDEMPTION PRICE, SUCH
DISPUTE SHALL BE RESOLVED PURSUANT TO SECTION 2(D)(III) ABOVE WITH THE TERM
“REDEMPTION PRICE” BEING SUBSTITUTED FOR THE TERM “CONVERSION RATE”. A HOLDER’S
DELIVERY OF A VOID OPTIONAL REDEMPTION NOTICE AND EXERCISE OF ITS RIGHTS
FOLLOWING SUCH NOTICE SHALL NOT EFFECT THE COMPANY’S OBLIGATIONS TO MAKE ANY
PAYMENTS WHICH HAVE ACCRUED PRIOR TO THE DATE OF SUCH NOTICE. IN THE EVENT OF A
REDEMPTION PURSUANT TO THIS SECTION 3 OF LESS THAN ALL OF THE PREFERRED SHARES
REPRESENTED BY A PARTICULAR PREFERRED STOCK CERTIFICATE, THE COMPANY SHALL
PROMPTLY CAUSE TO BE ISSUED AND DELIVERED TO THE HOLDER OF SUCH PREFERRED SHARES
A PREFERRED STOCK CERTIFICATE REPRESENTING THE REMAINING PREFERRED SHARES WHICH
HAVE NOT BEEN REDEEMED, IF NECESSARY.

(4)        OTHER RIGHTS OF HOLDERS.

(A)   ASSUMPTION. THE COMPANY SHALL NOT ENTER INTO OR BE PARTY TO A FUNDAMENTAL
TRANSACTION UNLESS (I)  THE SUCCESSOR ENTITY ASSUMES IN WRITING (WITH THE
PURCHASE OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF THE COMPANY’S
COMMON STOCK AUTOMATICALLY CONSTITUTING AN ASSUMPTION IN WRITING) ALL OF THE
OBLIGATIONS OF THE COMPANY UNDER THIS CERTIFICATE OF DESIGNATIONS AND THE OTHER
TRANSACTION DOCUMENTS IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION 4(A)
PURSUANT TO WRITTEN AGREEMENTS IN FORM AND SUBSTANCE SATISFACTORY TO THE
REQUIRED HOLDERS AND APPROVED BY THE REQUIRED HOLDERS PRIOR TO SUCH FUNDAMENTAL
TRANSACTION, INCLUDING AGREEMENTS TO DELIVER TO EACH HOLDER OF PREFERRED SHARES
IN EXCHANGE FOR SUCH PREFERRED SHARES A SECURITY OF THE SUCCESSOR ENTITY
EVIDENCED BY A WRITTEN INSTRUMENT SUBSTANTIALLY SIMILAR IN FORM AND SUBSTANCE TO
THIS CERTIFICATE OF DESIGNATIONS INCLUDING, WITHOUT LIMITATION, HAVING A STATED
VALUE AND DIVIDEND RATE EQUAL TO THE STATED VALUE AND DIVIDEND RATE OF THE
PREFERRED SHARES HELD BY SUCH HOLDER AND HAVING SIMILAR RANKING TO THE PREFERRED
SHARES, AND SATISFACTORY TO THE REQUIRED HOLDERS AND (II) THE SUCCESSOR ENTITY
(INCLUDING ITS PARENT ENTITY) IS A PUBLICLY TRADED CORPORATION WHOSE COMMON
STOCK IS QUOTED ON OR LISTED FOR TRADING ON THE PRINCIPAL MARKET OR AN ELIGIBLE
MARKET. UPON THE OCCURRENCE OF ANY FUNDAMENTAL TRANSACTION, THE SUCCESSOR ENTITY
SHALL SUCCEED TO, AND BE SUBSTITUTED FOR (SO THAT FROM AND AFTER THE DATE OF
SUCH FUNDAMENTAL TRANSACTION, THE PROVISIONS OF THIS CERTIFICATE OF DESIGNATIONS
REFERRING TO THE “COMPANY” SHALL REFER INSTEAD TO THE SUCCESSOR ENTITY), AND MAY
EXERCISE EVERY

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RIGHT AND POWER OF THE COMPANY AND SHALL ASSUME ALL OF THE OBLIGATIONS OF THE
COMPANY UNDER THIS CERTIFICATE OF DESIGNATIONS WITH THE SAME EFFECT AS IF SUCH
SUCCESSOR ENTITY HAD BEEN NAMED AS THE COMPANY HEREIN. UPON CONSUMMATION OF THE
FUNDAMENTAL TRANSACTION, THE SUCCESSOR ENTITY SHALL DELIVER TO THE HOLDER
CONFIRMATION THAT THERE SHALL BE ISSUED UPON CONVERSION OF THE PREFERRED SHARES
AT ANY TIME AFTER THE CONSUMMATION OF THE FUNDAMENTAL TRANSACTION, IN LIEU OF
THE SHARES OF COMMON STOCK (OR OTHER SECURITIES, CASH, ASSETS OR OTHER PROPERTY)
ISSUABLE UPON THE CONVERSION OF THE PREFERRED SHARES PRIOR TO SUCH FUNDAMENTAL
TRANSACTION, SUCH SHARES OF PUBLICLY TRADED COMMON STOCK (OR THEIR EQUIVALENT)
OF THE SUCCESSOR ENTITY, AS ADJUSTED IN ACCORDANCE WITH THE PROVISIONS OF THIS
CERTIFICATE OF DESIGNATIONS. THE PROVISIONS OF THIS SECTION SHALL APPLY
SIMILARLY AND EQUALLY TO SUCCESSIVE FUNDAMENTAL TRANSACTIONS AND SHALL BE
APPLIED WITHOUT REGARD TO ANY LIMITATIONS ON THE CONVERSION OF THE PREFERRED
SHARES.

(B)   PURCHASE RIGHTS. IF AT ANY TIME THE COMPANY GRANTS, ISSUES OR SELLS ANY
OPTIONS, CONVERTIBLE SECURITIES OR RIGHTS TO PURCHASE STOCK, WARRANTS,
SECURITIES OR OTHER PROPERTY PRO RATA TO THE RECORD HOLDERS OF ANY CLASS OF
COMMON STOCK (THE “PURCHASE RIGHTS”), THEN THE HOLDERS WILL BE ENTITLED TO
ACQUIRE, UPON THE TERMS APPLICABLE TO SUCH PURCHASE RIGHTS, THE AGGREGATE
PURCHASE RIGHTS WHICH SUCH HOLDER COULD HAVE ACQUIRED IF SUCH HOLDER HAD HELD
THE NUMBER OF SHARES OF COMMON STOCK ACQUIRABLE UPON COMPLETE CONVERSION OF THE
PREFERRED SHARES (WITHOUT TAKING INTO ACCOUNT ANY LIMITATIONS OR RESTRICTIONS ON
THE CONVERTIBILITY OF THE PREFERRED SHARES) IMMEDIATELY BEFORE THE DATE ON WHICH
A RECORD IS TAKEN FOR THE GRANT, ISSUANCE OR SALE OF SUCH PURCHASE RIGHTS, OR,
IF NO SUCH RECORD IS TAKEN, THE DATE AS OF WHICH THE RECORD HOLDERS OF COMMON
STOCK ARE TO BE DETERMINED FOR THE GRANT, ISSUE OR SALE OF SUCH PURCHASE RIGHTS.

(C)   ASSET SALES.

(I) PROMPTLY AFTER THE OCCURRENCE OF AN ASSET SALE, THE COMPANY SHALL DELIVER
WRITTEN NOTICE THEREOF VIA FACSIMILE AND OVERNIGHT COURIER (AN “ASSET SALE
NOTICE”) TO EACH OF THE HOLDERS. AT ANY TIME AFTER THE RECEIPT OF THE ASSET SALE
NOTICE, A HOLDER MAY REQUIRE THE COMPANY TO REDEEM, WITH THE AVAILABLE ASSET
SALE PROCEEDS ALL OR ANY PORTION OF THE PREFERRED SHARES HELD BY SUCH HOLDER BY
DELIVERING WRITTEN NOTICE THEREOF (THE “ASSET SALE REDEMPTION NOTICE”) TO THE
COMPANY, WHICH ASSET SALE REDEMPTION NOTICE SHALL INDICATE THE NUMBER OF SUCH
PREFERRED SHARES SUCH HOLDER IS ELECTING TO REDEEM; PROVIDED THAT IF THE
AGGREGATE NUMBER AMOUNT OF PREFERRED SHARES TO BE REDEEMED FROM SUCH HOLDER AND
THE OTHER HOLDERS WITH THE CASH PROCEEDS OF AN ASSET SALE EXCEED THE AVAILABLE
ASSET SALE PROCEEDS FOR SUCH ASSET SALE, THE COMPANY SHALL REDEEM THE PREFERRED
SHARES PRESENTED FOR REDEMPTION ON A PRO RATA BASIS WITH SUCH PROCEEDS. EACH
PREFERRED SHARE SUBJECT TO REDEMPTION BY THE COMPANY PURSUANT TO THIS SECTION
8(E) SHALL BE REDEEMED BY THE COMPANY AT A PRICE EQUAL TO AT A PRICE PER
PREFERRED SHARE EQUAL TO THE GREATER OF (I) THE CONVERSION AMOUNT AND (II) THE
PRODUCT OF (A) THE CONVERSION RATE IN EFFECT AT SUCH TIME AS SUCH HOLDER
DELIVERS AN ASSET SALE REDEMPTION

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NOTICE AND (B) THE GREATER OF THE CLOSING SALE PRICE OF THE COMMON STOCK ON THE
TRADING DAY FOLLOWING SUCH ASSET SALE AND THE CLOSING SALE PRICE OF THE COMMON
STOCK ON THE DATE THE HOLDER DELIVERS THE ASSET SALE REDEMPTION NOTICE (THE
“ASSET SALE REDEMPTION PRICE”). THE COMPANY SHALL DELIVER ON THE FIFTH (5TH)
BUSINESS DAY (THE “ASSET SALE REDEMPTION DATE”) AFTER THE COMPANY’S RECEIPT OF
THE FIRST ASSET SALE REDEMPTION NOTICE THE APPLICABLE ASSET SALE REDEMPTION
PRICE TO ALL HOLDERS THAT DELIVER A ASSET SALE REDEMPTION NOTICE PRIOR TO SUCH
FIFTH (5TH) BUSINESS DAY AFTER THE COMPANY’S RECEIPT OF THE FIRST ASSET SALE
REDEMPTION NOTICE.

(II) FOR SO LONG AS ANY PREFERRED SHARES ARE OUTSTANDING, THE COMPANY SHALL NOT,
AND SHALL NOT PERMIT ANY OF ITS SUBSIDIARIES TO, DIRECTLY OR INDIRECTLY,
CONSUMMATE ANY ASSET SALE UNLESS THE COMPANY (OR THE APPLICABLE SUBSIDIARY, AS
THE CASE MAY BE) RECEIVES CONSIDERATION AT THE TIME OF THE ASSET SALE AT LEAST
EQUAL TO THE FAIR MARKET VALUE OF THE ASSETS OR EQUITY INTERESTS ISSUED OR SOLD
OR OTHERWISE DISPOSED OF.

(5)        RESERVATION OF SHARES.

(A)   THE COMPANY SHALL HAVE SUFFICIENT AUTHORIZED AND UNISSUED SHARES OF COMMON
STOCK FOR EACH OF THE PREFERRED SHARES EQUAL TO 130% OF THE NUMBER OF SHARES OF
COMMON STOCK NECESSARY TO EFFECT THE CONVERSION AT THE CONVERSION RATE WITH
RESPECT TO THE CONVERSION AMOUNT OF EACH SUCH PREFERRED SHARE AS OF THE INITIAL
ISSUANCE DATE. THE COMPANY SHALL, SO LONG AS ANY OF THE PREFERRED SHARES ARE
OUTSTANDING, TAKE ALL ACTION NECESSARY TO RESERVE AND KEEP AVAILABLE OUT OF ITS
AUTHORIZED AND UNISSUED COMMON STOCK, SOLELY FOR THE PURPOSE OF EFFECTING THE
CONVERSIONS OF THE PREFERRED SHARES, SUCH NUMBER OF SHARES OF COMMON STOCK AS
SHALL FROM TIME TO TIME BE NECESSARY TO EFFECT THE CONVERSION OF ALL OF THE
PREFERRED SHARES THEN OUTSTANDING; PROVIDED THAT AT NO TIME SHALL THE NUMBER OF
SHARES OF COMMON STOCK SO RESERVED SHALL AT NO TIME BE LESS THAN 130% OF THE
NUMBER OF SHARES OF COMMON STOCK FOR WHICH THE PREFERRED SHARES ARE AT ANY TIME
CONVERTIBLE (WITHOUT REGARD TO ANY LIMITATIONS ON CONVERSIONS); PROVIDED THAT AT
NO TIME SHALL THE NUMBER OF SHARES OF COMMON STOCK SO RESERVED BE LESS THAN THE
NUMBER OF SHARES REQUIRED TO BE RESERVED BY REASON OF THE PREVIOUS SENTENCE
(WITHOUT REGARD TO ANY LIMITATIONS ON CONVERSIONS) (THE “REQUIRED RESERVE
AMOUNT”). THE INITIAL NUMBER OF SHARES OF COMMON STOCK RESERVED FOR CONVERSIONS
OF THE PREFERRED SHARES AND EACH INCREASE IN THE NUMBER OF SHARES SO RESERVED
SHALL BE ALLOCATED PRO RATA AMONG THE HOLDERS BASED ON THE NUMBER OF PREFERRED
SHARES HELD BY EACH HOLDER AT THE TIME OF ISSUANCE OF THE PREFERRED SHARES OR
INCREASE IN THE NUMBER OF RESERVED SHARES, AS THE CASE MAY BE (THE “AUTHORIZED
SHARE ALLOCATION”). IN THE EVENT A HOLDER SHALL SELL OR OTHERWISE TRANSFER ANY
OF SUCH HOLDER’S PREFERRED SHARES, EACH TRANSFEREE SHALL BE ALLOCATED A PRO RATA
PORTION OF THE NUMBER OF RESERVED SHARES OF COMMON STOCK RESERVED FOR SUCH
TRANSFEROR. ANY SHARES OF COMMON STOCK RESERVED AND ALLOCATED TO ANY PERSON
WHICH CEASES TO HOLD ANY PREFERRED SHARES (OTHER THAN PURSUANT TO A TRANSFER OF
PREFERRED SHARES IN ACCORDANCE WITH THE IMMEDIATELY PRECEDING SENTENCE) SHALL BE
ALLOCATED TO THE REMAINING HOLDERS OF PREFERRED SHARES, PRO RATA BASED ON THE
NUMBER OF PREFERRED SHARES THEN HELD BY SUCH HOLDERS.

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(B)   INSUFFICIENT AUTHORIZED SHARES. IF AT ANY TIME WHILE ANY OF THE PREFERRED
SHARES REMAIN OUTSTANDING THE COMPANY DOES NOT HAVE A SUFFICIENT NUMBER OF
AUTHORIZED AND UNRESERVED SHARES OF COMMON STOCK TO SATISFY ITS OBLIGATION TO
RESERVE FOR ISSUANCE UPON CONVERSION OF THE PREFERRED SHARES AT LEAST A NUMBER
OF SHARES OF COMMON STOCK EQUAL TO THE REQUIRED RESERVE AMOUNT (AN “AUTHORIZED
SHARE FAILURE”), THEN THE COMPANY SHALL IMMEDIATELY TAKE ALL ACTION NECESSARY TO
INCREASE THE COMPANY’S AUTHORIZED SHARES OF COMMON STOCK TO AN AMOUNT SUFFICIENT
TO ALLOW THE COMPANY TO RESERVE THE REQUIRED RESERVE AMOUNT FOR THE PREFERRED
SHARES THEN OUTSTANDING. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING
SENTENCE, AS SOON AS PRACTICABLE AFTER THE DATE OF THE OCCURRENCE OF AN
AUTHORIZED SHARE FAILURE, BUT IN NO EVENT LATER THAN NINETY (90) DAYS AFTER THE
OCCURRENCE OF SUCH AUTHORIZED SHARE FAILURE, THE COMPANY SHALL HOLD A MEETING OF
ITS STOCKHOLDERS FOR THE APPROVAL OF AN INCREASE IN THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK. IN CONNECTION WITH SUCH MEETING, THE COMPANY SHALL
PROVIDE EACH STOCKHOLDER WITH A PROXY STATEMENT AND SHALL USE ITS BEST EFFORTS
TO SOLICIT ITS STOCKHOLDERS’ APPROVAL OF SUCH INCREASE IN AUTHORIZED SHARES OF
COMMON STOCK AND TO CAUSE ITS BOARD OF DIRECTORS TO RECOMMEND TO THE
STOCKHOLDERS THAT THEY APPROVE SUCH PROPOSAL.

 

(6)        VOTING RIGHTS. SUBJECT TO SECTIONS 7 AND 10, EACH HOLDER SHALL BE
ENTITLED TO THE WHOLE NUMBER OF VOTES EQUAL TO THE LESSER OF (I) THE NUMBER OF
SHARES OF COMMON STOCK INTO WHICH SUCH HOLDER’S PREFERRED SHARES WOULD BE
CONVERTIBLE BASED ON THE CONVERSION PRICE ON THE RECORD DATE FOR THE VOTE OR
CONSENT OF STOCKHOLDERS, AND SHALL OTHERWISE HAVE VOTING RIGHTS AND POWERS EQUAL
TO THE VOTING RIGHTS AND POWERS OF THE COMMON STOCK AND (II) THE NUMBER OF
SHARES OF COMMON STOCK INTO WHICH SUCH HOLDER’S PREFERRED SHARES WOULD BE
CONVERTIBLE IF THE CONVERSION PRICE ON THE RECORD DATE FOR THE VOTE OR CONSENT
OF STOCKHOLDERS IS DEEMED TO BE THE MARKET PRICE. EACH HOLDER SHALL BE ENTITLED
TO RECEIVE THE SAME PRIOR NOTICE OF ANY STOCKHOLDERS’ MEETING AS IS PROVIDED TO
THE HOLDERS OF COMMON STOCK IN ACCORDANCE WITH THE BYLAWS OF THE COMPANY, AS
WELL AS PRIOR NOTICE OF ALL STOCKHOLDER ACTIONS TO BE TAKEN BY LEGALLY AVAILABLE
MEANS IN LIEU OF A MEETING, AND SHALL VOTE AS A CLASS WITH THE HOLDERS OF COMMON
STOCK AS IF THEY WERE A SINGLE CLASS OF SECURITIES UPON ANY MATTER SUBMITTED TO
A VOTE OF STOCKHOLDERS, EXCEPT THOSE MATTERS REQUIRED BY LAW OR BY THE TERMS
HEREOF TO BE SUBMITTED TO A CLASS VOTE OF THE HOLDERS OF PREFERRED SHARES, IN
WHICH CASE THE HOLDERS OF PREFERRED SHARES ONLY SHALL VOTE AS A SEPARATE CLASS.

(7)        LIMITATION ON BENEFICIAL OWNERSHIP. THE COMPANY SHALL NOT EFFECT ANY
CONVERSION OF PREFERRED SHARES, AND NO HOLDER SHALL HAVE THE RIGHT TO CONVERT
ANY PREFERRED SHARES, TO THE EXTENT THAT AFTER GIVING EFFECT TO SUCH CONVERSION,
THE BENEFICIAL OWNER OF SUCH SHARES (TOGETHER WITH SUCH PERSON’S AFFILIATES)
WOULD HAVE ACQUIRED, THROUGH CONVERSION OF PREFERRED SHARES OR OTHERWISE,
BENEFICIAL OWNERSHIP OF A NUMBER OF SHARES OF COMMON STOCK THAT EXCEEDS THE
PERCENTAGE SET FORTH OPPOSITE EACH HOLDER’S NAME IN COLUMN (8) OF THE SCHEDULE
OF BUYERS TO THE SECURITIES PURCHASE AGREEMENT (“MAXIMUM PERCENTAGE”) OF THE
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING IMMEDIATELY AFTER GIVING EFFECT TO
SUCH CONVERSION. THE COMPANY SHALL NOT GIVE EFFECT TO ANY VOTING RIGHTS OF THE
PREFERRED SHARES, AND ANY HOLDER SHALL NOT HAVE THE RIGHT TO EXERCISE VOTING
RIGHTS WITH RESPECT TO ANY PREFERRED SHARES PURSUANT HERETO, TO THE EXTENT THAT
GIVING EFFECT TO SUCH VOTING RIGHTS WOULD RESULT IN SUCH HOLDER (TOGETHER WITH
ITS AFFILIATES) BEING DEEMED TO BENEFICIALLY OWN IN EXCESS OF THE MAXIMUM
PERCENTAGE OF THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING IMMEDIATELY AFTER
GIVING EFFECT TO SUCH EXERCISE, ASSUMING SUCH EXERCISE AS BEING EQUIVALENT TO
CONVERSION. FOR PURPOSES OF THE FOREGOING, THE

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NUMBER OF SHARES OF COMMON STOCK BENEFICIALLY OWNED BY A PERSON AND ITS
AFFILIATES SHALL INCLUDE THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF THE PREFERRED SHARES WITH RESPECT TO WHICH THE DETERMINATION OF
SUCH SENTENCE IS BEING MADE, BUT SHALL EXCLUDE THE NUMBER OF SHARES OF COMMON
STOCK WHICH WOULD BE ISSUABLE UPON (A) CONVERSION OF THE REMAINING, NONCONVERTED
PREFERRED SHARES BENEFICIALLY OWNED BY SUCH PERSON OR ANY OF ITS AFFILIATES AND
(B) EXERCISE OR CONVERSION OF THE UNEXERCISED OR UNCONVERTED PORTION OF ANY
OTHER SECURITIES OF THE COMPANY (INCLUDING, WITHOUT LIMITATION, ANY NOTES OR
WARRANTS) SUBJECT TO A LIMITATION ON CONVERSION OR EXERCISE ANALOGOUS TO THE
LIMITATION CONTAINED IN THIS SECTION BENEFICIALLY OWNED BY SUCH PERSON OR ANY OF
ITS AFFILIATES. EXCEPT AS SET FORTH IN THE PRECEDING SENTENCE, FOR PURPOSES OF
THIS SECTION 7, BENEFICIAL OWNERSHIP SHALL BE CALCULATED IN ACCORDANCE WITH
SECTION 13(D) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FOR PURPOSES
OF THIS SECTION 7, IN DETERMINING THE NUMBER OF OUTSTANDING SHARES OF COMMON
STOCK, A HOLDER MAY RELY ON THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK AS
REFLECTED IN (1) THE COMPANY’S MOST RECENT FORM 10-K, FORM 10-KSB, FORM 10-Q,
FORM 10-QSB OR FORM 8-K, AS THE CASE MAY BE, (2) A MORE RECENT PUBLIC
ANNOUNCEMENT BY THE COMPANY, OR (3) ANY OTHER NOTICE BY THE COMPANY OR THE
TRANSFER AGENT SETTING FORTH THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING.
FOR ANY REASON AT ANY TIME, UPON THE WRITTEN REQUEST OF ANY HOLDER, THE COMPANY
SHALL WITHIN ONE (1) BUSINESS DAY FOLLOWING THE RECEIPT OF SUCH NOTICE, CONFIRM
ORALLY AND IN WRITING TO ANY SUCH HOLDER THE NUMBER OF SHARES OF COMMON STOCK
THEN OUTSTANDING. IN ANY CASE, THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK
SHALL BE DETERMINED AFTER GIVING EFFECT TO THE CONVERSION OR EXERCISE OF
SECURITIES OF THE COMPANY, INCLUDING THE PREFERRED SHARES, BY SUCH HOLDER AND
ITS AFFILIATES SINCE THE DATE AS OF WHICH SUCH NUMBER OF OUTSTANDING SHARES OF
COMMON STOCK WAS REPORTED. BY WRITTEN NOTICE TO THE COMPANY, THE HOLDER MAY FROM
TIME TO TIME INCREASE OR DECREASE THE MAXIMUM PERCENTAGE TO ANY OTHER PERCENTAGE
NOT IN EXCESS OF 9.99% SPECIFIED IN SUCH NOTICE; PROVIDED THAT (I) ANY SUCH
INCREASE WILL NOT BE EFFECTIVE UNTIL THE SIXTY-FIRST (61ST) DAY AFTER SUCH
NOTICE IS DELIVERED TO THE COMPANY, AND (II) ANY SUCH INCREASE OR DECREASE WILL
APPLY ONLY TO THE HOLDER PROVIDING SUCH WRITTEN NOTICE AND NOT TO ANY OTHER
HOLDER. NOTWITHSTANDING THE FOREGOING, IF A HOLDER HAS ELECTED “NO LIMIT” IN
COLUMN (8) OF THE SCHEDULE OF BUYERS TO THE SECURITIES PURCHASE AGREEMENT, THE
LIMITATIONS SET FORTH IN THIS SECTION 7 SHALL NOT BE APPLICABLE TO SUCH HOLDER.

(8)        CHANGE OF CONTROL REDEMPTION RIGHT; LIQUIDATION, DISSOLUTION,
WINDING-UP.

(A)   CHANGE OF CONTROL. NO SOONER THAN FIFTEEN (15) DAYS NOR LATER THAN TEN
(10) DAYS PRIOR TO THE CONSUMMATION OF A CHANGE OF CONTROL, BUT NOT PRIOR TO THE
PUBLIC ANNOUNCEMENT OF SUCH CHANGE OF CONTROL, THE COMPANY SHALL DELIVER WRITTEN
NOTICE THEREOF VIA FACSIMILE AND OVERNIGHT COURIER TO THE HOLDERS (A “CHANGE OF
CONTROL NOTICE”). AT ANY TIME DURING THE PERIOD (THE “CHANGE OF CONTROL PERIOD”)
BEGINNING AFTER A HOLDER’S RECEIPT OF A CHANGE OF CONTROL NOTICE AND ENDING ON
THE DATE THAT IS TWENTY (20) TRADING DAYS AFTER THE CONSUMMATION OF SUCH CHANGE
OF CONTROL, SUCH ELIGIBLE HOLDER MAY REQUIRE THE COMPANY TO REDEEM ALL OR ANY
PORTION OF SUCH HOLDER’S PREFERRED SHARES BY DELIVERING WRITTEN NOTICE THEREOF
(“CHANGE OF CONTROL REDEMPTION NOTICE”) TO THE COMPANY, WHICH CHANGE OF CONTROL
REDEMPTION NOTICE SHALL INDICATE THE CONVERSION AMOUNT THE HOLDER IS ELECTING TO
REDEEM. ANY PREFERRED SHARES SUBJECT TO REDEMPTION PURSUANT TO THIS SECTION 8
SHALL BE REDEEMED BY THE COMPANY IN CASH AT A PRICE EQUAL TO THE GREATER OF (I)
THE PRODUCT OF (A) THE

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CHANGE OF CONTROL REDEMPTION PREMIUM AND (B) THE CONVERSION AMOUNT BEING
REDEEMED AND (II) (1) THE PRODUCT OF (A) THE CONVERSION AMOUNT BEING REDEEMED
MULTIPLIED BY (B) THE QUOTIENT DETERMINED BY DIVIDING (I) THE AGGREGATE CASH
CONSIDERATION AND THE AGGREGATE CASH VALUE OF ANY NON-CASH CONSIDERATION PER
SHARE OF COMMON STOCK TO BE PAID TO THE HOLDERS OF THE SHARE OF COMMON STOCK
UPON CONSUMMATION OF THE CHANGE OF CONTROL (ANY SUCH NON-CASH CONSIDERATION
CONSISTING OF MARKETABLE SECURITIES TO BE VALUED AT THE HIGHER OF (X) THE
CLOSING SALE PRICE OF SUCH SECURITIES AS OF THE TRADING DAY IMMEDIATELY PRIOR TO
THE CONSUMMATION OF SUCH CHANGE OF CONTROL, (Y) THE CLOSING SALE PRICE AS OF THE
TRADING DAY IMMEDIATELY FOLLOWING THE PUBLIC ANNOUNCEMENT OF SUCH PROPOSED
CHANGE OF CONTROL AND (Z) THE CLOSING SALE PRICE AS OF THE TRADING DAY
IMMEDIATELY PRIOR TO THE PUBLIC ANNOUNCEMENT OF SUCH PROPOSED CHANGE OF CONTROL)
BY (II) THE CONVERSION PRICE (THE “CHANGE OF CONTROL REDEMPTION PRICE”). THE
COMPANY SHALL MAKE PAYMENT OF THE CHANGE OF CONTROL REDEMPTION PRICE
CONCURRENTLY WITH THE CONSUMMATION OF SUCH CHANGE OF CONTROL IF SUCH A CHANGE OF
CONTROL REDEMPTION NOTICE IS RECEIVED PRIOR TO THE CONSUMMATION OF SUCH CHANGE
OF CONTROL AND WITHIN FIVE (5) TRADING DAYS AFTER THE COMPANY’S RECEIPT OF SUCH
NOTICE OTHERWISE (THE “CHANGE OF CONTROL REDEMPTION DATE”). TO THE EXTENT
REDEMPTIONS REQUIRED BY THIS SECTION 8(A) ARE DEEMED OR DETERMINED BY A COURT OF
COMPETENT JURISDICTION TO BE PREPAYMENTS OF THE PREFERRED SHARES BY THE COMPANY,
SUCH REDEMPTIONS SHALL BE DEEMED TO BE VOLUNTARY PREPAYMENTS. NOTWITHSTANDING
ANYTHING TO THE CONTRARY IN THIS SECTION 8(A), UNTIL THE CHANGE OF CONTROL
REDEMPTION PRICE IS PAID IN FULL, THE CONVERSION AMOUNT SUBMITTED FOR REDEMPTION
UNDER THIS SECTION 8 MAY BE CONVERTED, IN WHOLE OR IN PART, BY THE HOLDER INTO
SHARES OF COMMON STOCK, OR IN THE EVENT THE CONVERSION DATE IS AFTER THE
CONSUMMATION OF THE CHANGE OF CONTROL, SHARES OR EQUITY INTERESTS OF THE
SUCCESSOR ENTITY SUBSTANTIALLY EQUIVALENT TO THE COMPANY’S COMMON STOCK PURSUANT
TO SECTION 2(C)(I). THE PARTIES HERETO AGREE THAT IN THE EVENT OF THE COMPANY’S
REDEMPTION OF ANY PORTION OF THE PREFERRED SHARES UNDER THIS SECTION 8(A), THE
HOLDER’S DAMAGES WOULD BE UNCERTAIN AND DIFFICULT TO ESTIMATE BECAUSE OF THE
PARTIES’ INABILITY TO PREDICT FUTURE INTEREST RATES AND THE UNCERTAINTY OF THE
AVAILABILITY OF A SUITABLE SUBSTITUTE INVESTMENT OPPORTUNITY FOR THE HOLDER.
ACCORDINGLY, ANY REDEMPTION PREMIUM DUE UNDER THIS SECTION 8(A) IS INTENDED BY
THE PARTIES TO BE, AND SHALL BE DEEMED, A REASONABLE ESTIMATE OF THE HOLDER’S
ACTUAL LOSS OF ITS INVESTMENT OPPORTUNITY AND NOT AS A PENALTY. IN THE EVENT
THAT THE COMPANY DOES NOT PAY THE CHANGE OF CONTROL REDEMPTION PRICE ON THE
CHANGE OF CONTROL REDEMPTION DATE, THEN THE HOLDER SHALL HAVE THE OPTION TO, IN
LIEU OF REDEMPTION, REQUIRE THE COMPANY TO PROMPTLY RETURN TO SUCH HOLDER ANY OR
ALL OF THE PREFERRED SHARES THAT WERE SUBMITTED FOR REDEMPTION BY SUCH HOLDER
UNDER THIS SECTION 8(A) AND FOR WHICH THE APPLICABLE CHANGE OF CONTROL
REDEMPTION PRICE (TOGETHER WITH ANY INTEREST THEREON) HAS NOT BEEN PAID, BY
SENDING WRITTEN NOTICE THEREOF TO THE COMPANY VIA FACSIMILE (THE “VOID CHANGE OF
CONTROL REDEMPTION NOTICE”). UPON THE COMPANY’S RECEIPT OF SUCH VOID CHANGE OF
CONTROL REDEMPTION NOTICE, (I) THE CHANGE OF CONTROL REDEMPTION NOTICE SHALL BE
NULL AND VOID WITH RESPECT TO THOSE PREFERRED SHARES SUBJECT TO THE VOID CHANGE
OF CONTROL REDEMPTION NOTICE, (II) THE COMPANY SHALL IMMEDIATELY

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RETURN ANY PREFERRED SHARES SUBJECT TO THE VOID CHANGE OF CONTROL REDEMPTION
NOTICE, AND (III) THE CONVERSION PRICE OF SUCH RETURNED PREFERRED SHARES SHALL
BE ADJUSTED TO THE LESSER OF (A) THE CONVERSION PRICE AS IN EFFECT ON THE DATE
ON WHICH THE VOID CHANGE OF CONTROL REDEMPTION NOTICE IS DELIVERED TO THE
COMPANY AND (B) THE LOWEST WEIGHTED AVERAGE PRICE OF THE COMMON STOCK DURING THE
PERIOD BEGINNING ON THE DATE ON WHICH THE CHANGE OF CONTROL REDEMPTION NOTICE IS
DELIVERED TO THE COMPANY AND ENDING ON THE DATE ON WHICH THE VOID CHANGE OF
CONTROL REDEMPTION NOTICE IS DELIVERED TO THE COMPANY.

 

(B)   LIQUIDATION. IN THE EVENT OF A LIQUIDATION EVENT, THE HOLDERS SHALL BE
ENTITLED TO RECEIVE IN CASH OUT OF THE ASSETS OF THE COMPANY, WHETHER FROM
CAPITAL OR FROM EARNINGS AVAILABLE FOR DISTRIBUTION TO ITS STOCKHOLDERS (THE
“LIQUIDATION FUNDS”), BEFORE ANY AMOUNT SHALL BE PAID TO THE HOLDERS OF ANY OF
THE CAPITAL STOCK OF THE COMPANY OF ANY CLASS JUNIOR IN RANK TO THE PREFERRED
SHARES IN RESPECT OF THE PREFERENCES AS TO DISTRIBUTIONS AND PAYMENTS ON THE
LIQUIDATION, DISSOLUTION AND WINDING UP OF THE COMPANY, AN AMOUNT PER PREFERRED
SHARE EQUAL TO THE CONVERSION AMOUNT; PROVIDED THAT, IF THE LIQUIDATION FUNDS
ARE INSUFFICIENT TO PAY THE FULL AMOUNT DUE TO THE HOLDERS AND HOLDERS OF SHARES
OF OTHER CLASSES OR SERIES OF PREFERRED STOCK OF THE COMPANY THAT ARE OF EQUAL
RANK WITH THE PREFERRED SHARES AS TO PAYMENTS OF LIQUIDATION FUNDS (THE “PARI
PASSU SHARES”), IF ANY, THEN EACH HOLDER AND EACH HOLDER OF ANY SUCH PARI PASSU
SHARES SHALL RECEIVE A PERCENTAGE OF THE LIQUIDATION FUNDS EQUAL TO THE FULL
AMOUNT OF LIQUIDATION FUNDS PAYABLE TO SUCH HOLDER AS A LIQUIDATION PREFERENCE,
IN ACCORDANCE WITH THEIR RESPECTIVE CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS, AS A PERCENTAGE OF THE FULL AMOUNT OF LIQUIDATION FUNDS PAYABLE TO ALL
HOLDERS OF PREFERRED SHARES AND PARI PASSU SHARES. TO THE EXTENT NECESSARY, THE
COMPANY SHALL CAUSE SUCH ACTIONS TO BE TAKEN BY ANY OF ITS SUBSIDIARIES SO AS TO
ENABLE, TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE PROCEEDS OF A LIQUIDATION
EVENT TO BE DISTRIBUTED TO THE HOLDERS IN ACCORDANCE WITH THIS SECTION. ALL THE
PREFERENTIAL AMOUNTS TO BE PAID TO THE HOLDERS UNDER THIS SECTION SHALL BE PAID
OR SET APART FOR PAYMENT BEFORE THE PAYMENT OR SETTING APART FOR PAYMENT OF ANY
AMOUNT FOR, OR THE DISTRIBUTION OF ANY LIQUIDATION FUNDS OF THE COMPANY TO THE
HOLDERS OF SHARES OF OTHER CLASSES OR SERIES OF PREFERRED STOCK OF THE COMPANY
JUNIOR IN RANK TO THE PREFERRED SHARES IN CONNECTION WITH A LIQUIDATION EVENT AS
TO WHICH THIS SECTION APPLIES. THE PURCHASE OR REDEMPTION BY THE COMPANY OF
STOCK OF ANY CLASS, IN ANY MANNER PERMITTED BY LAW, SHALL NOT, FOR THE PURPOSES
HEREOF, BE REGARDED AS A LIQUIDATION EVENT. NOTWITHSTANDING ANYTHING TO THE
CONTRARY IN THIS SECTION 8, BUT SUBJECT TO SECTION 7, UNTIL THE LIQUIDATION
FUNDS ARE DISTRIBUTED TO THE HOLDERS, THE PREFERRED SHARES MAY BE CONVERTED, IN
WHOLE OR IN PART, BY ANY HOLDER INTO COMMON STOCK PURSUANT TO SECTION 2(B).

 

(9)        RANKING; ISSUANCES OF OTHER SECURITIES.

(A)   PREFERRED RANK. ALL SHARES OF COMMON STOCK, SERIES A PREFERRED STOCK,
SERIES B PREFERRED STOCK AND SERIES C PREFERRED STOCK SHALL BE OF JUNIOR RANK TO
ALL PREFERRED SHARES WITH RESPECT TO THE PREFERENCES AS TO DIVIDENDS,
DISTRIBUTIONS AND PAYMENTS UPON THE LIQUIDATION, DISSOLUTION AND WINDING UP OF
THE

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COMPANY. THE RIGHTS OF THE SHARES OF COMMON STOCK SHALL BE SUBJECT TO THE
PREFERENCES AND RELATIVE RIGHTS OF THE PREFERRED SHARES. WITHOUT THE PRIOR
EXPRESS WRITTEN CONSENT OF THE REQUIRED HOLDERS, THE COMPANY SHALL NOT HEREAFTER
AUTHORIZE OR ISSUE ADDITIONAL OR OTHER CAPITAL STOCK THAT IS OF SENIOR OR
PARI-PASSU RANK TO THE PREFERRED SHARES IN RESPECT OF THE PREFERENCES AS TO
DISTRIBUTIONS AND PAYMENTS UPON A LIQUIDATION EVENT. THE COMPANY SHALL BE
PERMITTED TO ISSUE PREFERRED STOCK THAT IS JUNIOR IN RANK TO THE PREFERRED
SHARES IN RESPECT OF THE PREFERENCES AS TO DIVIDENDS AND OTHER DISTRIBUTIONS,
AMORTIZATION AND REDEMPTION PAYMENTS AND PAYMENTS UPON THE LIQUIDATION,
DISSOLUTION AND WINDING UP OF THE COMPANY, PROVIDED THAT THE MATURITY DATE (OR
ANY OTHER DATE REQUIRING REDEMPTION OR REPAYMENT (WHETHER THROUGH A SCHEDULED
AMORTIZATION, REDEMPTION OR OTHERWISE) OF SUCH PREFERRED STOCK) OF ANY SUCH
JUNIOR PREFERRED STOCK IS NOT ON OR BEFORE THE NINETY-FIRST (91ST) DAY FOLLOWING
THE MATURITY DATE. IN THE EVENT OF THE MERGER OR CONSOLIDATION OF THE COMPANY
WITH OR INTO ANOTHER CORPORATION, THE PREFERRED SHARES SHALL MAINTAIN THEIR
RELATIVE POWERS, DESIGNATIONS AND PREFERENCES PROVIDED FOR HEREIN (EXCEPT THAT
THE PREFERRED SHARES MAY NOT BE PARI PASSU WITH, OR JUNIOR TO, ANY CAPITAL STOCK
OF THE SUCCESSOR ENTITY) AND NO MERGER SHALL RESULT INCONSISTENT  THEREWITH.

 

(B)   ISSUANCES OF EQUITY-LINKED SECURITIES. FOR SO LONG AS ANY PREFERRED SHARES
ARE OUTSTANDING, THE COMPANY WILL NOT, DIRECTLY OR INDIRECTLY, OFFER, SELL,
GRANT ANY OPTION TO PURCHASE, OR OTHERWISE DISPOSE OF (OR ANNOUNCE ANY OFFER,
SALE, GRANT OR ANY OPTION TO PURCHASE OR OTHER DISPOSITION OF) ANY INDEBTEDNESS
OF IT OR ITS SUBSIDIARIES THAT IS, AT ANY TIME DURING ITS LIFE AND UNDER ANY
CIRCUMSTANCES, CONVERTIBLE INTO OR EXCHANGEABLE OR EXERCISABLE FOR SHARES OF
COMMON STOCK, OPTIONS, CONVERTIBLE SECURITIES OR OTHER CAPITAL STOCK OF THE
COMPANY.

 

(10)      LIMITATION ON NUMBER OF CONVERSION SHARES. NOTWITHSTANDING ANYTHING TO
THE CONTRARY CONTAINED HEREIN, THE COMPANY SHALL NOT ISSUE ANY SHARES OF COMMON
STOCK UPON CONVERSION OF THE PREFERRED SHARES IF THE ISSUANCE OF SUCH SHARES OF
COMMON STOCK WOULD EXCEED THAT NUMBER OF SHARES OF COMMON STOCK WHICH THE
COMPANY MAY ISSUE UPON CONVERSION OF THE PREFERRED SHARES WITHOUT BREACHING THE
COMPANY’S OBLIGATIONS UNDER THE RULES OR REGULATIONS OF THE PRINCIPAL MARKET, OR
THE MARKET OR EXCHANGE WHERE THE COMMON STOCK IS THEN TRADED (THE “EXCHANGE
CAP”), EXCEPT THAT SUCH LIMITATION SHALL NOT APPLY IN THE EVENT THAT THE COMPANY
(A) OBTAINS THE STOCKHOLDER APPROVAL AS REQUIRED BY THE APPLICABLE RULES OF THE
PRINCIPAL MARKET (AND ANY SUCCESSOR RULE OR REGULATION) FOR ISSUANCES OF COMMON
STOCK IN EXCESS OF SUCH AMOUNT, OR (B) OBTAINS A WRITTEN OPINION FROM OUTSIDE
COUNSEL TO THE COMPANY THAT SUCH APPROVAL IS NOT REQUIRED, WHICH OPINION SHALL
BE REASONABLY SATISFACTORY TO THE REQUIRED HOLDERS. UNTIL SUCH APPROVAL OR
WRITTEN OPINION IS OBTAINED, NO PURCHASER OF PREFERRED SHARES PURSUANT TO THE
SECURITIES PURCHASE AGREEMENT (THE “PURCHASERS”) SHALL BE ISSUED, IN THE
AGGREGATE, UPON CONVERSION OF PREFERRED SHARES, SHARES OF COMMON STOCK IN AN
AMOUNT GREATER THAN THE PRODUCT OF (I) THE EXCHANGE CAP AMOUNT MULTIPLIED BY
(II) A FRACTION, THE NUMERATOR OF WHICH IS THE NUMBER OF PREFERRED SHARES ISSUED
TO SUCH PURCHASER PURSUANT TO THE SECURITIES PURCHASE AGREEMENT ON THE INITIAL
ISSUANCE DATE AND THE DENOMINATOR OF WHICH IS THE AGGREGATE AMOUNT OF ALL OF THE
PREFERRED SHARES ISSUED TO THE PURCHASERS ON THE INITIAL ISSUANCE DATE PURSUANT
TO THE SECURITIES PURCHASE AGREEMENT (THE “EXCHANGE CAP ALLOCATION”). IN THE
EVENT THAT ANY PURCHASER SHALL SELL OR OTHERWISE TRANSFER ANY OF SUCH
PURCHASER’S PREFERRED SHARES, THE TRANSFEREE

35

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SHALL BE ALLOCATED A PRO RATA PORTION OF SUCH PURCHASER’S EXCHANGE CAP
ALLOCATION. IN THE EVENT THAT ANY HOLDER SHALL CONVERT ALL OF SUCH HOLDER’S
PREFERRED SHARES INTO A NUMBER OF SHARES OF COMMON STOCK WHICH, IN THE
AGGREGATE, IS LESS THAN SUCH HOLDER’S EXCHANGE CAP ALLOCATION, THEN THE
DIFFERENCE BETWEEN SUCH HOLDER’S EXCHANGE CAP ALLOCATION AND THE NUMBER OF
SHARES OF COMMON STOCK ACTUALLY ISSUED TO SUCH HOLDER SHALL BE ALLOCATED TO THE
RESPECTIVE EXCHANGE CAP ALLOCATIONS OF THE REMAINING HOLDERS ON A PRO RATA BASIS
IN PROPORTION TO THE NUMBER OF PREFERRED SHARES THEN HELD BY EACH SUCH HOLDER.

(11)      PARTICIPATION. SUBJECT TO THE RIGHTS OF THE HOLDERS, IF ANY, OF THE
PARI PASSU SHARES, THE HOLDERS SHALL, AS HOLDERS OF PREFERRED STOCK, BE ENTITLED
TO SUCH DIVIDENDS PAID AND DISTRIBUTIONS MADE TO THE HOLDERS OF COMMON STOCK TO
THE SAME EXTENT AS IF SUCH HOLDERS HAD CONVERTED THE PREFERRED SHARES INTO
COMMON STOCK (WITHOUT REGARD TO ANY LIMITATIONS ON CONVERSION HEREIN OR
ELSEWHERE) AND HAD HELD SUCH SHARES OF COMMON STOCK ON THE RECORD DATE FOR SUCH
DIVIDENDS AND DISTRIBUTIONS. PAYMENTS UNDER THE PRECEDING SENTENCE SHALL BE MADE
CONCURRENTLY WITH THE DIVIDEND OR DISTRIBUTION TO THE HOLDERS OF COMMON STOCK.
FOLLOWING THE OCCURRENCE OF A LIQUIDATION EVENT AND THE PAYMENT IN FULL TO A
HOLDER OF ITS APPLICABLE LIQUIDATION PREFERENCE, SUCH HOLDER SHALL CEASE TO HAVE
ANY RIGHTS HEREUNDER TO PARTICIPATE IN ANY FUTURE DIVIDENDS OR DISTRIBUTIONS
MADE TO THE HOLDERS OF COMMON STOCK.

(12)      VOTE TO CHANGE THE TERMS OF OR ISSUE PREFERRED SHARES. EXCEPT WHERE
THE VOTE OR WRITTEN CONSENT OF THE HOLDERS OF A GREATER NUMBER OF SHARES IS
REQUIRED BY LAW OR BY ANOTHER PROVISION OF THE CERTIFICATE OF INCORPORATION, THE
AFFIRMATIVE VOTE AT A MEETING DULY CALLED FOR SUCH PURPOSE OR THE WRITTEN
CONSENT WITHOUT A MEETING OF THE REQUIRED HOLDERS, VOTING TOGETHER AS A SINGLE
CLASS, SHALL BE REQUIRED BEFORE THE COMPANY MAY: (A) AMEND OR REPEAL ANY
PROVISION OF, OR ADD ANY PROVISION TO, THE CERTIFICATE OF INCORPORATION OR
BYLAWS, OR FILE ANY ARTICLES OF AMENDMENT, CERTIFICATE OF DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF ANY SERIES OF PREFERRED STOCK
(INCLUDING ANY AMENDMENT TO THE CERTIFICATES OF DESIGNATIONS FOR THE SERIES A
PREFERRED STOCK, SERIES B PREFERRED STOCK AND SERIES C PREFERRED STOCK), IF SUCH
ACTION WOULD ADVERSELY ALTER OR CHANGE THE PREFERENCES, RIGHTS, PRIVILEGES OR
POWERS OF, OR RESTRICTIONS PROVIDED FOR THE BENEFIT OF THE PREFERRED SHARES,
REGARDLESS OF WHETHER ANY SUCH ACTION SHALL BE BY MEANS OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION OR BY MERGER, CONSOLIDATION OR OTHERWISE; (B)
INCREASE OR DECREASE (OTHER THAN BY CONVERSION) THE AUTHORIZED NUMBER OF SHARES
OF PREFERRED SHARES; (C) CREATE OR AUTHORIZE (BY RECLASSIFICATION OR OTHERWISE)
ANY NEW CLASS OR SERIES OF SHARES THAT HAS A PREFERENCE OVER OR IS ON A PARITY
WITH THE PREFERRED SHARES WITH RESPECT TO DIVIDENDS OR THE DISTRIBUTION OF
ASSETS ON THE LIQUIDATION, DISSOLUTION OR WINDING UP OF THE COMPANY; (D)
PURCHASE, REPURCHASE OR REDEEM ANY SHARES OF COMMON STOCK (OTHER THAN PURSUANT
TO EQUITY INCENTIVE AGREEMENTS WITH EMPLOYEES GIVING THE COMPANY THE RIGHT TO
REPURCHASE SHARES UPON THE TERMINATION OF SERVICES AT COST); (E) PAY DIVIDENDS
OR MAKE ANY OTHER DISTRIBUTION ON THE COMMON STOCK; OR (F) WHETHER OR NOT
PROHIBITED BY THE TERMS OF THE PREFERRED SHARES, CIRCUMVENT A RIGHT OF THE
PREFERRED SHARES.

(13)      LOST OR STOLEN CERTIFICATES. UPON RECEIPT BY THE COMPANY OF EVIDENCE
REASONABLY SATISFACTORY TO THE COMPANY OF THE LOSS, THEFT, DESTRUCTION OR
MUTILATION OF ANY PREFERRED STOCK CERTIFICATES REPRESENTING THE PREFERRED
SHARES, AND, IN THE CASE OF LOSS, THEFT OR DESTRUCTION, OF AN INDEMNIFICATION
UNDERTAKING BY THE HOLDER TO THE COMPANY IN CUSTOMARY FORM AND, IN THE CASE OF
MUTILATION, UPON SURRENDER AND CANCELLATION OF THE PREFERRED STOCK
CERTIFICATE(S), THE COMPANY SHALL EXECUTE AND DELIVER NEW PREFERRED STOCK
CERTIFICATE(S) OF LIKE

36

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TENOR AND DATE; PROVIDED, HOWEVER, THE COMPANY SHALL NOT BE OBLIGATED TO
RE-ISSUE PREFERRED STOCK CERTIFICATES IF THE HOLDER CONTEMPORANEOUSLY REQUESTS
THE COMPANY TO CONVERT SUCH PREFERRED SHARES INTO COMMON STOCK.

(14)      REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH HEREIN, THE
REMEDIES PROVIDED IN THIS CERTIFICATE OF DESIGNATIONS SHALL BE CUMULATIVE AND IN
ADDITION TO ALL OTHER REMEDIES AVAILABLE UNDER THIS CERTIFICATE OF DESIGNATIONS,
AT LAW OR IN EQUITY (INCLUDING A DECREE OF SPECIFIC PERFORMANCE AND/OR OTHER
INJUNCTIVE RELIEF). EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH HEREIN, NO REMEDY
CONTAINED HEREIN SHALL BE DEEMED A WAIVER OF COMPLIANCE WITH THE PROVISIONS
GIVING RISE TO SUCH REMEDY. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH HEREIN,
NOTHING HEREIN SHALL LIMIT A HOLDER’S RIGHT TO PURSUE ACTUAL DAMAGES FOR ANY
FAILURE BY THE COMPANY TO COMPLY WITH THE TERMS OF THIS CERTIFICATE OF
DESIGNATIONS. THE COMPANY COVENANTS TO EACH HOLDER THAT THERE SHALL BE NO
CHARACTERIZATION CONCERNING THIS INSTRUMENT OTHER THAN AS EXPRESSLY PROVIDED
HEREIN. AMOUNTS SET FORTH OR PROVIDED FOR HEREIN WITH RESPECT TO PAYMENTS,
CONVERSION AND THE LIKE (AND THE COMPUTATION THEREOF) SHALL BE THE AMOUNTS TO BE
RECEIVED BY THE HOLDER THEREOF AND SHALL NOT, EXCEPT AS EXPRESSLY PROVIDED
HEREIN, BE SUBJECT TO ANY OTHER OBLIGATION OF THE COMPANY (OR THE PERFORMANCE
THEREOF). THE COMPANY ACKNOWLEDGES THAT A BREACH BY IT OF ITS OBLIGATIONS
HEREUNDER WILL CAUSE IRREPARABLE HARM TO THE HOLDERS AND THAT THE REMEDY AT LAW
FOR ANY SUCH BREACH MAY BE INADEQUATE. THE COMPANY THEREFORE AGREES THAT, IN THE
EVENT OF ANY SUCH BREACH OR THREATENED BREACH, EXCEPT AS OTHERWISE SPECIFICALLY
SET FORTH HEREIN, THE HOLDERS SHALL BE ENTITLED, IN ADDITION TO ALL OTHER
AVAILABLE REMEDIES, TO AN INJUNCTION RESTRAINING ANY BREACH, WITHOUT THE
NECESSITY OF SHOWING ECONOMIC LOSS AND WITHOUT ANY BOND OR OTHER SECURITY BEING
REQUIRED. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NO HOLDER
SHALL BE ENTITLED TO CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES HEREUNDER.
HOWEVER, THE FOREGOING SHALL NOT IN ANY WAY LIMIT A HOLDER FROM BEING REIMBURSED
FOR ITS COSTS, FEES OR EXPENSES, INCLUDING, WITHOUT LIMITATION, REASONABLE
ATTORNEYS’ FEES AND DISBURSEMENTS IN CONNECTION WITH ANY OF ITS RIGHTS AND
REMEDIES HEREUNDER.

(15)      CONSTRUCTION. THIS CERTIFICATE OF DESIGNATIONS SHALL BE DEEMED TO BE
JOINTLY DRAFTED BY THE COMPANY AND ALL BUYERS (AS DEFINED IN THE SECURITIES
PURCHASE AGREEMENT) AND SHALL NOT BE CONSTRUED AGAINST ANY PERSON AS THE DRAFTER
HEREOF.

(16)      FAILURE OR INDULGENCE NOT WAIVER. NO FAILURE OR DELAY ON THE PART OF A
HOLDER IN THE EXERCISE OF ANY POWER, RIGHT OR PRIVILEGE HEREUNDER SHALL OPERATE
AS A WAIVER THEREOF, NOR SHALL ANY SINGLE OR PARTIAL EXERCISE OF ANY SUCH POWER,
RIGHT OR PRIVILEGE PRECLUDE OTHER OR FURTHER EXERCISE THEREOF OR OF ANY OTHER
RIGHT, POWER OR PRIVILEGE.

(17)      NOTICE. WHENEVER NOTICE OR OTHER COMMUNICATION IS REQUIRED TO BE GIVEN
UNDER THIS CERTIFICATE OF DESIGNATIONS, UNLESS OTHERWISE PROVIDED HEREIN, SUCH
NOTICE SHALL BE GIVEN IN ACCORDANCE WITH SECTION 9(F) OF THE SECURITIES PURCHASE
AGREEMENT (PROVIDED THAT IF THE PREFERRED SHARES ARE NOT HELD BY A BUYER THEN
SUBSTITUTING THE WORDS “HOLDER OF SECURITIES” FOR THE WORD “BUYER”).

(18)      TRANSFER OF PREFERRED SHARES. A HOLDER MAY ASSIGN SOME OR ALL OF THE
PREFERRED SHARES AND THE ACCOMPANYING RIGHTS HEREUNDER HELD BY SUCH HOLDER
WITHOUT THE

37

--------------------------------------------------------------------------------

 

CONSENT OF THE COMPANY; PROVIDED THAT SUCH ASSIGNMENT IS IN COMPLIANCE WITH
APPLICABLE SECURITIES LAWS.

(19)      PREFERRED SHARE REGISTER. THE COMPANY SHALL MAINTAIN AT ITS PRINCIPAL
EXECUTIVE OFFICES (OR SUCH OTHER OFFICE OR AGENCY OF THE COMPANY AS IT MAY
DESIGNATE BY NOTICE TO THE HOLDERS), A REGISTER FOR THE PREFERRED SHARES, IN
WHICH THE COMPANY SHALL RECORD THE NAME AND ADDRESS OF THE PERSONS IN WHOSE NAME
THE PREFERRED SHARES HAVE BEEN ISSUED, AS WELL AS THE NAME AND ADDRESS OF EACH
TRANSFEREE. THE COMPANY MAY TREAT THE PERSON IN WHOSE NAME ANY PREFERRED SHARE
IS REGISTERED ON THE REGISTER AS THE OWNER AND HOLDER THEREOF FOR ALL PURPOSES,
NOTWITHSTANDING ANY NOTICE TO THE CONTRARY, BUT IN ALL EVENTS RECOGNIZING ANY
PROPERLY MADE TRANSFERS.

(20)      STOCKHOLDER MATTERS. ANY STOCKHOLDER ACTION, APPROVAL OR CONSENT
REQUIRED, DESIRED OR OTHERWISE SOUGHT BY THE COMPANY PURSUANT TO THE RULES AND
REGULATIONS OF THE PRINCIPAL MARKET, THE DGCL, THIS CERTIFICATE OF DESIGNATIONS
OR OTHERWISE WITH RESPECT TO THE ISSUANCE OF THE PREFERRED SHARES OR THE COMMON
STOCK ISSUABLE UPON CONVERSION THEREOF MAY BE EFFECTED BY WRITTEN CONSENT OF THE
COMPANY’S STOCKHOLDERS OR AT A DULY CALLED MEETING OF THE COMPANY’S
STOCKHOLDERS, ALL IN ACCORDANCE WITH THE APPLICABLE RULES AND REGULATIONS OF THE
PRINCIPAL MARKET AND THE DGCL. THIS PROVISION IS INTENDED TO COMPLY WITH THE
APPLICABLE SECTIONS OF THE DGCL PERMITTING STOCKHOLDER ACTION, APPROVAL AND
CONSENT AFFECTED BY WRITTEN CONSENT IN LIEU OF A MEETING.

(21)     DISCLOSURE. UPON RECEIPT OR DELIVERY BY THE COMPANY OF ANY NOTICE IN
ACCORDANCE WITH THE TERMS OF THIS CERTIFICATE OF DESIGNATIONS, UNLESS THE
COMPANY HAS IN GOOD FAITH DETERMINED THAT THE MATTERS RELATING TO SUCH NOTICE DO
NOT CONSTITUTE MATERIAL, NONPUBLIC INFORMATION RELATING TO THE COMPANY OR ITS
SUBSIDIARIES, THE COMPANY SHALL WITHIN ONE (1) BUSINESS DAY AFTER ANY SUCH
RECEIPT OR DELIVERY PUBLICLY DISCLOSE SUCH MATERIAL, NONPUBLIC INFORMATION ON A
CURRENT REPORT ON FORM 8-K OR OTHERWISE. IN THE EVENT THAT THE COMPANY BELIEVES
THAT A NOTICE CONTAINS MATERIAL, NONPUBLIC INFORMATION RELATING TO THE COMPANY
OR ITS SUBSIDIARIES, THE COMPANY SO SHALL INDICATE TO THE HOLDERS
CONTEMPORANEOUSLY WITH DELIVERY OF SUCH NOTICE, AND IN THE ABSENCE OF ANY SUCH
INDICATION, THE HOLDERS SHALL BE ALLOWED TO PRESUME THAT ALL MATTERS RELATING TO
SUCH NOTICE DO NOT CONSTITUTE MATERIAL, NONPUBLIC INFORMATION RELATING TO THE
COMPANY OR ITS SUBSIDIARIES.

(22)      SUBORDINATION.

(A)           NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS
CERTIFICATE OF DESIGNATION, THE SECURITIES PURCHASE AGREEMENT OR ANY OTHER
AGREEMENT, DOCUMENT, CERTIFICATE, OR INSTRUMENT GIVEN IN CONNECTION WITH,
RELATED TO OR AFFECTING THE PREFERRED SHARES, THE COMPANY’S OBLIGATION TO MAKE,
AND THE HOLDERS RIGHT TO RECEIVE, ANY DIVIDEND OR DISTRIBUTION (WHETHER IN CASH,
SECURITIES OR OTHER PROPERTY) OR ANY DIRECT OR INDIRECT PAYMENT OF ANY KIND OR
CHARACTER (WHETHER IN CASH, SECURITIES OR OTHER PROPERTY) IN CONSIDERATION FOR
OR OTHERWISE IN CONNECTION THE PREFERRED SHARES, INCLUDING, WITHOUT LIMITATION,
ANY AMORTIZATION, RETIREMENT, PURCHASE, REDEMPTION OR OTHER ACQUISITION OF ANY
PREFERRED SHARE, OR ANY OPTIONS, WARRANTS OR RIGHTS TO PURCHASE OR ACQUIRE ANY
PREFERRED SHARES OR COMMON STOCK OF THE COMPANY (COLLECTIVELY, THE “RESTRICTED
PAYMENTS”) ARE STRICTLY JUNIOR AND FULLY SUBORDINATED TO THE RIGHT

38

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OF PAYMENT HELD BY THE HOLDERS OF THE SENIOR DEBT (THE “SENIOR DEBT HOLDERS”).
IF A DEFAULT (HOWEVER DEFINED) UNDER ANY DOCUMENT, INSTRUMENT, OR OTHER
AGREEMENT IN ANY WAY RELATED TO THE SENIOR DEBT, WHETHER SUCH DOCUMENT,
INSTRUMENT, OR OTHER AGREEMENT EXISTS ON THE INITIAL ISSUANCE DATE OR IS ENTERED
INTO AFTER THE INITIAL ISSUANCE DATE, EXISTS AT THE TIME A RESTRICTED PAYMENT IS
TO BE MADE OR WOULD EXIST AS A RESULT OF SUCH RESTRICTED PAYMENT BEING MADE, (I)
THE COMPANY SHALL NOT MAKE, AND NO HOLDER IS ENTITLED TO RECEIVE, ANY RESTRICTED
PAYMENT UNLESS AND UNTIL THE “PAYMENT IN FULL OF THE SENIOR DEBT” (AS DEFINED
BELOW); AND (II) NO HOLDER SHALL BE ENTITLED TO ASK, DEMAND, SUE FOR, TAKE OR
RECEIVE FROM THE COMPANY OR ANY OF ITS SUBSIDIARIES, DIRECTLY OR INDIRECTLY, IN
CASH OR OTHER PROPERTY, OR BY SET-OFF OR IN ANY OTHER MANNER (INCLUDING WITHOUT
LIMITATION FROM OR BY WAY OF COLLATERAL) PAYMENT OF ANY RESTRICTED PAYMENT
UNLESS AND UNTIL THE PAYMENT IN FULL OF THE SENIOR DEBT.

(B)           THE SUBORDINATION OF THE RIGHTS OF THE HOLDERS TO THE SENIOR DEBT
HOLDERS SHALL BE EFFECTIVE BOTH BEFORE AND AFTER THE COMMENCEMENT OF ANY
INSOLVENCY PROCEEDING (AS DEFINED BELOW). ALL REFERENCES IN THIS CLAUSE 22 TO
THE COMPANY OR ANY OF ITS SUBSIDIARIES SHALL INCLUDE SUCH ENTITY AS A
DEBTOR-IN-POSSESSION AND ANY RECEIVER OR TRUSTEE FOR SUCH ENTITY IN ANY
INSOLVENCY PROCEEDING.

(C)           AS BETWEEN THE HOLDERS AND THE SENIOR DEBT HOLDERS AND WITHOUT
RELEASING OR AFFECTING ANY OF ITS SENIOR RIGHTS AS TO THE HOLDERS, ANY SENIOR
DEBT HOLDER MAY, ONE OR MORE TIMES, IN ITS SOLE DISCRETION, WITHOUT NOTICE TO OR
THE CONSENT OF ANY HOLDER, TAKE ANY ACTION WITH RESPECT TO THE COMPANY, ANY OF
ITS SUBSIDIARIES OR ANY OF THE SENIOR DEBT, INCLUDING, WITHOUT LIMITATION, ONE
OR MORE OF THE FOLLOWING ACTIONS: (I) EXTEND CREDIT TO THE COMPANY OR ANY OF ITS
SUBSIDIARIES IN SUCH AMOUNTS AS SUCH SENIOR DEBT HOLDER MAY DETERMINE OR
WITHHOLD CREDIT FROM THE COMPANY OR ANY OF ITS SUBSIDIARIES;  (II) RELEASE,
RENEW OR MODIFY THE OBLIGATIONS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES OR ANY
OTHER PERSON OR ENTITY OBLIGATED ON ANY OF THE SENIOR DEBT; (C) RELEASE,
EXCHANGE, MODIFY, OR SURRENDER IN WHOLE OR IN PART SUCH SENIOR DEBT HOLDER’S
RIGHTS WITH RESPECT TO ANY SECURITY FOR ANY OF THE SENIOR DEBT; (D) MODIFY OR
ALTER THE TERM, INTEREST RATE OR DUE DATE OF ANY PAYMENT OF ANY OF THE SENIOR
DEBT; (E) GRANT ANY POSTPONEMENTS, COMPROMISES, INDULGENCES, WAIVERS, SURRENDERS
OR DISCHARGES OR MODIFY THE TERMS OF ITS AGREEMENTS WITH THE COMPANY OR ANY OF
ITS SUBSIDIARIES; (F) CHANGE ITS MANNER OF DOING BUSINESS WITH THE COMPANY OR
ANY OF ITS SUBSIDIARIES OR ANY OTHER PERSON OR ENTITY; (G) OBTAIN ADDITIONAL
SECURITY FOR THE SENIOR DEBT; OR (H) IMPUTE PAYMENTS OR PROCEEDS OF ANY SECURITY
FURNISHED FOR ANY OF THE SENIOR DEBT, IN WHOLE OR IN PART, TO ANY OF THE SENIOR
DEBT, OR RETAIN THE PAYMENTS OR PROCEEDS AS SECURITY FOR THE SENIOR DEBT WITHOUT
APPLYING SAME TOWARD PAYMENT OF THE SENIOR DEBT. EACH HOLDER WAIVES AND RELEASES
ALL CLAIMS AND DEFENSES ARISING FROM ANY SUCH ACTIONS BY ANY HOLDER OF SENIOR
DEBT, INCLUDING, WITHOUT LIMITATION, CLAIMS AND DEFENSES RELATING TO THE
INABILITY TO COLLECT ANY RESTRICTED PAYMENT. NO SENIOR DEBT HOLDER WILL BE
LIABLE FOR ANY ACTION OR FAILURE TO ACT UNDER OR IN CONNECTION WITH ANY OF THE
DOCUMENTS OR INSTRUMENTS EVIDENCING OR SECURING THE SENIOR DEBT, IT BEING
UNDERSTOOD THAT THE DECISION OF WHETHER AND WHEN TO ACT AND THE MANNER OF
PROCEEDING UNDER SUCH INSTRUMENTS AND DOCUMENTS ARE WITHIN THE SOLE DISCRETION
OF SUCH SENIOR DEBT HOLDERS, AND SHALL NOT BE AFFECTED IN ANY MANNER BY THE
EXISTENCE OF THE COMPANY’S OBLIGATIONS HEREUNDER.

(D)           FOR PURPOSES HEREOF, “PAYMENT IN FULL OF THE SENIOR DEBT” MEANS
THE SATISFACTION OF ALL OF THE FOLLOWING: (I) THE PASSAGE OF 90 DAYS AFTER THE
INDEFEASIBLE AND FINAL PAYMENT IN FULL IN CASH OF THE SENIOR DEBT, (II) THE
TERMINATION OF ALL HEDGING TRANSACTIONS WITH

39

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ANY SENIOR DEBT HOLDER, (III) THE TERMINATION OR EXPIRATION OF ALL COMMITMENTS
OF EACH SENIOR DEBT HOLDER TO ADVANCE FUNDS OR ISSUE LETTERS OF CREDIT, AND (IV)
THE TERMINATION OR EXPIRATION AND RETURN OF ALL LETTERS OF CREDIT ISSUED BY ANY
SENIOR DEBT HOLDER. FOR PURPOSES HEREOF, “INSOLVENCY PROCEEDING” MEANS ANY
DISTRIBUTION OF ALL OR ANY OF THE ASSETS OF ANY ENTITY TO CREDITORS OF SUCH
ENTITY UPON THE DISSOLUTION, WINDING UP, LIQUIDATION, ARRANGEMENT,
REORGANIZATION, ADJUSTMENT, PROTECTION, RELIEF, OR COMPOSITION OF SUCH ENTITY OR
ITS DEBTS, WHETHER IN ANY BANKRUPTCY, INSOLVENCY, ARRANGEMENT, REORGANIZATION,
RECEIVERSHIP, RELIEF OR SIMILAR PROCEEDINGS OR UPON AN ASSIGNMENT FOR THE
BENEFIT OF CREDITORS OR ANY OTHER MARSHALLING OF THE ASSETS AND LIABILITIES OF
SUCH ENTITY OR OTHERWISE.

*  *  *  *  *

40

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to
be signed by [NAME], its [OFFICE], as of the          day of August, 2006

 

CANO PETROLEUM, INC.

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

--------------------------------------------------------------------------------

 

EXHIBIT I

CANO PETROLEUM, INC. CONVERSION NOTICE

Reference is made to the Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock  of Cano Petroleum, Inc. (the “Certificate
of Designations”).  In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series D Convertible Preferred Stock, par value $[0.0001] per share (the
“Preferred Shares”), of Cano Petroleum, Inc., a Delaware corporation (the
“Company”), indicated below into shares of Common Stock, par value $0.0001 per
share (the “Common Stock”), of the Company, as of the date specified below.

Date of Conversion:

 

Number of Preferred Shares to be converted:

 

Stock certificate no(s). of Preferred Shares to be converted:

 

Tax ID Number (If applicable):

 

 

Please confirm the following information:

Conversion Price:

 

Number of shares of Common Stock to be issued:

 

 

Please issue the Common Stock into which the Preferred Shares are being
converted in the following name and to the following address:

Issue to:

 

 

 

Address:

 

Telephone Number:

 

Facsimile Number:

 

Authorization:

 

By:

 

 

Title:

 

 

Dated:

 

Account Number (if electronic book entry transfer):

 

Transaction Code Number (if electronic book entry transfer):

 

 

--------------------------------------------------------------------------------

 

[NOTE TO HOLDER — THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT]

43

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ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs
[Transfer Agent] to issue the above indicated number of shares of Common Stock
in accordance with the Irrevocable Transfer Agent Instructions dated August    ,
2006 from the Company and acknowledged and agreed to by [Transfer Agent].

 

CANO PETROLEUM, INC.

 

By:

 

 

Name:

 

 

Title:

 

 

--------------------------------------------------------------------------------

Exhibit B

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS WARRANT NOR
THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. 
THE WARRANT AND THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE WARRANT OR THE SECURITIES INTO WHICH
THIS WARRANT IS EXERCISABLE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B)
AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE WARRANT
AND THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE MAY BE PLEDGED
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE WARRANT OR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE.

CANO PETROELUM, INC.

WARRANT TO PURCHASE COMMON STOCK

No. W-   

August     , 2006

 

Void After February    , 2008

THIS CERTIFIES THAT, for value received,
                                                     , with its principal office
at                                       , or its successors and permitted
assigns (the “Holder”), is entitled to subscribe for and purchase at the
Exercise Price (defined below) from Cano Petroleum, Inc., a Delaware
corporation, with its principal office at 801 Cherry St., Suite 3200, Fort
Worth, Texas 76102 (the “Company”) up to                         shares of the
common stock of the Company, par value $.0001 per share (the “Common Stock”),
subject to adjustment as provided herein.  This Warrant is one of a series of
Warrants being issued pursuant to the terms of the Securities Purchase
Agreement, dated August     , 2006, among the Company and the original Holder of
this Warrant and the other parties named therein (the “Purchase Agreement”). 
Capitalized terms not otherwise defined herein shall have the respective
meanings ascribed to such terms in the Purchase Agreement.

1.             DEFINITIONS.  As used herein, the following terms shall have the
meanings ascribed to them below:

--------------------------------------------------------------------------------

 

(a)           “Exercise Period” shall mean the period commencing 180 days after
the date hereof and ending February    , 2008 at 5:00 p.m. Eastern Standard
Time, unless sooner exercised or terminated as provided below.

(b)           “Exercise Price” shall mean $4.79 per share, subject to adjustment
pursuant to Section 5 below.

(c)           “Warrant Shares” shall mean the shares of the Common Stock issued
upon exercise of this Warrant, subject to adjustment pursuant to the terms
herein, including but not limited to adjustment pursuant to Section 5 below.

2.             EXERCISE OF WARRANT.

2.1          Method of Exercise.  The rights represented by this Warrant may be
exercised in whole or in part at any time during the Exercise Period, by
delivery of the following to the Company at its address set forth above (or at
such other address as it may designate by notice in writing to the Holder):

(a)           an executed Notice of Exercise in the form attached hereto;

(b)           payment of the Exercise Price either (i) in cash or by check or
wire transfer of immediately available funds, or (ii) pursuant to a Cashless
Exercise, as described below; and

(c)           this Warrant.

Upon the exercise of the rights represented by this Warrant, shares of Common
Stock shall be issued for the Warrant Shares so purchased, and shall be
registered in the name of the Holder or persons affiliated with the Holder, if
the Holder so designates, within a reasonable time after the rights represented
by this Warrant shall have been so exercised and shall be issued in certificate
form and delivered to the Holder, if so requested.

The person in whose name any Warrant Shares are to be issued upon exercise of
this Warrant shall be deemed to have become the holder of record of such shares
on the date on which this Warrant was surrendered and payment of the Exercise
Price was made, irrespective of the date of issuance of the shares of Common
Stock, except that, if the date of such surrender and payment is a date when the
stock transfer books of the Company are closed, such person shall be deemed to
have become the holder of such shares at the close of business on the next
succeeding date on which the stock transfer books are open.

2.2          Cashless Exercise.  Notwithstanding any provisions herein to the
contrary, if, at any time during the Exercise Period, the Current Market Price
(as defined below) of one share of Common Stock is greater than the Exercise
Price (at the date of calculation as set forth below), in lieu of exercising
this Warrant by payment of cash, the Holder may exercise this Warrant by a
cashless exercise by surrender of this Warrant at the principal office of the
Company together with the properly endorsed Notice of Exercise and the Company
shall issue to the Holder a number of shares of Common Stock computed using the
following formula:

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X =       Y (B-A)
B

Where:                                                         X =          the
number of shares of Common Stock to be issued to the Holder.

Y =                              the number of shares of Common Stock
purchasable upon exercise of all of the Warrant or, if only a portion of the
Warrant is being exercised, the portion of the Warrant being exercised.

A =         the Exercise Price.

B =          the Current Market Price of one share of Common Stock.

“Current Market Price” means on any particular date:

(a)           if the Common Stock is traded on the Nasdaq Capital Market, the
Nasdaq Global Market or the Nasdaq Global Select Market, the average of the
closing prices of the Common Stock on such market over the five trading days
ending immediately prior to the applicable date of valuation;

(b)           if the Common Stock is traded on any registered national stock
exchange but is not traded on the Nasdaq Capital Market, the Nasdaq Global
Market or the Nasdaq Global Select Market, the average of the closing prices of
the Common Stock on such exchange over the five trading days ending immediately
prior to the applicable date of valuation

(c)           if the Common Stock is traded over-the-counter, but not on the
Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market
or a registered national stock exchange, the average of the closing bid prices
over the 30-day period ending immediately prior to the applicable date of
valuation; and

(d)           if there is no active public market for the Common Stock, the
value thereof, as determined in good faith by the Board of Directors of the
Company upon due consideration of the proposed determination thereof by the
Holder.

2.3          Partial Exercise.  If this Warrant is exercised in part only, the
Company shall, upon surrender of this Warrant, execute and deliver, within 10
days of the date of exercise, a new Warrant evidencing the rights of the Holder,
or such other person as shall be designated in the Notice of Exercise, to
purchase the balance of the Warrant Shares purchasable hereunder.  In no event
shall this Warrant be exercised for a fractional Warrant Share, and the Company
shall not distribute a Warrant exercisable for a fractional Warrant Share. 
Fractional Warrant Shares shall be treated as provided in Section 6 hereof.

2.4           Delivery.  Certificates for shares purchased hereunder shall be
transmitted by the transfer agent of the Company to the Holder by crediting the
account of the Holder’s prime broker with the Depository Trust Company through
its Deposit Withdrawal Agent Commission system if the Company is a participant
in such system (and so long as the legend may be removed in accordance with
Section 2(h) of the Purchase Agreement), and otherwise by physical delivery to
the address specified by the Holder in the Notice of Exercise.

3

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3.             COVENANTS OF THE COMPANY.

3.1          Covenants as to Warrant Shares.  The Company covenants and agrees
that if at any time during the Exercise Period the number of authorized but
unissued shares of Common Stock shall not be sufficient to permit exercise of
this Warrant, the Company will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock (or other securities as provided herein) to such number of shares
as shall be sufficient for such purposes.

3.2          No Impairment.  Except and to the extent as waived or consented to
by the Holder or otherwise in accordance with Section 10 hereof, the Company
will not, by amendment of its Certificate of Incorporation (as such may be
amended from time to time), or through any means, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the exercise
rights of the Holder against impairment.

3.3          Notices of Record Date.  In the event of any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend which is the same as cash dividends paid in previous
quarters) or other distribution, the Company shall mail to the Holder, at least
ten days prior to the date specified herein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend or
distribution.

4.             REPRESENTATIONS OF HOLDER.

4.1          Acquisition of Warrant for Personal Account.  The Holder represents
and warrants that it is acquiring the Warrant and the Warrant Shares solely for
its account and not with a present view toward the public or distribution of
said Warrant or Warrant Shares or any part thereof and has no intention of
selling or distributing said Warrant or Warrant Shares or any arrangement or
understanding with any other persons regarding the sale or distribution of said
Warrant or the Warrant Shares.  The Holder will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) the Warrant except in
accordance with the Securities Act and will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) the Warrant Shares except in
accordance with the Securities Act.

4.2          Securities Are Not Registered.

(a)           The Holder understands that the offer and sale of the Warrant or
the Warrant Shares have not been registered under the Securities Act on the
basis that no distribution or public offering of the stock of the Company is to
be effected.  The Holder realizes that the basis for the exemption may not be
present if, notwithstanding its representations, the Holder has a present
intention of acquiring the securities for a fixed or determinable period in the

4

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future, selling (in connection with a distribution or otherwise), granting any
participation in, or otherwise distributing the securities.  The Holder has no
such present intention.

(b)           The Holder recognizes that the Warrant and the Warrant Shares must
be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available.  The Holder
recognizes that the Company has no obligation to register the Warrant or, except
as provided in the Purchase Agreement, the Warrant Shares, or to comply with any
exemption from such registration.

(c)           The Holder is aware that neither the Warrant nor the Warrant
Shares may be sold pursuant to Rule 144 adopted under the Securities Act unless
certain conditions are met, including, among other things, the existence of a
public market for the shares, the availability of certain current public
information about the Company, the resale following the required holding period
under Rule 144 and the number of shares being sold during any three month period
not exceeding specified limitations.  Holder is aware that any such sale made in
reliance on Rule 144, if Rule 144 is available, may be made only in accordance
with the terms of Rule 144.

4.3          Disposition of Warrant and Warrant Shares.  Holder understands that
this Warrant and until such time as the resale of the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Warrant Shares, except as set
forth below, shall bear any legend as required by the “blue sky” laws of any
state and a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of this warrant or such stock
certificates):

[NEITHER THE ISSUANCE AND SALE OF THIS WARRANT NOR THE SECURITIES INTO WHICH
THIS WARRANT IS EXERCISABLE HAVE BEEN][THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE 1933 ACT IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue this
Warrant or a certificate without such legend to the holder of the Warrant Shares
upon which it is stamped, if,

5

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unless otherwise required by state securities laws, (i) the Warrant or such
Warrant Shares, as applicable, are registered for resale under the 1933 Act,
(ii) in connection with a sale, assignment or other transfer, such holder
provides the Company with an opinion of counsel, in a generally acceptable form,
to the effect that such sale, assignment or transfer of the Warrant or the
Warrant Shares, as applicable, may be made without registration under the
applicable requirements of the 1933 Act, or (iii) such holder provides the
Company with reasonable assurance that the Warrant or the Warrant Shares, as
applicable can be sold, assigned or transferred pursuant to Rule 144(k).

5.             ADJUSTMENT OF EXERCISE PRICE.  In the event of changes in the
outstanding Common Stock of the Company by reason of stock dividends, split-ups,
recapitalizations, reclassifications, combinations or exchanges of shares,
separations, reorganizations, liquidations, or the like (other than as set forth
in Section 7), the number and class of shares available under the Warrant in the
aggregate and the Exercise Price shall be correspondingly adjusted to give the
Holder, on exercise for the same aggregate Exercise Price, the total number,
class, and kind of shares as the Holder would have owned had the Warrant been
exercised prior to the event and had the Holder continued to hold such shares
until after the event requiring adjustment.  The form of this Warrant need not
be changed because of any adjustment in the number, class, and kind of shares
subject to this Warrant.  The Company shall promptly provide a certificate from
its Chief Executive Officer notifying the Holder in writing of any adjustment in
the Exercise Price and/or the total number, class, and kind of shares issuable
upon exercise of this Warrant, which certificate shall specify the Exercise
Price and number, class and kind of shares under this Warrant after giving
effect to such adjustment.

6.             FRACTIONAL SHARES.  No fractional shares shall be issued upon the
exercise of this Warrant as a consequence of any adjustment pursuant hereto. 
All Warrant Shares (including fractions) issuable upon exercise of this Warrant
may be aggregated for purposes of determining whether the exercise would result
in the issuance of any fractional share.  If, after aggregation, the exercise
would result in the issuance of a fractional share, the Company shall, in lieu
of issuance of any fractional share, pay the Holder otherwise entitled to such
fraction a sum in cash equal to the product resulting from multiplying the
Current Market Price of the Common Stock on the date of exercise of the Warrant
by such fraction.

7.             CERTAIN EVENTS.  In the event of, at any time during the Exercise
Period, any capital reorganization, or any reclassification of the capital stock
of the Company (other than a change in par value or from par value to no par
value or no par value to par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or merger
of the Company with or into another corporation (other than a merger solely to
effect a reincorporation of the Company into another state), in each case, in
which the stockholders of the Company immediately prior to such capital
reorganization, reclassification, consolidation or merger, will hold less than a
majority of the outstanding shares of the Company or resulting corporation
immediately after such capital reorganization, reclassification, consolidation
or merger, or the sale or other disposition of all or substantially all of the
properties and assets of the Company and its subsidiaries, taken as a whole, in
its entirety to any other person, other than sales or other dispositions that do
not require stockholder approval (each, an “Event”), then, as a condition of
such Event, lawful and adequate provision shall be made whereby each Holder
shall thereafter have the right to purchase and receive upon the basis and upon
the terms and conditions herein specified and in lieu of the Warrant Shares
immediately theretofore issuable

6

--------------------------------------------------------------------------------

 

upon exercise of the Warrant, such shares of stock, securities or assets as
would have been issuable or payable with respect to or in exchange for a number
of Warrant Shares equal to the number of Warrant Shares immediately theretofore
issuable upon exercise of the Warrant, had such Event not taken place, and in
any such case appropriate provision shall be made with respect to the rights and
interests of each Holder to the end that the provisions hereof (including,
without limitation, provision for adjustment of the Exercise Price) shall
thereafter be applicable, as nearly equivalent as may be practicable in relation
to any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof.  The Company shall not effect any such Event unless prior to or
simultaneously with the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger, or the
corporation purchasing or otherwise acquiring such assets or other appropriate
corporation or entity shall assume the obligation to deliver to the Holder, at
the last address of the Holder appearing on the books of the Company, such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to purchase, and the other obligations
under this Warrant.  The provisions of this Section 7 shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers, sales,
transfers or other dispositions.

8.             LIMITATION ON BENEFICIAL OWNERSHIP.  The Company shall not effect
any exercise of the Warrant, and the older shall not have the right to exercise
any of the Warrant, to the extent that after giving effect to such exercise, the
beneficial owner of such shares (together with such person’s affiliates) would
have acquired, through exercise of the Warrant or otherwise, beneficial
ownership of a number of shares of common stock that exceeds the percentage, if
any, set forth opposite the Holder’s name in column (8) of the schedule of
buyers to the securities purchase agreement (“maximum percentage”) of the number
of shares of common stock outstanding immediately after giving effect to such
conversion.  For purposes of this Section 8, beneficial ownership shall be
calculated in accordance with section 13(d) of the Securities Exchange Act of
1934, as amended.  For purposes of this Section 8, in determining the number of
outstanding shares of common stock, the Holder may rely on the number of
outstanding shares of common stock as reflected in (1) the Company’s most recent
Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB or Form 8-K, as the case may be,
(2) a more recent public announcement by the Company, or (3) any other notice by
the Company or the transfer agent setting forth the number of shares of Common
Stock outstanding.  for any reason at any time, upon the written request of the
Holder, the Company shall within one (1) business day following the receipt of
such notice, confirm orally and in writing to the Holder the number of shares of
Common Stock then outstanding.  In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including the Warrant, by the Holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  By written notice to the Company, the Holder may
from time to time increase or decrease the maximum percentage to any other
percentage specified in such notice; provided that (i) any such increase will
not be effective until the sixty-first (61st) day after such notice is delivered
to the Company, and (ii) any such increase or decrease will apply only to the
Holder providing such written notice.  Notwithstanding the foregoing, if the
Holder has elected “no limit” in column (8) of the Schedule of Buyers to the
Securities Purchase Agreement, the limitations set forth in this Section 8 shall
not be applicable to Holder.

7

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9.             STOCKHOLDER RIGHTS.  This Warrant in and of itself shall not
entitle the Holder to any voting rights or other rights as a stockholder of the
Company.

10.          LOST, STOLEN, MUTILATED OR DESTROYED WARRANT.  If this Warrant is
lost, stolen, mutilated or destroyed, the Company may, on such terms as to
indemnity or otherwise as it may reasonably impose (which shall, in the case of
a mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. 
Any such new Warrant shall constitute an original contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant shall be at any time enforceable by anyone.

11.          MODIFICATIONS AND WAIVER.  This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the Company and (i) Purchasers holding Warrants representing a
majority of the number of Warrant Shares then issuable upon exercise of the then
unexercised Warrants, provided, however, that such modification, amendment or
waiver is made with respect to all unexercised Warrants issued pursuant to the
Purchase Agreement and does not adversely affect the Holder without adversely
affecting all holders of Warrants in a similar manner; or (ii) the Holder.

12.          NOTICES, ETC.  All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified, (b) when sent by confirmed email, telex or facsimile
if sent during normal business hours of the recipient, if not, then on the next
business day, (c) five days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one business day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt.  All communications shall be
sent to the Company at the address listed on the signature page and to the
Holders at the addresses on the Company records, or at such other address as the
Company or Holder may designate pursuant to this Section 11.

13.          ACCEPTANCE.  Receipt of this Warrant by the Holder shall constitute
acceptance of and agreement to all of the terms and conditions contained herein.

14.          GOVERNING LAW; JURISDICTION; JURY TRIAL.  All questions concerning
the construction, validity, enforcement and interpretation of this Warrant shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Warrant and agrees that
such service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained

8

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herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS WARRANT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

15.          DESCRIPTIVE HEADINGS.  The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.

16.          SEVERABILITY.  The invalidity or unenforceability of any provision
of this Warrant in any jurisdiction shall not affect the validity or
enforceability of such provision in any other jurisdiction, or affect any other
provision of this Warrant, which shall remain in full force and effect.

[Signature Page Follows]

9

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
duly authorized officer as of August    , 2006.

CANO PETROLEUM, INC.

 

 

 

 

 

By:

 

 

 

 

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

 

 

 

Address:

801 Cherry St., Suite 3200

 

 

Fort Worth, Texas 76102

 

 

Attention: Morris B. Smith and
James K. Teringo, Jr.

 

 

Facsimile: (817) 334-0222

 

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NOTICE OF EXERCISE

TO:  CANO PETROLEUM, INC.

(1)           The undersigned hereby elects to (check one box only):

o            purchase              shares of the Common Stock of Cano Petroleum,
Inc. (the “Company”) pursuant to the terms of the attached Warrant, and tenders
herewith payment of the exercise price in full for such shares, together with
all applicable transfer taxes, if any.

o            purchase the number of shares of Common Stock of the Company by
cashless exercise pursuant to the terms of the Warrant as shall be issuable upon
cashless exercise of the portion of the Warrant relating to                
shares, and shall tender payment of all applicable transfer taxes, if any.

(2)           Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:

 

 

 

(Name)

 

 

 

 

 

 

 

 

(Address)

 

 

(3)           The undersigned represents that (i) the aforesaid shares of Common
Stock are being acquired for the account of the undersigned for investment and
not with a view to, or for resale in connection with, the distribution thereof
and that the undersigned has no present intention of distributing or reselling
such shares; (ii) the undersigned is aware of the Company’s business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision regarding its investment in the
Company; (iii) the undersigned is experienced in making investments of this type
and has such knowledge and background in financial and business matters that the
undersigned is capable of evaluating the merits and risks of this investment and
protecting the undersigned’s own interests; (iv) the undersigned is aware that
the aforesaid shares of Common Stock may not be sold pursuant to Rule 144
adopted under the Securities Act unless certain conditions are met and until the
undersigned has held the shares for the number of years prescribed by Rule 144,
that among the conditions for use of the Rule is the availability of current
information to the public about the Company and the Company has not made such
information available and has no present plans to do so; and (v) the undersigned
agrees not to make any disposition of all or any part of the aforesaid shares of
Common Stock unless and until there is then in effect a registration statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with said registration statement, or the undersigned has
provided the Company with an opinion of counsel satisfactory to the Company,
stating that such registration is not required.

 

 

 

 

 

(Date)

(Signature)

 

 

 

 

 

 

(Print name)

 

11

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EXHIBIT C

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of August 25, 2006,
by and among Cano Petroleum, Inc., a Delaware corporation, with headquarters
located at 801 Cherry St., Suite 3200, Fort Worth, Texas 76102 (the ”Company”),
and the undersigned buyers (each, a “Buyer”, and collectively, the “Buyers”).

WHEREAS:

A.            In connection with the Securities Purchase Agreement by and among
the parties hereto of even date herewith (the “Securities Purchase Agreement”),
the Company has agreed, upon the terms and subject to the conditions set forth
in the Securities Purchase Agreement, to issue and sell to each Buyer (i) shares
(the “Common Shares”) of the Company’s common stock, par value $0.0001 per share
(the “Common Stock”) (ii) preferred shares of the Company designated as Series D
Convertible Preferred Stock, the terms of which are set forth in the certificate
of designations for such series of preferred shares (the “Certificate of
Designations”) in the form attached as Exhibit A to the Securities Purchase
Agreement (the “Preferred Shares”) which, among other things, will be
convertible into shares of Common Stock (as converted, the “Conversion Shares”),
in accordance with the terms of the Certificate of Designations and (iii)
warrants (the “Warrants”), which will be exercisable to purchase shares of
Common Stock (as exercised collectively, the “Warrant Shares”).

B.            In accordance with the terms of the Securities Purchase Agreement,
the Company has agreed to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any similar successor statute (collectively, the “1933 Act”), and applicable
state securities laws.

NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the Buyers
hereby agree as follows:

1.     DEFINITIONS.

Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.  As used in
this Agreement, the following terms shall have the following meanings:

A.     “BUSINESS DAY” MEANS ANY DAY OTHER THAN SATURDAY, SUNDAY OR ANY OTHER DAY
ON WHICH COMMERCIAL BANKS IN THE CITY OF NEW YORK ARE AUTHORIZED OR REQUIRED BY
LAW TO REMAIN CLOSED.

B.     “CLOSING DATE” SHALL HAVE THE MEANING SET FORTH IN THE SECURITIES
PURCHASE AGREEMENT.

C.     “EFFECTIVE DATE” MEANS THE DATE THAT THE REGISTRATION STATEMENT HAS BEEN
DECLARED EFFECTIVE BY THE SEC.

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D.     “EFFECTIVENESS DEADLINE” MEANS THE DATE WHICH IS (I) IN THE EVENT THAT
THE REGISTRATION STATEMENT IS NOT SUBJECT TO ANY REVIEW BY THE SEC, NINETY (90)
DAYS AFTER THE CLOSING DATE OR (II) IN THE EVENT THAT THE REGISTRATION STATEMENT
IS SUBJECT TO ANY REVIEW BY THE SEC, ONE HUNDRED TWENTY (120) DAYS AFTER THE
CLOSING DATE.

E.     “FILING DEADLINE” MEANS THE DATE THAT IS FORTY FIVE (45) DAYS AFTER THE
CLOSING DATE.

F.      “INVESTOR” MEANS A BUYER OR ANY TRANSFEREE OR ASSIGNEE THEREOF TO WHOM A
BUYER ASSIGNS ITS RIGHTS UNDER THIS AGREEMENT AND WHO AGREES TO BECOME BOUND BY
THE PROVISIONS OF THIS AGREEMENT IN ACCORDANCE WITH SECTION 9 AND ANY TRANSFEREE
OR ASSIGNEE THEREOF TO WHOM A TRANSFEREE OR ASSIGNEE ASSIGNS ITS RIGHTS UNDER
THIS AGREEMENT AND WHO AGREES TO BECOME BOUND BY THE PROVISIONS OF THIS
AGREEMENT IN ACCORDANCE WITH SECTION 9.

G.     “PERSON” MEANS AN INDIVIDUAL, A LIMITED LIABILITY COMPANY, A PARTNERSHIP,
A JOINT VENTURE, A CORPORATION, A TRUST, AN UNINCORPORATED ORGANIZATION AND A
GOVERNMENT OR ANY DEPARTMENT OR AGENCY THEREOF.

H.     “REGISTER,” “REGISTERED,” AND “REGISTRATION” REFER TO A REGISTRATION
EFFECTED BY PREPARING AND FILING ONE OR MORE REGISTRATION STATEMENTS (AS DEFINED
BELOW) IN COMPLIANCE WITH THE 1933 ACT AND PURSUANT TO RULE 415, AND THE
DECLARATION OR ORDERING OF EFFECTIVENESS OF SUCH REGISTRATION STATEMENT(S) BY
THE SEC.

I.      “REGISTRABLE SECURITIES” MEANS (I) THE COMMON SHARES, (II) THE
CONVERSION SHARES ISSUED OR ISSUABLE UPON CONVERSION OF THE PREFERRED SHARES,
(III) THE WARRANT SHARES ISSUED OR ISSUABLE UPON EXERCISE OF THE WARRANTS AND
(IV) ANY CAPITAL STOCK OF THE COMPANY ISSUED OR ISSUABLE WITH RESPECT TO THE
WARRANTS, THE WARRANT SHARES, THE COMMON SHARES OR THE CONVERSION SHARES AS A
RESULT OF ANY STOCK SPLIT, STOCK DIVIDEND, RECAPITALIZATION, EXCHANGE OR SIMILAR
EVENT OR OTHERWISE, WITHOUT REGARD TO ANY LIMITATIONS ON CONVERSIONS OF THE
PREFERRED SHARES OR EXERCISES OF THE WARRANTS.

J.      “REGISTRATION STATEMENT” MEANS A REGISTRATION STATEMENT OR REGISTRATION
STATEMENTS OF THE COMPANY FILED UNDER THE 1933 ACT COVERING THE REGISTRABLE
SECURITIES.

K.     “REQUIRED HOLDERS” MEANS THE HOLDERS OF AT LEAST A MAJORITY OF THE
REGISTRABLE SECURITIES.

L.      “REQUIRED REGISTRATION AMOUNT” MEANS THE SUM OF (I) 100% OF THE NUMBER
OF COMMON SHARES ISSUED AND(II) 130% OF THE MAXIMUM NUMBER OF CONVERSION SHARES
ISSUED AND ISSUABLE PURSUANT TO THE CERTIFICATE OF DESIGNATIONS AND (III) 100%
OF THE MAXIMUM NUMBER OF WARRANT SHARES ISSUED AND ISSUABLE PURSUANT TO THE
WARRANTS, AS OF THE TRADING DAY IMMEDIATELY PRECEDING THE APPLICABLE DATE OF
DETERMINATION, ALL SUBJECT TO ADJUSTMENT AS PROVIDED IN SECTION 2(E) (WITHOUT
REGARD TO ANY LIMITATIONS ON CONVERSION OF THE PREFERRED SHARES OR EXERCISE OF
THE WARRANTS).

M.    “RULE 415” MEANS RULE 415 UNDER THE 1933 ACT OR ANY SUCCESSOR RULE
PROVIDING FOR OFFERING SECURITIES ON A CONTINUOUS OR DELAYED BASIS.

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N.     “SEC” MEANS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.

2.     REGISTRATION.

A.     MANDATORY REGISTRATION.  THE COMPANY SHALL PREPARE, AND, AS SOON AS
PRACTICABLE, BUT IN NO EVENT LATER THAN THE FILING DEADLINE, FILE WITH THE SEC
THE REGISTRATION STATEMENT ON FORM S-1 COVERING THE RESALE OF ALL OF THE
REGISTRABLE SECURITIES.  THE REGISTRATION STATEMENT PREPARED PURSUANT HERETO
SHALL REGISTER FOR RESALE AT LEAST THE NUMBER OF SHARES OF COMMON STOCK EQUAL TO
THE REQUIRED REGISTRATION AMOUNT DETERMINED AS OF THE DATE THE REGISTRATION
STATEMENT IS INITIALLY FILED WITH THE SEC.  THE REGISTRATION STATEMENT SHALL
CONTAIN (EXCEPT IF OTHERWISE DIRECTED BY THE REQUIRED HOLDERS) THE “SELLING
STOCKHOLDERS” AND “PLAN OF DISTRIBUTION” SECTIONS IN SUBSTANTIALLY THE FORM
ATTACHED HERETO AS EXHIBIT B.  THE COMPANY SHALL USE ITS BEST EFFORTS TO HAVE
THE REGISTRATION STATEMENT DECLARED EFFECTIVE BY THE SEC AS SOON AS PRACTICABLE,
BUT IN NO EVENT LATER THAN THE EFFECTIVENESS DEADLINE.  BY 9:30 AM ON THE SECOND
BUSINESS DAY FOLLOWING THE EFFECTIVE DATE, THE COMPANY SHALL FILE WITH THE SEC
IN ACCORDANCE WITH RULE 424 UNDER THE 1933 ACT THE FINAL PROSPECTUS TO BE USED
IN CONNECTION WITH SALES PURSUANT TO SUCH REGISTRATION STATEMENT.

B.     ALLOCATION OF REGISTRABLE SECURITIES.  THE INITIAL NUMBER OF REGISTRABLE
SECURITIES INCLUDED IN ANY REGISTRATION STATEMENT AND ANY INCREASE IN THE NUMBER
OF REGISTRABLE SECURITIES INCLUDED THEREIN SHALL BE ALLOCATED PRO RATA AMONG THE
INVESTORS BASED ON THE NUMBER OF REGISTRABLE SECURITIES HELD BY EACH INVESTOR AT
THE TIME THE REGISTRATION STATEMENT COVERING SUCH INITIAL NUMBER OF REGISTRABLE
SECURITIES OR INCREASE THEREOF IS DECLARED EFFECTIVE BY THE SEC.  IN THE EVENT
THAT AN INVESTOR SELLS OR OTHERWISE TRANSFERS ANY OF SUCH INVESTOR’S REGISTRABLE
SECURITIES, EACH TRANSFEREE SHALL BE ALLOCATED A PRO RATA PORTION OF THE THEN
REMAINING NUMBER OF REGISTRABLE SECURITIES INCLUDED IN SUCH REGISTRATION
STATEMENT FOR SUCH TRANSFEROR.  ANY SHARES OF COMMON STOCK INCLUDED IN A
REGISTRATION STATEMENT AND WHICH REMAIN ALLOCATED TO ANY PERSON WHICH CEASES TO
HOLD ANY REGISTRABLE SECURITIES COVERED BY SUCH REGISTRATION STATEMENT SHALL BE
ALLOCATED TO THE REMAINING INVESTORS, PRO RATA BASED ON THE NUMBER OF
REGISTRABLE SECURITIES THEN HELD BY SUCH INVESTORS WHICH ARE COVERED BY SUCH
REGISTRATION STATEMENT.  EXCEPT FOR SCOTT WHITE AND THE ESTATE OF MILES
O’LOUGHLIN, WHO HAVE THE RIGHT TO INCLUDE UP TO 1,791,320 SHARES OF COMMON STOCK
IN THE REGISTRATION STATEMENT, IN NO EVENT SHALL THE COMPANY INCLUDE ANY
SECURITIES OTHER THAN REGISTRABLE SECURITIES ON ANY REGISTRATION STATEMENT
WITHOUT THE PRIOR WRITTEN CONSENT OF THE REQUIRED HOLDERS.

C.     LEGAL COUNSEL.  SUBJECT TO SECTION 5 HEREOF, THE REQUIRED HOLDERS SHALL
HAVE THE RIGHT TO SELECT ONE LEGAL COUNSEL TO REVIEW AND OVERSEE ANY
REGISTRATION PURSUANT TO THIS SECTION 2 (“LEGAL COUNSEL”), WHICH SHALL BE
SCHULTE ROTH & ZABEL LLP OR SUCH OTHER COUNSEL AS THEREAFTER DESIGNATED BY THE
REQUIRED HOLDERS.  THE COMPANY AND LEGAL COUNSEL SHALL REASONABLY COOPERATE WITH
EACH OTHER IN PERFORMING THE COMPANY’S OBLIGATIONS UNDER THIS AGREEMENT.

D.     INELIGIBILITY FOR FORM S-3.  IN THE EVENT THAT FORM S-3 IS NOT AVAILABLE
FOR THE REGISTRATION OF THE RESALE OF REGISTRABLE SECURITIES HEREUNDER, THE
COMPANY SHALL (I) REGISTER THE RESALE OF THE REGISTRABLE SECURITIES ON ANOTHER
APPROPRIATE FORM REASONABLY ACCEPTABLE TO THE REQUIRED HOLDERS AND (II)
UNDERTAKE TO REGISTER THE REGISTRABLE SECURITIES ON FORM S-3 AS SOON AS SUCH
FORM IS AVAILABLE, PROVIDED THAT THE COMPANY SHALL MAINTAIN THE

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EFFECTIVENESS OF THE REGISTRATION STATEMENT THEN IN EFFECT UNTIL SUCH TIME AS A
REGISTRATION STATEMENT ON FORM S-3 COVERING THE REGISTRABLE SECURITIES HAS BEEN
DECLARED EFFECTIVE BY THE SEC.

E.     SUFFICIENT NUMBER OF SHARES REGISTERED.  IN THE EVENT THE NUMBER OF
SHARES AVAILABLE UNDER A REGISTRATION STATEMENT FILED PURSUANT TO SECTION 2(A)
IS INSUFFICIENT TO COVER ALL OF THE REGISTRABLE SECURITIES REQUIRED TO BE
COVERED BY SUCH REGISTRATION STATEMENT OR AN INVESTOR’S ALLOCATED PORTION OF THE
REGISTRABLE SECURITIES PURSUANT TO SECTION 2(B), THE COMPANY SHALL AMEND THE
APPLICABLE REGISTRATION STATEMENT, OR FILE A NEW REGISTRATION STATEMENT (ON THE
SHORT FORM AVAILABLE THEREFOR, IF APPLICABLE), OR BOTH, SO AS TO COVER AT LEAST
THE REQUIRED REGISTRATION AMOUNT AS OF THE TRADING DAY IMMEDIATELY PRECEDING THE
DATE OF THE FILING OF SUCH AMENDMENT OR NEW REGISTRATION STATEMENT, IN EACH
CASE, AS SOON AS PRACTICABLE, BUT IN ANY EVENT NOT LATER THAN FIFTEEN (15) DAYS
AFTER THE NECESSITY THEREFOR ARISES.  THE COMPANY SHALL USE ITS BEST EFFORTS TO
CAUSE SUCH AMENDMENT AND/OR NEW REGISTRATION STATEMENT TO BECOME EFFECTIVE AS
SOON AS PRACTICABLE FOLLOWING THE FILING THEREOF.  FOR PURPOSES OF THE FOREGOING
PROVISION, THE NUMBER OF SHARES AVAILABLE UNDER A REGISTRATION STATEMENT SHALL
BE DEEMED “INSUFFICIENT TO COVER ALL OF THE REGISTRABLE SECURITIES” IF AT ANY
TIME THE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR RESALE UNDER THE
REGISTRATION STATEMENT IS LESS THAN THE PRODUCT DETERMINED BY MULTIPLYING (I)
THE REQUIRED REGISTRATION AMOUNT AS OF SUCH TIME BY (II) 0.90.  THE CALCULATION
SET FORTH IN THE FOREGOING SENTENCE SHALL BE MADE WITHOUT REGARD TO ANY
LIMITATIONS ON THE CONVERSION OF THE PREFERRED SHARES OR THE EXERCISE OF THE
WARRANTS AND SUCH CALCULATION SHALL ASSUME THAT THE PREFERRED SHARES ARE THEN
CONVERTIBLE INTO SHARES OF COMMON STOCK AT THE THEN PREVAILING CONVERSION RATE
(AS DEFINED IN THE CERTIFICATE OF DESIGNATIONS) AND THAT THE WARRANTS ARE THEN
EXERCISABLE FOR SHARES OF COMMON STOCK AT THE THEN PREVAILING EXERCISE PRICE (AS
DEFINED IN THE WARRANTS).

F.      EFFECT OF FAILURE TO FILE AND OBTAIN AND MAINTAIN EFFECTIVENESS OF
REGISTRATION STATEMENT.  IF (I) A REGISTRATION STATEMENT COVERING ALL OF THE
REGISTRABLE SECURITIES REQUIRED TO BE COVERED THEREBY AND REQUIRED TO BE FILED
BY THE COMPANY PURSUANT TO THIS AGREEMENT IS (A) NOT FILED WITH THE SEC ON OR
BEFORE THE RESPECTIVE FILING DEADLINE (A “FILING FAILURE”) OR (B) NOT DECLARED
EFFECTIVE BY THE SEC ON OR BEFORE THE RESPECTIVE EFFECTIVENESS DEADLINE (AN
“EFFECTIVENESS FAILURE”) OR (II) ON ANY DAY AFTER THE EFFECTIVE DATE SALES OF
ALL OF THE REGISTRABLE SECURITIES REQUIRED TO BE INCLUDED ON SUCH REGISTRATION
STATEMENT CANNOT BE MADE (OTHER THAN DURING AN ALLOWABLE GRACE PERIOD (AS
DEFINED IN SECTION 3(R)) PURSUANT TO SUCH REGISTRATION STATEMENT (INCLUDING,
WITHOUT LIMITATION, BECAUSE OF A FAILURE TO KEEP SUCH REGISTRATION STATEMENT
EFFECTIVE, TO DISCLOSE SUCH INFORMATION AS IS NECESSARY FOR SALES TO BE MADE
PURSUANT TO SUCH REGISTRATION STATEMENT, TO REGISTER A SUFFICIENT NUMBER OF
SHARES OF COMMON STOCK OR TO MAINTAIN THE LISTING OF THE COMMON STOCK) (A
“MAINTENANCE FAILURE”) THEN, AS PARTIAL RELIEF FOR THE DAMAGES TO ANY HOLDER BY
REASON OF ANY SUCH DELAY IN OR REDUCTION OF ITS ABILITY TO SELL THE UNDERLYING
SHARES OF COMMON STOCK AND NOT AS A PENALTY (WHICH REMEDY SHALL NOT BE EXCLUSIVE
OF ANY OTHER REMEDIES AVAILABLE AT LAW OR IN EQUITY), THE COMPANY SHALL PAY TO
EACH HOLDER OF REGISTRABLE SECURITIES RELATING TO SUCH REGISTRATION STATEMENT AN
AMOUNT IN CASH EQUAL TO ONE AND ONE-HALF PERCENT (1.5%) OF THE AGGREGATE
PURCHASE PRICE (AS SUCH TERM IS DEFINED IN THE SECURITIES PURCHASE AGREEMENT) OF
SUCH INVESTOR’S REGISTRABLE SECURITIES INCLUDED IN SUCH REGISTRATION STATEMENT
ON EACH OF THE FOLLOWING DATES:  (I) THE DAY OF A FILING FAILURE; (II) THE DAY
OF AN EFFECTIVENESS FAILURE; (III) THE INITIAL DAY OF A MAINTENANCE FAILURE;
(IV) ON EVERY THIRTIETH DAY AFTER THE DAY OF A FILING FAILURE AND THEREAFTER
(PRO RATED FOR PERIODS TOTALING LESS THAN THIRTY

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DAYS) UNTIL SUCH FILING FAILURE IS CURED; (V) ON EVERY THIRTIETH DAY AFTER THE
DAY OF AN EFFECTIVENESS FAILURE AND THEREAFTER (PRO RATED FOR PERIODS TOTALING
LESS THAN THIRTY DAYS) UNTIL SUCH EFFECTIVENESS FAILURE IS CURED; AND (VI) ON
EVERY THIRTIETH DAY AFTER THE INITIAL DAY OF A MAINTENANCE FAILURE AND
THEREAFTER (PRO RATED FOR PERIODS TOTALING LESS THAN THIRTY DAYS) UNTIL SUCH
MAINTENANCE FAILURE IS CURED.  THE PAYMENTS TO WHICH A HOLDER SHALL BE ENTITLED
PURSUANT TO THIS SECTION 2(F) ARE REFERRED TO HEREIN AS “REGISTRATION DELAY
PAYMENTS.”  REGISTRATION DELAY PAYMENTS SHALL BE PAID ON THE EARLIER OF (I) THE
DATES SET FORTH ABOVE AND (II) THE THIRD BUSINESS DAY AFTER THE EVENT OR FAILURE
GIVING RISE TO THE REGISTRATION DELAY PAYMENTS IS CURED.  IN THE EVENT THE
COMPANY FAILS TO MAKE REGISTRATION DELAY PAYMENTS IN A TIMELY MANNER, SUCH
REGISTRATION DELAY PAYMENTS SHALL BEAR INTEREST AT THE RATE OF ONE AND ONE-HALF
PERCENT (1.5%) PER MONTH (PRORATED FOR PARTIAL MONTHS) UNTIL PAID IN FULL. 
NOTWITHSTANDING ANYTHING HEREIN OR IN THE SECURITIES PURCHASE AGREEMENT TO THE
CONTRARY (I) NO REGISTRATION DELAY PAYMENTS SHALL BE DUE AND PAYABLE WITH
RESPECT TO THE WARRANTS OR THE WARRANT SHARES AND (II) IN NO EVENT SHALL THE
AGGREGATE AMOUNT OF REGISTRATION DELAY PAYMENTS (OTHER THAN REGISTRATION DELAY
PAYMENTS PAYABLE PURSUANT TO EVENTS THAT ARE WITHIN THE CONTROL OF THE COMPANY)
EXCEED, IN THE AGGREGATE, 10% OF THE AGGREGATE PURCHASE PRICE.

3.     RELATED OBLIGATIONS.

At such time as the Company is obligated to file a Registration Statement with
the SEC pursuant to Section 2(a), 2(d) or 2(e), the Company will use its best
efforts to effect the registration of the Registrable Securities in accordance
with the intended method of disposition thereof and, pursuant thereto, the
Company shall have the following obligations:

A.     THE COMPANY SHALL PROMPTLY PREPARE AND FILE WITH THE SEC A REGISTRATION
STATEMENT WITH RESPECT TO THE REGISTRABLE SECURITIES AND USE ITS REASONABLE BEST
EFFORTS TO CAUSE SUCH REGISTRATION STATEMENT RELATING TO THE REGISTRABLE
SECURITIES TO BECOME EFFECTIVE AS SOON AS PRACTICABLE AFTER SUCH FILING (BUT IN
NO EVENT LATER THAN THE EFFECTIVENESS DEADLINE).  THE COMPANY SHALL KEEP EACH
REGISTRATION STATEMENT EFFECTIVE PURSUANT TO RULE 415 AT ALL TIMES UNTIL THE
EARLIER OF (I) THE DATE AS OF WHICH THE INVESTORS MAY SELL ALL OF THE
REGISTRABLE SECURITIES COVERED BY SUCH REGISTRATION STATEMENT WITHOUT
RESTRICTION PURSUANT TO RULE 144(K) (OR ANY SUCCESSOR THERETO) PROMULGATED UNDER
THE 1933 ACT OR (II) THE DATE ON WHICH THE INVESTORS SHALL HAVE SOLD ALL OF THE
REGISTRABLE SECURITIES COVERED BY SUCH REGISTRATION STATEMENT (THE “REGISTRATION
PERIOD”).  THE COMPANY SHALL ENSURE THAT EACH REGISTRATION STATEMENT (INCLUDING
ANY AMENDMENTS OR SUPPLEMENTS THERETO AND PROSPECTUSES CONTAINED THEREIN) SHALL
NOT CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT TO STATE A MATERIAL
FACT REQUIRED TO BE STATED THEREIN, OR NECESSARY TO MAKE THE STATEMENTS THEREIN
(IN THE CASE OF PROSPECTUSES, IN THE LIGHT OF THE CIRCUMSTANCES IN WHICH THEY
WERE MADE) NOT MISLEADING.  THE TERM “REASONABLE BEST EFFORTS” SHALL MEAN, AMONG
OTHER THINGS, THAT THE COMPANY SHALL SUBMIT TO THE SEC, WITHIN THREE (3)
BUSINESS DAYS AFTER THE LATER OF THE DATE THAT (I) THE COMPANY LEARNS THAT NO
REVIEW OF A PARTICULAR REGISTRATION STATEMENT WILL BE MADE BY THE STAFF OF THE
SEC OR THAT THE STAFF HAS NO FURTHER COMMENTS ON A PARTICULAR REGISTRATION
STATEMENT, AS THE CASE MAY BE, AND (II) THE APPROVAL OF LEGAL COUNSEL PURSUANT
TO SECTION 3(C) (WHICH APPROVAL IS IMMEDIATELY SOUGHT AND SHALL NOT BE
UNREASONABLY WITHHELD OR DELAYED), A REQUEST FOR ACCELERATION OF EFFECTIVENESS
OF SUCH REGISTRATION STATEMENT TO A TIME AND DATE NOT LATER THAN 48 HOURS AFTER
THE SUBMISSION OF SUCH REQUEST.

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B.     THE COMPANY SHALL PREPARE AND FILE WITH THE SEC SUCH AMENDMENTS
(INCLUDING POST-EFFECTIVE AMENDMENTS) AND SUPPLEMENTS TO A REGISTRATION
STATEMENT AND THE PROSPECTUS USED IN CONNECTION WITH SUCH REGISTRATION
STATEMENT, WHICH PROSPECTUS IS TO BE FILED PURSUANT TO RULE 424 PROMULGATED
UNDER THE 1933 ACT, AS MAY BE NECESSARY TO KEEP SUCH REGISTRATION STATEMENT
EFFECTIVE AT ALL TIMES DURING THE REGISTRATION PERIOD, AND, DURING SUCH PERIOD,
COMPLY WITH THE PROVISIONS OF THE 1933 ACT WITH RESPECT TO THE DISPOSITION OF
ALL REGISTRABLE SECURITIES OF THE COMPANY COVERED BY SUCH REGISTRATION STATEMENT
UNTIL SUCH TIME AS ALL OF SUCH REGISTRABLE SECURITIES SHALL HAVE BEEN DISPOSED
OF IN ACCORDANCE WITH THE INTENDED METHODS OF DISPOSITION BY THE SELLER OR
SELLERS THEREOF AS SET FORTH IN SUCH REGISTRATION STATEMENT.  IN THE CASE OF
AMENDMENTS AND SUPPLEMENTS TO A REGISTRATION STATEMENT WHICH ARE REQUIRED TO BE
FILED PURSUANT TO THIS AGREEMENT (INCLUDING PURSUANT TO THIS SECTION 3(B)) BY
REASON OF THE COMPANY FILING A REPORT ON FORM 10-Q, FORM 10-K OR ANY ANALOGOUS
REPORT UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE “1934 ACT”),
THE COMPANY SHALL HAVE INCORPORATED SUCH REPORT BY REFERENCE INTO SUCH
REGISTRATION STATEMENT, IF APPLICABLE, OR SHALL FILE SUCH AMENDMENTS OR
SUPPLEMENTS WITH THE SEC WITHIN ONE (1) BUSINESS DAY AFTER THE DAY ON WHICH THE
1934 ACT REPORT IS FILED WHICH CREATED THE REQUIREMENT FOR THE COMPANY TO AMEND
OR SUPPLEMENT SUCH REGISTRATION STATEMENT.

C.     THE COMPANY SHALL (A) PERMIT LEGAL COUNSEL TO REVIEW AND COMMENT UPON (I)
A REGISTRATION STATEMENT AT LEAST FIVE (5) BUSINESS DAYS PRIOR TO ITS FILING
WITH THE SEC AND (II) ALL AMENDMENTS AND SUPPLEMENTS TO ALL REGISTRATION
STATEMENTS (EXCEPT FOR ANNUAL REPORTS ON FORM 10-K OR FORM 10-KSB, QUARTERLY
REPORTS ON FORM 10-Q OR FORM 10-QSB, CURRENT REPORTS ON FORM 8-K, AND ANY
SIMILAR OR SUCCESSOR REPORTS) WITHIN A REASONABLE NUMBER OF DAYS PRIOR TO THEIR
FILING WITH THE SEC, AND (B) NOT FILE ANY REGISTRATION STATEMENT OR AMENDMENT OR
SUPPLEMENT THERETO IN A FORM TO WHICH LEGAL COUNSEL REASONABLY OBJECTS.  THE
COMPANY SHALL NOT SUBMIT A REQUEST FOR ACCELERATION OF THE EFFECTIVENESS OF A
REGISTRATION STATEMENT OR ANY AMENDMENT OR SUPPLEMENT THERETO WITHOUT THE PRIOR
APPROVAL OF LEGAL COUNSEL, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR
DELAYED.  THE COMPANY SHALL FURNISH TO LEGAL COUNSEL, WITHOUT CHARGE, (I) COPIES
OF ANY CORRESPONDENCE FROM THE SEC OR THE STAFF OF THE SEC TO THE COMPANY OR ITS
REPRESENTATIVES RELATING TO ANY REGISTRATION STATEMENT, (II) PROMPTLY AFTER THE
SAME IS PREPARED AND FILED WITH THE SEC, ONE COPY OF ANY REGISTRATION STATEMENT
AND ANY AMENDMENT(S) THERETO, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES, ALL
DOCUMENTS INCORPORATED THEREIN BY REFERENCE, IF REQUESTED BY AN INVESTOR, AND
ALL EXHIBITS AND (III) UPON THE EFFECTIVENESS OF ANY REGISTRATION STATEMENT, ONE
COPY OF THE PROSPECTUS INCLUDED IN SUCH REGISTRATION STATEMENT AND ALL
AMENDMENTS AND SUPPLEMENTS THERETO.  THE COMPANY SHALL REASONABLY COOPERATE WITH
LEGAL COUNSEL IN PERFORMING THE COMPANY’S OBLIGATIONS PURSUANT TO THIS SECTION
3.

D.     THE COMPANY SHALL FURNISH TO EACH INVESTOR WHOSE REGISTRABLE SECURITIES
ARE INCLUDED IN ANY REGISTRATION STATEMENT, WITHOUT CHARGE, (I) PROMPTLY AFTER
THE SAME IS PREPARED AND FILED WITH THE SEC, AT LEAST ONE COPY OF SUCH
REGISTRATION STATEMENT AND ANY AMENDMENT(S) THERETO, INCLUDING FINANCIAL
STATEMENTS AND SCHEDULES, ALL DOCUMENTS INCORPORATED THEREIN BY REFERENCE, AND,
IF REQUESTED BY AN INVESTOR, ALL EXHIBITS AND EACH PRELIMINARY PROSPECTUS, (II)
UPON THE EFFECTIVENESS OF ANY REGISTRATION STATEMENT, TEN (10) COPIES OF THE
PROSPECTUS INCLUDED IN SUCH REGISTRATION STATEMENT AND ALL AMENDMENTS AND
SUPPLEMENTS THERETO (OR SUCH OTHER NUMBER OF COPIES AS SUCH INVESTOR MAY
REASONABLY REQUEST) AND (III) SUCH OTHER DOCUMENTS, INCLUDING COPIES OF ANY
PRELIMINARY OR FINAL PROSPECTUS, AS SUCH INVESTOR MAY

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REASONABLY REQUEST FROM TIME TO TIME IN ORDER TO FACILITATE THE DISPOSITION OF
THE REGISTRABLE SECURITIES OWNED BY SUCH INVESTOR.

E.     THE COMPANY SHALL USE ITS BEST EFFORTS TO (I) REGISTER AND QUALIFY,
UNLESS AN EXEMPTION FROM REGISTRATION AND QUALIFICATION APPLIES, THE RESALE BY
INVESTORS OF THE REGISTRABLE SECURITIES COVERED BY A REGISTRATION STATEMENT
UNDER SUCH OTHER SECURITIES OR “BLUE SKY” LAWS OF ALL APPLICABLE JURISDICTIONS
IN THE UNITED STATES, (II) PREPARE AND FILE IN THOSE JURISDICTIONS, SUCH
AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) AND SUPPLEMENTS TO SUCH
REGISTRATIONS AND QUALIFICATIONS AS MAY BE NECESSARY TO MAINTAIN THE
EFFECTIVENESS THEREOF DURING THE REGISTRATION PERIOD, (III) TAKE SUCH OTHER
ACTIONS AS MAY BE NECESSARY TO MAINTAIN SUCH REGISTRATIONS AND QUALIFICATIONS IN
EFFECT AT ALL TIMES DURING THE REGISTRATION PERIOD, AND (IV) TAKE ALL OTHER
ACTIONS REASONABLY NECESSARY OR ADVISABLE TO QUALIFY THE REGISTRABLE SECURITIES
FOR SALE IN SUCH JURISDICTIONS; PROVIDED, HOWEVER, THAT THE COMPANY SHALL NOT BE
REQUIRED IN CONNECTION THEREWITH OR AS A CONDITION THERETO TO (X) QUALIFY TO DO
BUSINESS IN ANY JURISDICTION WHERE IT WOULD NOT OTHERWISE BE REQUIRED TO QUALIFY
BUT FOR THIS SECTION 3(E), (Y) SUBJECT ITSELF TO GENERAL TAXATION IN ANY SUCH
JURISDICTION, OR (Z) FILE A GENERAL CONSENT TO SERVICE OF PROCESS IN ANY SUCH
JURISDICTION.  THE COMPANY SHALL PROMPTLY NOTIFY LEGAL COUNSEL AND EACH INVESTOR
WHO HOLDS REGISTRABLE SECURITIES OF THE RECEIPT BY THE COMPANY OF ANY
NOTIFICATION WITH RESPECT TO THE SUSPENSION OF THE REGISTRATION OR QUALIFICATION
OF ANY OF THE REGISTRABLE SECURITIES FOR SALE UNDER THE SECURITIES OR “BLUE SKY”
LAWS OF ANY JURISDICTION IN THE UNITED STATES OR ITS RECEIPT OF ACTUAL NOTICE OF
THE INITIATION OR THREATENING OF ANY PROCEEDING FOR SUCH PURPOSE.

F.      THE COMPANY SHALL NOTIFY LEGAL COUNSEL AND EACH INVESTOR IN WRITING OF
THE HAPPENING OF ANY EVENT, AS PROMPTLY AS PRACTICABLE AFTER BECOMING AWARE OF
SUCH EVENT, AS A RESULT OF WHICH THE PROSPECTUS INCLUDED IN A REGISTRATION
STATEMENT, AS THEN IN EFFECT, INCLUDES AN UNTRUE STATEMENT OF A MATERIAL FACT OR
OMISSION TO STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN OR NECESSARY TO
MAKE THE STATEMENTS THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY
WERE MADE, NOT MISLEADING (PROVIDED THAT IN NO EVENT SHALL SUCH NOTICE CONTAIN
ANY MATERIAL, NONPUBLIC INFORMATION), AND, SUBJECT TO SECTION 3(R), PROMPTLY
PREPARE A SUPPLEMENT OR AMENDMENT TO SUCH REGISTRATION STATEMENT TO CORRECT SUCH
UNTRUE STATEMENT OR OMISSION, AND DELIVER TEN (10) COPIES OF SUCH SUPPLEMENT OR
AMENDMENT TO LEGAL COUNSEL AND EACH INVESTOR (OR SUCH OTHER NUMBER OF COPIES AS
LEGAL COUNSEL OR SUCH INVESTOR MAY REASONABLY REQUEST).  THE COMPANY SHALL ALSO
PROMPTLY NOTIFY LEGAL COUNSEL AND EACH INVESTOR IN WRITING (I) WHEN A PROSPECTUS
OR ANY PROSPECTUS SUPPLEMENT OR POST-EFFECTIVE AMENDMENT HAS BEEN FILED, AND
WHEN A REGISTRATION STATEMENT OR ANY POST-EFFECTIVE AMENDMENT HAS BECOME
EFFECTIVE (NOTIFICATION OF SUCH EFFECTIVENESS SHALL BE DELIVERED TO LEGAL
COUNSEL AND EACH INVESTOR BY FACSIMILE OR E-MAIL ON THE SAME DAY OF SUCH
EFFECTIVENESS AND BY OVERNIGHT MAIL), (II) OF ANY REQUEST BY THE SEC FOR
AMENDMENTS OR SUPPLEMENTS TO A REGISTRATION STATEMENT OR RELATED PROSPECTUS OR
RELATED INFORMATION, AND (III) OF THE COMPANY’S REASONABLE DETERMINATION THAT A
POST-EFFECTIVE AMENDMENT TO A REGISTRATION STATEMENT WOULD BE APPROPRIATE.

G.     THE COMPANY SHALL USE ITS BEST EFFORTS TO PREVENT THE ISSUANCE OF ANY
STOP ORDER OR OTHER SUSPENSION OF EFFECTIVENESS OF A REGISTRATION STATEMENT, OR
THE SUSPENSION OF THE QUALIFICATION OF ANY OF THE REGISTRABLE SECURITIES FOR
SALE IN ANY JURISDICTION AND, IF SUCH AN ORDER OR SUSPENSION IS ISSUED, TO
OBTAIN THE WITHDRAWAL OF SUCH ORDER OR SUSPENSION AT THE EARLIEST POSSIBLE
MOMENT AND TO NOTIFY LEGAL COUNSEL AND EACH INVESTOR WHO HOLDS REGISTRABLE
SECURITIES

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BEING SOLD OF THE ISSUANCE OF SUCH ORDER AND THE RESOLUTION THEREOF OR ITS
RECEIPT OF ACTUAL NOTICE OF THE INITIATION OR THREAT OF ANY PROCEEDING FOR SUCH
PURPOSE.

H.     IF ANY INVESTOR IS DEEMED TO BE, ALLEGED TO BE OR REASONABLY BELIEVES IT
MAY BE DEEMED OR ALLEGED TO BE, AN UNDERWRITER OR IS REQUIRED UNDER APPLICABLE
SECURITIES LAWS TO BE DESCRIBED IN THE REGISTRATION STATEMENT AS AN UNDERWRITER,
AT THE REASONABLE REQUEST OF SUCH INVESTOR, THE COMPANY SHALL FURNISH TO SUCH
INVESTOR, ON THE DATE OF THE EFFECTIVENESS OF THE REGISTRATION STATEMENT AND
THEREAFTER FROM TIME TO TIME ON SUCH DATES AS AN INVESTOR MAY REASONABLY REQUEST
(I) A LETTER, DATED SUCH DATE, FROM THE COMPANY’S INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS IN FORM AND SUBSTANCE AS IS CUSTOMARILY GIVEN BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS TO UNDERWRITERS IN AN UNDERWRITTEN PUBLIC OFFERING,
ADDRESSED TO THE INVESTORS, AND (II) AN OPINION, DATED AS OF SUCH DATE, OF
COUNSEL REPRESENTING THE COMPANY FOR PURPOSES OF SUCH REGISTRATION STATEMENT, IN
FORM, SCOPE AND SUBSTANCE AS IS CUSTOMARILY GIVEN IN AN UNDERWRITTEN PUBLIC
OFFERING, ADDRESSED TO THE INVESTORS.

I.      UPON THE WRITTEN REQUEST OF ANY INVESTOR IN CONNECTION WITH SUCH
INVESTOR’S DUE DILIGENCE REQUIREMENTS, IF ANY, THE COMPANY SHALL MAKE AVAILABLE
FOR INSPECTION BY (I) ANY INVESTOR, (II) LEGAL COUNSEL AND (III) ONE FIRM OF
ACCOUNTANTS OR OTHER AGENTS RETAINED BY THE INVESTORS (COLLECTIVELY, THE
“INSPECTORS”), ALL PERTINENT FINANCIAL AND OTHER RECORDS, AND PERTINENT
CORPORATE DOCUMENTS AND PROPERTIES OF THE COMPANY (COLLECTIVELY, THE “RECORDS”),
AS SHALL BE REASONABLY DEEMED NECESSARY BY EACH INSPECTOR, AND CAUSE THE
COMPANY’S OFFICERS, DIRECTORS AND EMPLOYEES, COUNSEL AND THE COMPANY’S
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO SUPPLY ALL INFORMATION WHICH MAY BE
NECESSARY AND ANY INSPECTOR MAY REASONABLY REQUEST; PROVIDED, HOWEVER, THAT EACH
INSPECTOR SHALL AGREE TO HOLD IN STRICT CONFIDENCE AND SHALL NOT MAKE ANY
DISCLOSURE (EXCEPT TO AN INVESTOR) OR USE OF ANY RECORD OR OTHER INFORMATION
WHICH THE COMPANY DETERMINES IN GOOD FAITH TO BE CONFIDENTIAL, AND OF WHICH
DETERMINATION THE INSPECTORS ARE SO NOTIFIED, UNLESS (A) THE DISCLOSURE OF SUCH
RECORDS IS NECESSARY TO AVOID OR CORRECT A MISSTATEMENT OR OMISSION IN ANY
REGISTRATION STATEMENT OR IS OTHERWISE REQUIRED UNDER THE 1933 ACT, (B) THE
RELEASE OF SUCH RECORDS IS ORDERED PURSUANT TO A FINAL, NON-APPEALABLE SUBPOENA
OR ORDER FROM A COURT OR GOVERNMENT BODY OF COMPETENT JURISDICTION, OR (C) THE
INFORMATION IN SUCH RECORDS HAS BEEN MADE GENERALLY AVAILABLE TO THE PUBLIC
OTHER THAN BY DISCLOSURE IN VIOLATION OF THIS AGREEMENT.  EACH INVESTOR AGREES
THAT IT SHALL, UPON LEARNING THAT DISCLOSURE OF SUCH RECORDS IS SOUGHT IN OR BY
A COURT OR GOVERNMENTAL BODY OF COMPETENT JURISDICTION OR THROUGH OTHER MEANS,
GIVE PROMPT NOTICE TO THE COMPANY AND ALLOW THE COMPANY, AT ITS EXPENSE, TO
UNDERTAKE APPROPRIATE ACTION TO PREVENT DISCLOSURE OF, OR TO OBTAIN A PROTECTIVE
ORDER FOR, THE RECORDS DEEMED CONFIDENTIAL.  NOTHING HEREIN (OR IN ANY OTHER
CONFIDENTIALITY AGREEMENT BETWEEN THE COMPANY AND ANY INVESTOR) SHALL BE DEEMED
TO LIMIT THE INVESTORS’ ABILITY TO SELL REGISTRABLE SECURITIES IN A MANNER WHICH
IS OTHERWISE CONSISTENT WITH APPLICABLE LAWS AND REGULATIONS.

J.      THE COMPANY SHALL HOLD IN CONFIDENCE AND NOT MAKE ANY DISCLOSURE OF
INFORMATION CONCERNING AN INVESTOR PROVIDED TO THE COMPANY UNLESS (I) DISCLOSURE
OF SUCH INFORMATION IS NECESSARY TO COMPLY WITH FEDERAL OR STATE SECURITIES
LAWS, (II) THE DISCLOSURE OF SUCH INFORMATION IS NECESSARY TO AVOID OR CORRECT A
MISSTATEMENT OR OMISSION IN ANY REGISTRATION STATEMENT, (III) THE RELEASE OF
SUCH INFORMATION IS ORDERED PURSUANT TO A SUBPOENA OR OTHER FINAL,
NON-APPEALABLE ORDER FROM A COURT OR GOVERNMENTAL BODY OF COMPETENT
JURISDICTION, OR (IV) SUCH INFORMATION HAS BEEN MADE GENERALLY AVAILABLE TO THE
PUBLIC OTHER THAN BY DISCLOSURE IN VIOLATION OF THIS AGREEMENT OR ANY OTHER
AGREEMENT.  THE COMPANY AGREES THAT IT SHALL, UPON LEARNING THAT

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DISCLOSURE OF SUCH INFORMATION CONCERNING AN INVESTOR IS SOUGHT IN OR BY A COURT
OR GOVERNMENTAL BODY OF COMPETENT JURISDICTION OR THROUGH OTHER MEANS, GIVE
PROMPT WRITTEN NOTICE TO SUCH INVESTOR AND ALLOW SUCH INVESTOR, AT THE
INVESTOR’S EXPENSE, TO UNDERTAKE APPROPRIATE ACTION TO PREVENT DISCLOSURE OF, OR
TO OBTAIN A PROTECTIVE ORDER FOR, SUCH INFORMATION.

K.     THE COMPANY SHALL USE ITS BEST EFFORTS EITHER TO (I) CAUSE ALL OF THE
REGISTRABLE SECURITIES COVERED BY A REGISTRATION STATEMENT TO BE LISTED ON EACH
SECURITIES EXCHANGE ON WHICH SECURITIES OF THE SAME CLASS OR SERIES ISSUED BY
THE COMPANY ARE THEN LISTED, IF ANY, IF THE LISTING OF SUCH REGISTRABLE
SECURITIES IS THEN PERMITTED UNDER THE RULES OF SUCH EXCHANGE OR (II) SECURE THE
INCLUSION FOR QUOTATION OF ALL OF THE REGISTRABLE SECURITIES ON THE NASDAQ
GLOBAL MARKET OR THE NASDAQ GLOBAL SELECT MARKET, OR (III) IF, DESPITE THE
COMPANY’S BEST EFFORTS, THE COMPANY IS UNSUCCESSFUL IN SATISFYING THE PRECEDING
CLAUSES (I) OR (II), TO SECURE THE INCLUSION FOR QUOTATION ON THE NASDAQ CAPITAL
MARKET FOR SUCH REGISTRABLE SECURITIES AND, WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, TO USE ITS BEST EFFORTS TO ARRANGE FOR AT LEAST TWO MARKET MAKERS
TO REGISTER WITH THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (“NASD”)
AS SUCH WITH RESPECT TO SUCH REGISTRABLE SECURITIES.  THE COMPANY SHALL PAY ALL
FEES AND EXPENSES IN CONNECTION WITH SATISFYING ITS OBLIGATION UNDER THIS
SECTION 3(K).

L.      THE COMPANY SHALL COOPERATE WITH THE INVESTORS WHO HOLD REGISTRABLE
SECURITIES BEING OFFERED AND, TO THE EXTENT APPLICABLE, FACILITATE THE TIMELY
PREPARATION AND DELIVERY OF CERTIFICATES (NOT BEARING ANY RESTRICTIVE LEGEND)
REPRESENTING THE REGISTRABLE SECURITIES TO BE OFFERED PURSUANT TO A REGISTRATION
STATEMENT AND ENABLE SUCH CERTIFICATES TO BE IN SUCH DENOMINATIONS OR AMOUNTS,
AS THE CASE MAY BE, AS THE INVESTORS MAY REASONABLY REQUEST AND REGISTERED IN
SUCH NAMES AS THE INVESTORS MAY REQUEST.

M.      IF REQUESTED BY AN INVESTOR, THE COMPANY SHALL AS SOON AS PRACTICABLE
BUT IN NO EVENT LATER THAN FIVE (5) DAYS AFTER THE RECEIPT OF NOTICE FROM SUCH
INVESTOR, (I) INCORPORATE IN A PROSPECTUS SUPPLEMENT OR POST-EFFECTIVE AMENDMENT
SUCH INFORMATION AS AN INVESTOR REASONABLY REQUESTS TO BE INCLUDED THEREIN
RELATING TO THE SALE AND DISTRIBUTION OF REGISTRABLE SECURITIES, INCLUDING,
WITHOUT LIMITATION, INFORMATION WITH RESPECT TO THE NUMBER OF REGISTRABLE
SECURITIES BEING OFFERED OR SOLD, THE PURCHASE PRICE BEING PAID THEREFOR AND ANY
OTHER TERMS OF THE OFFERING OF THE REGISTRABLE SECURITIES TO BE SOLD IN SUCH
OFFERING; (II) MAKE ALL REQUIRED FILINGS OF SUCH PROSPECTUS SUPPLEMENT OR
POST-EFFECTIVE AMENDMENT AFTER BEING NOTIFIED OF THE MATTERS TO BE INCORPORATED
IN SUCH PROSPECTUS SUPPLEMENT OR POST-EFFECTIVE AMENDMENT; AND (III) SUPPLEMENT
OR MAKE AMENDMENTS TO ANY REGISTRATION STATEMENT IF REASONABLY REQUESTED BY AN
INVESTOR HOLDING ANY REGISTRABLE SECURITIES.

N.     THE COMPANY SHALL USE ITS BEST EFFORTS TO CAUSE THE REGISTRABLE
SECURITIES COVERED BY THE REGISTRATION STATEMENT TO BE REGISTERED WITH OR
APPROVED BY SUCH OTHER GOVERNMENTAL AGENCIES OR AUTHORITIES AS MAY BE NECESSARY
TO CONSUMMATE THE DISPOSITION OF SUCH REGISTRABLE SECURITIES.

O.     THE COMPANY SHALL MAKE GENERALLY AVAILABLE TO ITS SECURITY HOLDERS AS
SOON AS PRACTICAL, BUT NOT LATER THAN NINETY (90) DAYS AFTER THE CLOSE OF THE
PERIOD COVERED THEREBY, AN EARNINGS STATEMENT (IN FORM COMPLYING WITH, AND IN
THE MANNER PROVIDED BY, THE PROVISIONS OF RULE 158 UNDER THE 1933 ACT) COVERING
A TWELVE-MONTH PERIOD BEGINNING NOT LATER THAN THE FIRST

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DAY OF THE COMPANY’S FISCAL QUARTER NEXT FOLLOWING THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT.

P.     THE COMPANY SHALL OTHERWISE USE ITS BEST EFFORTS TO COMPLY WITH ALL
APPLICABLE RULES AND REGULATIONS OF THE SEC IN CONNECTION WITH ANY REGISTRATION
HEREUNDER.

Q.     WITHIN TWO (2) BUSINESS DAYS AFTER A REGISTRATION STATEMENT WHICH COVERS
REGISTRABLE SECURITIES IS ORDERED EFFECTIVE BY THE SEC, THE COMPANY SHALL
DELIVER, AND SHALL CAUSE LEGAL COUNSEL FOR THE COMPANY TO DELIVER, TO THE
TRANSFER AGENT FOR SUCH REGISTRABLE SECURITIES (WITH COPIES TO THE INVESTORS
WHOSE REGISTRABLE SECURITIES ARE INCLUDED IN SUCH REGISTRATION STATEMENT)
CONFIRMATION THAT SUCH REGISTRATION STATEMENT HAS BEEN DECLARED EFFECTIVE BY THE
SEC IN THE FORM ATTACHED HERETO AS EXHIBIT A.

R.      NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, AT ANY TIME AFTER THE
EFFECTIVE DATE, THE COMPANY MAY DELAY THE DISCLOSURE OF MATERIAL, NON-PUBLIC
INFORMATION CONCERNING THE COMPANY THE DISCLOSURE OF WHICH AT THE TIME IS NOT,
IN THE GOOD FAITH OPINION OF THE BOARD OF DIRECTORS OF THE COMPANY AND ITS
COUNSEL, IN THE BEST INTEREST OF THE COMPANY AND, IN THE OPINION OF COUNSEL TO
THE COMPANY, OTHERWISE REQUIRED (A “GRACE PERIOD”); PROVIDED, THAT THE COMPANY
SHALL PROMPTLY (I) NOTIFY THE INVESTORS IN WRITING OF THE EXISTENCE OF MATERIAL,
NON-PUBLIC INFORMATION GIVING RISE TO A GRACE PERIOD (PROVIDED THAT IN EACH
NOTICE THE COMPANY WILL NOT DISCLOSE THE CONTENT OF SUCH MATERIAL, NON-PUBLIC
INFORMATION TO THE INVESTORS) AND THE DATE ON WHICH THE GRACE PERIOD WILL BEGIN,
AND (II) NOTIFY THE INVESTORS IN WRITING OF THE DATE ON WHICH THE GRACE PERIOD
ENDS; AND, PROVIDED FURTHER, THAT NO GRACE PERIOD SHALL EXCEED TWELVE (12)
CONSECUTIVE DAYS AND DURING ANY THREE HUNDRED SIXTY FIVE (365) DAY PERIOD SUCH
GRACE PERIODS SHALL NOT EXCEED AN AGGREGATE OF TWENTY-FIVE (25) DAYS AND THE
FIRST DAY OF ANY GRACE PERIOD MUST BE AT LEAST FIVE (5) TRADING DAYS AFTER THE
LAST DAY OF ANY PRIOR GRACE PERIOD (EACH, AN “ALLOWABLE GRACE PERIOD”).  FOR
PURPOSES OF DETERMINING THE LENGTH OF A GRACE PERIOD ABOVE, THE GRACE PERIOD
SHALL BEGIN ON AND INCLUDE THE DATE THE INVESTORS RECEIVE THE NOTICE REFERRED TO
IN CLAUSE (I) AND SHALL END ON AND INCLUDE THE LATER OF THE DATE THE INVESTORS
RECEIVE THE NOTICE REFERRED TO IN CLAUSE (II) AND THE DATE REFERRED TO IN SUCH
NOTICE.  THE PROVISIONS OF SECTION 3(G) HEREOF SHALL NOT BE APPLICABLE DURING
THE PERIOD OF ANY ALLOWABLE GRACE PERIOD.  UPON EXPIRATION OF THE GRACE PERIOD,
THE COMPANY SHALL AGAIN BE BOUND BY THE FIRST SENTENCE OF SECTION 3(G) WITH
RESPECT TO THE INFORMATION GIVING RISE THERETO UNLESS SUCH MATERIAL, NON-PUBLIC
INFORMATION IS NO LONGER APPLICABLE.  NOTWITHSTANDING ANYTHING TO THE CONTRARY,
THE COMPANY SHALL CAUSE ITS TRANSFER AGENT TO DELIVER UNLEGENDED SHARES OF
COMMON STOCK TO A TRANSFEREE OF AN INVESTOR IN ACCORDANCE WITH THE TERMS OF THE
SECURITIES PURCHASE AGREEMENT IN CONNECTION WITH ANY SALE OF REGISTRABLE
SECURITIES WITH RESPECT TO WHICH AN INVESTOR HAS ENTERED INTO A CONTRACT FOR
SALE, AND DELIVERED A COPY OF THE PROSPECTUS INCLUDED AS PART OF THE APPLICABLE
REGISTRATION STATEMENT (UNLESS AN EXEMPTION FROM SUCH DELIVERY REQUIREMENT
EXISTS), PRIOR TO THE INVESTOR’S RECEIPT OF THE NOTICE OF A GRACE PERIOD AND FOR
WHICH THE INVESTOR HAS NOT YET SETTLED.

4.     OBLIGATIONS OF THE INVESTORS.

A.     AT LEAST TEN (10) BUSINESS DAYS PRIOR TO THE FIRST ANTICIPATED FILING
DATE OF A REGISTRATION STATEMENT, THE COMPANY SHALL NOTIFY EACH INVESTOR IN
WRITING OF THE INFORMATION THE COMPANY REQUIRES FROM EACH SUCH INVESTOR IF SUCH
INVESTOR ELECTS TO HAVE ANY OF SUCH INVESTOR’S REGISTRABLE SECURITIES INCLUDED
IN SUCH REGISTRATION STATEMENT.  IT SHALL BE A CONDITION

10

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PRECEDENT TO THE OBLIGATIONS OF THE COMPANY TO COMPLETE THE REGISTRATION
PURSUANT TO THIS AGREEMENT WITH RESPECT TO THE REGISTRABLE SECURITIES OF A
PARTICULAR INVESTOR THAT SUCH INVESTOR SHALL FURNISH TO THE COMPANY SUCH
INFORMATION REGARDING ITSELF, THE REGISTRABLE SECURITIES HELD BY IT AND THE
INTENDED METHOD OF DISPOSITION OF THE REGISTRABLE SECURITIES HELD BY IT, AS
SHALL BE REASONABLY REQUIRED TO EFFECT AND MAINTAIN THE EFFECTIVENESS OF THE
REGISTRATION OF SUCH REGISTRABLE SECURITIES AND SHALL EXECUTE SUCH DOCUMENTS IN
CONNECTION WITH SUCH REGISTRATION AS THE COMPANY MAY REASONABLY REQUEST.

B.     EACH INVESTOR, BY SUCH INVESTOR’S ACCEPTANCE OF THE REGISTRABLE
SECURITIES, AGREES TO COOPERATE WITH THE COMPANY AS REASONABLY REQUESTED BY THE
COMPANY IN CONNECTION WITH THE PREPARATION AND FILING OF ANY REGISTRATION
STATEMENT HEREUNDER, UNLESS SUCH INVESTOR HAS NOTIFIED THE COMPANY IN WRITING OF
SUCH INVESTOR’S ELECTION TO EXCLUDE ALL OF SUCH INVESTOR’S REGISTRABLE
SECURITIES FROM SUCH REGISTRATION STATEMENT.

C.     EACH INVESTOR AGREES THAT, UPON RECEIPT OF ANY NOTICE FROM THE COMPANY OF
THE HAPPENING OF ANY EVENT OF THE KIND DESCRIBED IN SECTION 3(G) OR THE FIRST
SENTENCE OF 3(F), SUCH INVESTOR WILL IMMEDIATELY DISCONTINUE DISPOSITION OF
REGISTRABLE SECURITIES PURSUANT TO ANY REGISTRATION STATEMENT(S) COVERING SUCH
REGISTRABLE SECURITIES UNTIL SUCH INVESTOR’S RECEIPT OF THE COPIES OF THE
SUPPLEMENTED OR AMENDED PROSPECTUS CONTEMPLATED BY SECTION 3(G) OR THE FIRST
SENTENCE OF 3(F) OR RECEIPT OF NOTICE THAT NO SUPPLEMENT OR AMENDMENT IS
REQUIRED.  NOTWITHSTANDING ANYTHING TO THE CONTRARY, THE COMPANY SHALL CAUSE ITS
TRANSFER AGENT TO DELIVER UNLEGENDED SHARES OF COMMON STOCK TO A TRANSFEREE OF
AN INVESTOR IN ACCORDANCE WITH THE TERMS OF THE SECURITIES PURCHASE AGREEMENT IN
CONNECTION WITH ANY SALE OF REGISTRABLE SECURITIES WITH RESPECT TO WHICH AN
INVESTOR HAS ENTERED INTO A CONTRACT FOR SALE PRIOR TO THE INVESTOR’S RECEIPT OF
A NOTICE FROM THE COMPANY OF THE HAPPENING OF ANY EVENT OF THE KIND DESCRIBED IN
SECTION 3(G) OR THE FIRST SENTENCE OF 3(F) AND FOR WHICH THE INVESTOR HAS NOT
YET SETTLED.

D.     EACH INVESTOR COVENANTS AND AGREES THAT IT WILL COMPLY WITH THE
PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT AS APPLICABLE TO IT OR AN
EXEMPTION THEREFROM IN CONNECTION WITH SALES OF REGISTRABLE SECURITIES PURSUANT
TO THE REGISTRATION STATEMENT.

5.     EXPENSES OF REGISTRATION.

All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company shall be paid by the Company.  The Company shall also
reimburse the Investors for the fees and disbursements of Legal Counsel in
connection with registration, filing or qualification pursuant to Sections 2 and
3 of this Agreement which amount shall be limited to $15,000.

6.     INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration Statement
under this Agreement:

A.     TO THE FULLEST EXTENT PERMITTED BY LAW, THE COMPANY WILL, AND HEREBY
DOES, INDEMNIFY, HOLD HARMLESS AND DEFEND EACH INVESTOR, THE DIRECTORS,
OFFICERS, MEMBERS,

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PARTNERS, EMPLOYEES, AGENTS, REPRESENTATIVES OF, AND EACH PERSON, IF ANY, WHO
CONTROLS ANY INVESTOR WITHIN THE MEANING OF THE 1933 ACT OR THE 1934 ACT (EACH,
AN “INDEMNIFIED PERSON”), AGAINST ANY LOSSES, CLAIMS, DAMAGES, LIABILITIES,
JUDGMENTS, FINES, PENALTIES, CHARGES, COSTS, REASONABLE ATTORNEYS’ FEES, AMOUNTS
PAID IN SETTLEMENT OR EXPENSES, JOINT OR SEVERAL, OTHER THAN CONSEQUENTIAL,
INDIRECT OR INCIDENTAL DAMAGES (COLLECTIVELY, “CLAIMS”) INCURRED IN
INVESTIGATING, PREPARING OR DEFENDING ANY ACTION, CLAIM, SUIT, INQUIRY,
PROCEEDING, INVESTIGATION OR APPEAL TAKEN FROM THE FOREGOING BY OR BEFORE ANY
COURT OR GOVERNMENTAL, ADMINISTRATIVE OR OTHER REGULATORY AGENCY, BODY OR THE
SEC, WHETHER PENDING OR THREATENED, WHETHER OR NOT AN INDEMNIFIED PARTY IS OR
MAY BE A PARTY THERETO (“INDEMNIFIED DAMAGES”), TO WHICH ANY OF THEM MAY BECOME
SUBJECT INSOFAR AS SUCH CLAIMS (OR ACTIONS OR PROCEEDINGS, WHETHER COMMENCED OR
THREATENED, IN RESPECT THEREOF) ARISE OUT OF OR ARE BASED UPON:  (I) ANY UNTRUE
STATEMENT OR ALLEGED UNTRUE STATEMENT OF A MATERIAL FACT IN A REGISTRATION
STATEMENT OR ANY POST-EFFECTIVE AMENDMENT THERETO OR IN ANY FILING MADE IN
CONNECTION WITH THE QUALIFICATION OF THE OFFERING UNDER THE SECURITIES OR OTHER
“BLUE SKY” LAWS OF ANY JURISDICTION IN WHICH REGISTRABLE SECURITIES ARE OFFERED
(“BLUE SKY FILING”), OR THE OMISSION OR ALLEGED OMISSION TO STATE A MATERIAL
FACT REQUIRED TO BE STATED THEREIN OR NECESSARY TO MAKE THE STATEMENTS THEREIN
NOT MISLEADING, (II) ANY UNTRUE STATEMENT OR ALLEGED UNTRUE STATEMENT OF A
MATERIAL FACT CONTAINED IN ANY PRELIMINARY PROSPECTUS IF USED PRIOR TO THE
EFFECTIVE DATE OF SUCH REGISTRATION STATEMENT, OR CONTAINED IN THE FINAL
PROSPECTUS (AS AMENDED OR SUPPLEMENTED, IF THE COMPANY FILES ANY AMENDMENT
THEREOF OR SUPPLEMENT THERETO WITH THE SEC) OR THE OMISSION OR ALLEGED OMISSION
TO STATE THEREIN ANY MATERIAL FACT NECESSARY TO MAKE THE STATEMENTS MADE
THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THE STATEMENTS THEREIN WERE
MADE, NOT MISLEADING, (III) ANY VIOLATION OR ALLEGED VIOLATION BY THE COMPANY OF
THE 1933 ACT, THE 1934 ACT, ANY OTHER LAW, INCLUDING, WITHOUT LIMITATION, ANY
STATE SECURITIES LAW, OR ANY RULE OR REGULATION THEREUNDER RELATING TO THE OFFER
OR SALE OF THE REGISTRABLE SECURITIES PURSUANT TO A REGISTRATION STATEMENT OR
(IV) ANY VIOLATION OF THIS AGREEMENT (THE MATTERS IN THE FOREGOING CLAUSES (I)
THROUGH (IV) BEING, COLLECTIVELY, “VIOLATIONS”).  SUBJECT TO SECTION 6(C), THE
COMPANY SHALL REIMBURSE THE INDEMNIFIED PERSONS, PROMPTLY AS SUCH EXPENSES ARE
INCURRED AND ARE DUE AND PAYABLE, FOR ANY LEGAL FEES OR OTHER REASONABLE
EXPENSES INCURRED BY THEM IN CONNECTION WITH INVESTIGATING OR DEFENDING ANY SUCH
CLAIM.  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, THE
INDEMNIFICATION AGREEMENT CONTAINED IN THIS SECTION 6(A):  (I) SHALL NOT APPLY
TO A CLAIM BY AN INDEMNIFIED PERSON ARISING OUT OF OR BASED UPON A VIOLATION
WHICH OCCURS IN RELIANCE UPON AND IN CONFORMITY WITH INFORMATION FURNISHED IN
WRITING TO THE COMPANY BY SUCH INDEMNIFIED PERSON FOR SUCH INDEMNIFIED PERSON
EXPRESSLY FOR USE IN CONNECTION WITH THE PREPARATION OF THE REGISTRATION
STATEMENT OR ANY SUCH AMENDMENT THEREOF OR SUPPLEMENT THERETO, IF SUCH
PROSPECTUS WAS TIMELY MADE AVAILABLE BY THE COMPANY PURSUANT TO SECTION 3(D) AND
(II) SHALL NOT APPLY TO AMOUNTS PAID IN SETTLEMENT OF ANY CLAIM IF SUCH
SETTLEMENT IS EFFECTED WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED.  SUCH INDEMNITY SHALL
REMAIN IN FULL FORCE AND EFFECT REGARDLESS OF ANY INVESTIGATION MADE BY OR ON
BEHALF OF THE INDEMNIFIED PERSON AND SHALL SURVIVE THE TRANSFER OF THE
REGISTRABLE SECURITIES BY THE INVESTORS PURSUANT TO SECTION 9.

B.     IN CONNECTION WITH ANY REGISTRATION STATEMENT IN WHICH AN INVESTOR IS
PARTICIPATING, EACH SUCH INVESTOR AGREES TO SEVERALLY AND NOT JOINTLY INDEMNIFY,
HOLD HARMLESS AND DEFEND, TO THE SAME EXTENT AND IN THE SAME MANNER AS IS SET
FORTH IN SECTION 6(A), THE COMPANY, EACH OF ITS DIRECTORS, EACH OF ITS OFFICERS
WHO SIGNS THE REGISTRATION STATEMENT AND EACH PERSON, IF ANY, WHO CONTROLS THE
COMPANY WITHIN THE MEANING OF THE 1933 ACT OR THE 1934 ACT (EACH, AN
“INDEMNIFIED PARTY”), AGAINST ANY CLAIM OR INDEMNIFIED DAMAGES TO WHICH ANY OF
THEM MAY

12

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BECOME SUBJECT, UNDER THE 1933 ACT, THE 1934 ACT OR OTHERWISE, INSOFAR AS SUCH
CLAIM OR INDEMNIFIED DAMAGES ARISE OUT OF OR ARE BASED UPON ANY VIOLATION, IN
EACH CASE TO THE EXTENT, AND ONLY TO THE EXTENT, THAT SUCH VIOLATION OCCURS IN
RELIANCE UPON AND IN CONFORMITY WITH WRITTEN INFORMATION FURNISHED TO THE
COMPANY BY SUCH INVESTOR EXPRESSLY FOR USE IN CONNECTION WITH SUCH REGISTRATION
STATEMENT; AND, SUBJECT TO SECTION 6(C), SUCH INVESTOR WILL REIMBURSE ANY LEGAL
OR OTHER EXPENSES REASONABLY INCURRED BY AN INDEMNIFIED PARTY IN CONNECTION WITH
INVESTIGATING OR DEFENDING ANY SUCH CLAIM; PROVIDED, HOWEVER, THAT THE INDEMNITY
AGREEMENT CONTAINED IN THIS SECTION 6(B) AND THE AGREEMENT WITH RESPECT TO
CONTRIBUTION CONTAINED IN SECTION 7 SHALL NOT APPLY TO AMOUNTS PAID IN
SETTLEMENT OF ANY CLAIM IF SUCH SETTLEMENT IS EFFECTED WITHOUT THE PRIOR WRITTEN
CONSENT OF SUCH INVESTOR, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR
DELAYED; PROVIDED, FURTHER, HOWEVER, THAT THE INVESTOR SHALL BE LIABLE UNDER
THIS SECTION 6(B) FOR ONLY THAT AMOUNT OF A CLAIM OR INDEMNIFIED DAMAGES AS DOES
NOT EXCEED THE NET PROCEEDS TO SUCH INVESTOR AS A RESULT OF THE SALE OF
REGISTRABLE SECURITIES PURSUANT TO SUCH REGISTRATION STATEMENT.  SUCH INDEMNITY
SHALL REMAIN IN FULL FORCE AND EFFECT REGARDLESS OF ANY INVESTIGATION MADE BY OR
ON BEHALF OF SUCH INDEMNIFIED PARTY AND SHALL SURVIVE THE TRANSFER OF THE
REGISTRABLE SECURITIES BY THE INVESTORS PURSUANT TO SECTION 9.

C.     PROMPTLY AFTER RECEIPT BY AN INDEMNIFIED PERSON OR INDEMNIFIED PARTY
UNDER THIS SECTION 6 OF NOTICE OF THE COMMENCEMENT OF ANY ACTION OR PROCEEDING
(INCLUDING ANY GOVERNMENTAL ACTION OR PROCEEDING) INVOLVING A CLAIM, SUCH
INDEMNIFIED PERSON OR INDEMNIFIED PARTY SHALL, IF A CLAIM IN RESPECT THEREOF IS
TO BE MADE AGAINST ANY INDEMNIFYING PARTY UNDER THIS SECTION 6, DELIVER TO THE
INDEMNIFYING PARTY A WRITTEN NOTICE OF THE COMMENCEMENT THEREOF, AND THE
INDEMNIFYING PARTY SHALL HAVE THE RIGHT TO PARTICIPATE IN, AND, TO THE EXTENT
THE INDEMNIFYING PARTY SO DESIRES, JOINTLY WITH ANY OTHER INDEMNIFYING PARTY
SIMILARLY NOTICED, TO ASSUME CONTROL OF THE DEFENSE THEREOF WITH COUNSEL
MUTUALLY SATISFACTORY TO THE INDEMNIFYING PARTY AND THE INDEMNIFIED PERSON OR
THE INDEMNIFIED PARTY, AS THE CASE MAY BE; PROVIDED, HOWEVER, THAT AN
INDEMNIFIED PERSON OR INDEMNIFIED PARTY SHALL HAVE THE RIGHT TO RETAIN ITS OWN
COUNSEL WITH THE FEES AND EXPENSES OF NOT MORE THAN ONE COUNSEL FOR SUCH
INDEMNIFIED PERSON OR INDEMNIFIED PARTY TO BE PAID BY THE INDEMNIFYING PARTY,
IF, IN THE REASONABLE OPINION OF COUNSEL RETAINED BY THE INDEMNIFYING PARTY, THE
REPRESENTATION BY SUCH COUNSEL OF THE INDEMNIFIED PERSON OR INDEMNIFIED PARTY
AND THE INDEMNIFYING PARTY WOULD BE INAPPROPRIATE DUE TO ACTUAL OR POTENTIAL
DIFFERING INTERESTS BETWEEN SUCH INDEMNIFIED PERSON OR INDEMNIFIED PARTY AND ANY
OTHER PARTY REPRESENTED BY SUCH COUNSEL IN SUCH PROCEEDING.  IN THE CASE OF AN
INDEMNIFIED PERSON, LEGAL COUNSEL REFERRED TO IN THE IMMEDIATELY PRECEDING
SENTENCE SHALL BE SELECTED BY THE INVESTORS HOLDING AT LEAST A MAJORITY IN
INTEREST OF THE REGISTRABLE SECURITIES INCLUDED IN THE REGISTRATION STATEMENT TO
WHICH THE CLAIM RELATES.  THE INDEMNIFIED PARTY OR INDEMNIFIED PERSON SHALL
COOPERATE REASONABLY WITH THE INDEMNIFYING PARTY IN CONNECTION WITH ANY
NEGOTIATION OR DEFENSE OF ANY SUCH ACTION OR CLAIM BY THE INDEMNIFYING PARTY AND
SHALL FURNISH TO THE INDEMNIFYING PARTY ALL INFORMATION REASONABLY AVAILABLE TO
THE INDEMNIFIED PARTY OR INDEMNIFIED PERSON WHICH RELATES TO SUCH ACTION OR
CLAIM.  THE INDEMNIFYING PARTY SHALL KEEP THE INDEMNIFIED PARTY OR INDEMNIFIED
PERSON FULLY APPRISED AT ALL TIMES AS TO THE STATUS OF THE DEFENSE OR ANY
SETTLEMENT NEGOTIATIONS WITH RESPECT THERETO.  NO INDEMNIFYING PARTY SHALL BE
LIABLE FOR ANY SETTLEMENT OF ANY ACTION, CLAIM OR PROCEEDING EFFECTED WITHOUT
ITS PRIOR WRITTEN CONSENT, PROVIDED, HOWEVER, THAT THE INDEMNIFYING PARTY SHALL
NOT UNREASONABLY WITHHOLD, DELAY OR CONDITION ITS CONSENT.  NO INDEMNIFYING
PARTY SHALL, WITHOUT THE PRIOR WRITTEN CONSENT OF THE INDEMNIFIED PARTY OR
INDEMNIFIED PERSON, CONSENT TO ENTRY OF ANY JUDGMENT OR ENTER INTO ANY
SETTLEMENT OR OTHER COMPROMISE WHICH DOES NOT INCLUDE AS AN UNCONDITIONAL TERM
THEREOF THE GIVING BY THE CLAIMANT

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OR PLAINTIFF TO SUCH INDEMNIFIED PARTY OR INDEMNIFIED PERSON OF A RELEASE FROM
ALL LIABILITY IN RESPECT TO SUCH CLAIM OR LITIGATION, AND SUCH SETTLEMENT SHALL
NOT INCLUDE ANY ADMISSION AS TO FAULT ON THE PART OF THE INDEMNIFIED PARTY OR
THE INDEMNIFIED PERSON.  FOLLOWING INDEMNIFICATION AS PROVIDED FOR HEREUNDER,
THE INDEMNIFYING PARTY SHALL BE SUBROGATED TO ALL RIGHTS OF THE INDEMNIFIED
PARTY OR INDEMNIFIED PERSON WITH RESPECT TO ALL THIRD PARTIES, FIRMS OR
CORPORATIONS RELATING TO THE MATTER FOR WHICH INDEMNIFICATION HAS BEEN MADE. 
THE FAILURE TO DELIVER WRITTEN NOTICE TO THE INDEMNIFYING PARTY WITHIN A
REASONABLE TIME OF THE COMMENCEMENT OF ANY SUCH ACTION SHALL NOT RELIEVE SUCH
INDEMNIFYING PARTY OF ANY LIABILITY TO THE INDEMNIFIED PERSON OR INDEMNIFIED
PARTY UNDER THIS SECTION 6, EXCEPT TO THE EXTENT THAT THE INDEMNIFYING PARTY IS
PREJUDICED IN ITS ABILITY TO DEFEND SUCH ACTION.

D.     THE INDEMNIFICATION REQUIRED BY THIS SECTION 6 SHALL BE MADE BY PERIODIC
PAYMENTS OF THE AMOUNT THEREOF DURING THE COURSE OF THE INVESTIGATION OR
DEFENSE, AS AND WHEN BILLS ARE RECEIVED OR INDEMNIFIED DAMAGES ARE INCURRED.

E.     THE INDEMNITY AGREEMENTS CONTAINED HEREIN SHALL BE IN ADDITION TO  (I)
ANY CAUSE OF ACTION OR SIMILAR RIGHT OF THE INDEMNIFIED PARTY OR INDEMNIFIED
PERSON AGAINST THE INDEMNIFYING PARTY OR OTHERS, AND (II) ANY LIABILITIES THE
INDEMNIFYING PARTY MAY BE SUBJECT TO PURSUANT TO THE LAW.

7.     CONTRIBUTION.

To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that:  (i) no
Person involved in the sale of Registrable Securities which Person is guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) in connection with such sale shall be entitled to contribution from any
Person involved in such sale of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities pursuant to such
Registration Statement.

8.     REPORTS UNDER THE 1934 ACT.

With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration (“Rule 144”), the Company agrees to:

A.     MAKE AND KEEP PUBLIC INFORMATION AVAILABLE, AS THOSE TERMS ARE UNDERSTOOD
AND DEFINED IN RULE 144;

B.     FILE WITH THE SEC IN A TIMELY MANNER ALL REPORTS AND OTHER DOCUMENTS
REQUIRED OF THE COMPANY UNDER THE 1933 ACT AND THE 1934 ACT SO LONG AS THE
COMPANY REMAINS SUBJECT TO SUCH REQUIREMENTS (IT BEING UNDERSTOOD THAT NOTHING
HEREIN SHALL LIMIT THE COMPANY’S OBLIGATIONS UNDER SECTION 4(C) OF THE
SECURITIES PURCHASE AGREEMENT) AND THE FILING OF SUCH REPORTS AND OTHER
DOCUMENTS IS REQUIRED FOR THE APPLICABLE PROVISIONS OF RULE 144; AND

14

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C.     FURNISH TO EACH INVESTOR SO LONG AS SUCH INVESTOR OWNS REGISTRABLE
SECURITIES, PROMPTLY UPON REQUEST, (I) A WRITTEN STATEMENT BY THE COMPANY, IF
TRUE, THAT IT HAS COMPLIED WITH THE REPORTING REQUIREMENTS OF RULE 144, THE 1933
ACT AND THE 1934 ACT, (II) A COPY OF THE MOST RECENT ANNUAL OR QUARTERLY REPORT
OF THE COMPANY AND SUCH OTHER REPORTS AND DOCUMENTS SO FILED BY THE COMPANY, AND
(III) SUCH OTHER INFORMATION AS MAY BE REASONABLY REQUESTED TO PERMIT THE
INVESTORS TO SELL SUCH SECURITIES PURSUANT TO RULE 144 WITHOUT REGISTRATION.

9.     ASSIGNMENT OF REGISTRATION RIGHTS.

The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of such Investor’s Registrable
Securities if:  (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment; (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned; (iii) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act or applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.

10.   AMENDMENT OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Required
Holders.  Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.  No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities.  No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.

11.   MISCELLANEOUS.

A.     A PERSON IS DEEMED TO BE A HOLDER OF REGISTRABLE SECURITIES WHENEVER SUCH
PERSON OWNS OR IS DEEMED TO OWN OF RECORD SUCH REGISTRABLE SECURITIES.  IF THE
COMPANY RECEIVES CONFLICTING INSTRUCTIONS, NOTICES OR ELECTIONS FROM TWO OR MORE
PERSONS WITH RESPECT TO THE SAME REGISTRABLE SECURITIES, THE COMPANY SHALL ACT
UPON THE BASIS OF INSTRUCTIONS, NOTICE OR ELECTION RECEIVED FROM THE SUCH RECORD
OWNER OF SUCH REGISTRABLE SECURITIES.

B.     ANY NOTICES, CONSENTS, WAIVERS OR OTHER COMMUNICATIONS REQUIRED OR
PERMITTED TO BE GIVEN UNDER THE TERMS OF THIS AGREEMENT MUST BE IN WRITING AND
WILL BE DEEMED TO HAVE BEEN DELIVERED:  (I) UPON RECEIPT, WHEN DELIVERED
PERSONALLY; (II) UPON RECEIPT, WHEN SENT BY FACSIMILE (PROVIDED CONFIRMATION OF
TRANSMISSION IS MECHANICALLY OR ELECTRONICALLY GENERATED AND KEPT ON FILE BY THE
SENDING PARTY); OR (III) ONE BUSINESS DAY AFTER DEPOSIT WITH A NATIONALLY

15

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RECOGNIZED OVERNIGHT DELIVERY SERVICE, IN EACH CASE PROPERLY ADDRESSED TO THE
PARTY TO RECEIVE THE SAME.  THE ADDRESSES AND FACSIMILE NUMBERS FOR SUCH
COMMUNICATIONS SHALL BE:

If to the Company:

Cano Petroleum, Inc.
801 Cherry Street
Suite 3200
Fort Worth,   Texas 76102
Telephone:    (817) 698-0900
Facsimile:      (817) 334-0222
Attention:     Morris B. Smith and James K. Teringo, Jr.

With a copy to:

W. Bruce Newsome
Haynes and Boone, LLP
901 Main St., Suite 3100
Dallas, TX 75202
Telephone:    (214) 651-5119
Facsimile:      (214) 200-0636

If to Legal Counsel:

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York  10022
Telephone:    (212) 756-2000
Facsimile:      (212) 593-5955
Attention:     Eleazer N. Klein, Esq.

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers attached hereto, with copies to such Buyer’s representatives as set forth
on the Schedule of Buyers, or to such other address and/or facsimile number
and/or to the attention of such other Person as the recipient party has
specified by written notice given to each other party pursuant to this Section. 
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a courier or overnight courier service shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.

C.     FAILURE OF ANY PARTY TO EXERCISE ANY RIGHT OR REMEDY UNDER THIS AGREEMENT
OR OTHERWISE, OR DELAY BY A PARTY IN EXERCISING SUCH RIGHT OR REMEDY, SHALL NOT
OPERATE AS A WAIVER THEREOF.

16

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D.     ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW
PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTIONS)
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTIONS OTHER THAN THE
STATE OF NEW YORK.  EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK,
BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED
HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT,
ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT
IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER
THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED
TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. 
IF ANY PROVISION OF THIS AGREEMENT SHALL BE INVALID OR UNENFORCEABLE IN ANY
JURISDICTION, SUCH INVALIDITY OR UNENFORCEABILITY SHALL NOT AFFECT THE VALIDITY
OR ENFORCEABILITY OF THE REMAINDER OF THIS AGREEMENT IN THAT JURISDICTION OR THE
VALIDITY OR ENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT IN ANY OTHER
JURISDICTION.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

E.     THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS (AS DEFINED IN THE
SECURITIES PURCHASE AGREEMENT) AND THE INSTRUMENTS REFERENCED HEREIN AND THEREIN
CONSTITUTE THE ENTIRE AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND THEREOF.  THERE ARE NO RESTRICTIONS, PROMISES,
WARRANTIES OR UNDERTAKINGS, OTHER THAN THOSE SET FORTH OR REFERRED TO HEREIN AND
THEREIN.  THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS AND THE INSTRUMENTS
REFERENCED HEREIN AND THEREIN SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS
AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF.

F.      SUBJECT TO THE REQUIREMENTS OF SECTION 9, THIS AGREEMENT SHALL INURE TO
THE BENEFIT OF AND BE BINDING UPON THE PERMITTED SUCCESSORS AND ASSIGNS OF EACH
OF THE PARTIES HERETO.

G.     THE HEADINGS IN THIS AGREEMENT ARE FOR CONVENIENCE OF REFERENCE ONLY AND
SHALL NOT LIMIT OR OTHERWISE AFFECT THE MEANING HEREOF.

H.     THIS AGREEMENT MAY BE EXECUTED IN IDENTICAL COUNTERPARTS, EACH OF WHICH
SHALL BE DEEMED AN ORIGINAL BUT ALL OF WHICH SHALL CONSTITUTE ONE AND THE SAME
AGREEMENT.  THIS AGREEMENT, ONCE EXECUTED BY A PARTY, MAY BE DELIVERED TO THE
OTHER PARTY HERETO BY FACSIMILE TRANSMISSION OF A COPY OF THIS AGREEMENT BEARING
THE SIGNATURE OF THE PARTY SO DELIVERING THIS AGREEMENT.

17

--------------------------------------------------------------------------------

 

I.      EACH PARTY SHALL DO AND PERFORM, OR CAUSE TO BE DONE AND PERFORMED, ALL
SUCH FURTHER ACTS AND THINGS, AND SHALL EXECUTE AND DELIVER ALL SUCH OTHER
AGREEMENTS, CERTIFICATES, INSTRUMENTS AND DOCUMENTS, AS ANY OTHER PARTY MAY
REASONABLY REQUEST IN ORDER TO CARRY OUT THE INTENT AND ACCOMPLISH THE PURPOSES
OF THIS AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY.

J.      ALL CONSENTS AND OTHER DETERMINATIONS REQUIRED TO BE MADE BY THE
INVESTORS PURSUANT TO THIS AGREEMENT SHALL BE MADE, UNLESS OTHERWISE SPECIFIED
IN THIS AGREEMENT, BY THE REQUIRED HOLDERS.

K.     THE LANGUAGE USED IN THIS AGREEMENT WILL BE DEEMED TO BE THE LANGUAGE
CHOSEN BY THE PARTIES TO EXPRESS THEIR MUTUAL INTENT AND NO RULES OF STRICT
CONSTRUCTION WILL BE APPLIED AGAINST ANY PARTY.

L.      THIS AGREEMENT IS INTENDED FOR THE BENEFIT OF THE PARTIES HERETO AND
THEIR RESPECTIVE PERMITTED SUCCESSORS AND ASSIGNS, AND IS NOT FOR THE BENEFIT
OF, NOR MAY ANY PROVISION HEREOF BE ENFORCED BY, ANY OTHER PERSON.

M.    NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NO BUYER OR
HOLDER OF REGISTRABLE SECURITIES SHALL BE ENTITLED TO CONSEQUENTIAL, INDIRECT OR
INCIDENTAL DAMAGES HEREUNDER.  HOWEVER, THE FOREGOING SHALL NOT IN ANY WAY LIMIT
A BUYER OR HOLDER OF REGISTRABLE SECURITIES FROM BEING REIMBURSED FOR ITS COSTS,
FEES OR EXPENSES, INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS’ FEES AND
DISBURSEMENTS IN CONNECTION WITH ANY OF ITS RIGHTS AND REMEDIES HEREUNDER.

N.     THE OBLIGATIONS OF EACH INVESTOR HEREUNDER ARE SEVERAL AND NOT JOINT WITH
THE OBLIGATIONS OF ANY OTHER INVESTOR, AND NO PROVISION OF THIS AGREEMENT IS
INTENDED TO CONFER ANY OBLIGATIONS ON ANY INVESTOR VIS-À-VIS ANY OTHER
INVESTOR.  NOTHING CONTAINED HEREIN, AND NO ACTION TAKEN BY ANY INVESTOR
PURSUANT HERETO, SHALL BE DEEMED TO CONSTITUTE THE INVESTORS AS A PARTNERSHIP,
AN ASSOCIATION, A JOINT VENTURE OR ANY OTHER KIND OF ENTITY, OR CREATE A
PRESUMPTION THAT THE INVESTORS ARE IN ANY WAY ACTING IN CONCERT OR AS A GROUP
WITH RESPECT TO SUCH OBLIGATIONS OR THE TRANSACTIONS CONTEMPLATED HEREIN.

* * * * * *

18

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.

COMPANY:

 

 

 

 

 

CANO PETROLEUM, INC.

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

1

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.

 

BUYERS:

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

2

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.

 

[OTHER BUYERS]

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

3

--------------------------------------------------------------------------------

 

SCHEDULE OF BUYERS

 

Buyer

 

Buyer Address
and Facsimile Number

 

Buyer’s Representative’s Address
and Facsimile Number

 

 

 

 

 

[Buyer]

 

 

 

 

[Other Buyers]

 

 

 

 

 

 

4

--------------------------------------------------------------------------------

EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[Transfer Agent]
[Address]
Attention:

Re:          Cano Petroleum, Inc.

Ladies and Gentlemen:

[We are][I am] counsel to Cano Petroleum, Inc., a Delaware corporation (the
“Company”), and have represented the Company in connection with that certain
Securities Purchase Agreement (the “Securities Purchase Agreement”) entered into
by and among the Company and the buyers named therein (collectively, the
“Holders”) pursuant to which the Company issued to the Holders preferred shares
(the “Preferred Shares”) convertible into the Company’s common stock, $0.0001
par value (the ”Common Stock”), shares of Common Stock and warrants exercisable
for shares of Common Stock (the “Warrants”).  Pursuant to the Securities
Purchase Agreement, the Company also has entered into a Registration Rights
Agreement with the Holders (the “Registration Rights Agreement”) pursuant to
which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the
shares of Common Stock issuable upon conversion of the Preferred Shares, the
shares of Common Stock and the shares of Common Stock issuable upon exercise of
the Warrants, under the Securities Act of 1933, as amended (the “1933 Act”).  In
connection with the Company’s obligations under the Registration Rights
Agreement, on                     , 200  , the Company filed a Registration
Statement on Form S-1 (File No. 333-                  ) (the “Registration
Statement”) with the Securities and Exchange Commission (the “SEC”) relating to
the Registrable Securities which names each of the Holders as a selling
stockholder thereunder.

In connection with the foregoing, [we][I] advise you that a member of the SEC’s
staff has advised [us][me] by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
knowledge, after telephonic inquiry of a member of the SEC’s staff, that any
stop order suspending its effectiveness has been issued or that any proceedings
for that purpose are pending before, or threatened by, the SEC and the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.

Subject to the specific prohibitions contained in the Registration Rights
Agreement regarding the inability to use the Registration Statement under
specific circumstances (the “Registration Statement Limitations”), this letter
shall serve as our standing instruction to you that the shares of Common Stock
are freely transferable by the Holders pursuant to the Registration Statement
provided the prospectus delivery requirements, if any, are complied with.

1

--------------------------------------------------------------------------------

 

Subject to the Registration Statement Limitations, you need not require further
letters from us to effect any future legend-free issuance or reissuance of
shares of Common Stock to the Holders as contemplated by the Company’s
Irrevocable Transfer Agent Instructions dated                      , 2006.  This
letter shall serve as our standing opinion with regard to this matter.

Very truly yours,

 

 

 

[ISSUER’S COUNSEL]

 

 

 

By:

 

 

 

CC:          [LIST NAMES OF HOLDERS]

2

--------------------------------------------------------------------------------

 

EXHIBIT B

SELLING STOCKHOLDERS

The shares of Common Stock being offered by the Selling Stockholders are those
previously issued to the Selling Stockholders and those issuable to the Selling
Stockholders upon conversion of the convertible preferred shares, and upon
exercise of the warrants.  For additional information regarding the issuance of
those shares of Common Stock, convertible preferred shares and warrants, see
“Private Placement of Common Shares, Convertible Preferred Shares and Warrants”
above.  We are registering the shares of Common Stock in order to permit the
selling stockholders to offer the shares for resale from time to time.  Except
for [      ][Discuss Wellington’s relationships] and the ownership of the shares
of common stock, the convertible preferred shares and warrants issued pursuant
to the Securities Purchase Agreement, the selling stockholders have not had any
material relationship with us within the past three years.

The table below lists the Selling Stockholders and other information regarding
the beneficial ownership of the shares of Common Stock by each of the Selling
Stockholders.  The second column lists the number of shares of Common Stock
beneficially owned by each Selling Stockholder, based on its ownership of the
shares of common stock and the convertible preferred shares, as of         ,
200 , assuming conversion of all convertible preferred shares and exercise of
the warrants held by the selling stockholders on that date without regard to any
limitations on conversions or exercise.

The third column lists the shares of Common Stock being offered by this
prospectus by the Selling Stockholders.

In accordance with the terms of a registration rights agreement with the selling
stockholders, this prospectus generally covers the resale of at least the sum of
(i) 100% of the number of shares of common stock issued and (ii)130% of the
maximum the number of shares of Common Stock issuable upon conversion of the
convertible preferred shares and (iii) 100% of the maximum number of shares of
Common Stock issuable upon exercise of the warrants as of the trading day
immediately preceding the date the registration statement is initially filed
with the SEC.  Because the conversion price of the convertible preferred shares
and the exercise price of the warrants may be adjusted, the number of shares
that will actually be issued may be more or less than the number of shares being
offered by this prospectus.  The fourth column assumes the sale of all of the
shares offered by the Selling Stockholders pursuant to this prospectus.

Under the terms of the certificate of designations and the warrants, a Selling
Stockholder may not convert the preferred shares or exercise the warrants to the
extent such conversion or exercise would cause such Selling Stockholder,
together with its affiliates, to beneficially own a number of shares of Common
Stock which would exceed a percentage specified by the Selling Stockholder of
our then outstanding shares of Common Stock following such conversion or
exercise, excluding for purposes of such determination shares of Common Stock
issuable upon conversion of the convertible preferred shares and upon exercise
of the warrants which have not been exercised which have not been converted. 
The number of shares in the second column does

1

--------------------------------------------------------------------------------

 

not reflect this limitation.  The Selling Stockholders may sell all, some or
none of their shares in this offering.  See “Plan of Distribution.”

2

--------------------------------------------------------------------------------

 

Name of Selling Stockholder

 

 

 

Number of Ordinary Shares
Owned Prior to Offering

 

Maximum Number of
Ordinary Shares to be Sold
Pursuant to this Prospectus

 

Number of Ordinary
Shares Owned After
Offering

 

 

 

 

 

 

 

 

 

[Buyer] (1)

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

[Other Buyers]

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

(1)

 

1

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PLAN OF DISTRIBUTION

We are registering the shares of Common Stock previously issued and the shares
of Common Stock issuable upon conversion of the preferred shares and upon
exercise of the warrants to permit the resale of these shares of Common Stock by
the holders of the common stock, preferred shares and warrants from time to time
after the date of this prospectus.  We will not receive any of the proceeds from
the sale by the selling stockholders of the shares of Common Stock.  We will
bear all fees and expenses incident to our obligation to register the shares of
Common Stock.

The selling stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents.  If the shares of
Common Stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions.  The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated
prices.  These sales may be effected in transactions, which may involve crosses
or block transactions,

·                  on any national securities exchange or quotation service on
which the securities may be listed or quoted at the time of sale;

·                  in the over-the-counter market;

·                  in transactions otherwise than on these exchanges or systems
or in the over-the-counter market;

·                  through the writing of options, whether such options are
listed on an options exchange or otherwise;

·                  ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;

·                  block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;

·                  purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

·                  an exchange distribution in accordance with the rules of the
applicable exchange;

·                  privately negotiated transactions;

·                  short sales;

·                  sales pursuant to Rule 144;

--------------------------------------------------------------------------------

 

·                  broker-dealers may agree with the selling stockholders to
sell a specified number of such shares at a stipulated price per share;

·                  a combination of any such methods of sale; and

·                  any other method permitted pursuant to applicable law.

If the selling stockholders effect such transactions by selling shares of Common
Stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of Common Stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved).  In connection with sales of
the shares of Common Stock or otherwise, the selling stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of Common Stock in the course of hedging in positions they
assume.  The selling stockholders may also sell shares of Common Stock short and
deliver shares of Common Stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. 
The selling stockholders may also loan or pledge shares of Common Stock to
broker-dealers that in turn may sell such shares.

The selling stockholders may pledge or grant a security interest in some or all
of the preferred shares, warrants or shares of Common Stock owned by them and,
if they default in the performance of their secured obligations, the pledgees or
secured parties may offer and sell the shares of Common Stock from time to time
pursuant to this prospectus or any amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933, as
amended, amending, if necessary, the list of selling stockholders to include,
pursuant to prospectus amendment or prospectus supplement, the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.  The selling stockholders also may transfer and donate the shares of
Common Stock in other circumstances in which case the transferees, donees,
pledgees or other successors in interest will be the selling beneficial owners
for purposes of this prospectus.

The selling stockholders and any broker-dealer participating in the distribution
of the shares of Common Stock may be deemed to be “underwriters” within the
meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act.  At the time a particular
offering of the shares of Common Stock is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of Common Stock being offered and the terms of the offering, including
the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers.

Under the securities laws of some states, the shares of Common Stock may be sold
in such states only through registered or licensed brokers or dealers.  In
addition, in some states the

2

--------------------------------------------------------------------------------

 

shares of Common Stock may not be sold unless such shares have been registered
or qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.

There can be no assurance that any selling stockholder will sell any or all of
the shares of Common Stock registered pursuant to the registration statement, of
which this prospectus forms a part.

The selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of Common Stock by the selling
stockholders and any other participating person.  Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of Common
Stock to engage in market-making activities with respect to the shares of Common
Stock.  All of the foregoing may affect the marketability of the shares of
Common Stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of Common Stock.

We will pay all expenses of the registration of the shares of Common Stock
pursuant to the registration rights agreement, estimated to be $[     ] in
total, including, without limitation, Securities and Exchange Commission filing
fees and expenses of compliance with state securities or “blue sky” laws;
provided, however, that a selling stockholder will pay all underwriting
discounts and selling commissions, if any.  We will indemnify the selling
stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution.  We may be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling stockholder specifically for use in this prospectus, in
accordance with the related registration rights agreement, or we may be entitled
to contribution.

Once sold under the registration statement, of which this prospectus forms a
part, the shares of Common Stock will be freely tradable in the hands of persons
other than our affiliates.

3

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EXHIBIT D

 

TRANSFER AGENT INSTRUCTIONS

 

CANO PETROLEUM, INC.

 

August     , 2006

 

Interwest Transfer Company
1981 East 4800 South, Suite 100
Salt Lake City, UT 84117
Attention:  Lorraine Smith

 

Ladies and Gentlemen:

 

Reference is made to that certain Securities Purchase Agreement, dated as of
August     , 2006 (the “Agreement”), by and among Cano Petroleum, Inc. a
Delaware Corporation (the “Company”), and the investors named on the Schedule of
Buyers attached thereto (collectively, the “Holders”), pursuant to which the
Company is issuing to the Holders (i) shares (the “Common Shares”) of the common
stock of the Company, par value $0.0001 per share, (the “Common Stock”), (ii)
Series D Convertible Preferred Stock (the “Preferred Shares”), which are
convertible into shares of Common Stock and (iii) warrants (the “Warrants”),
which are exercisable to purchase shares of Common Stock.

 

This letter shall serve as our authorization and direction to you (provided that
you are the transfer agent of the Company at such time), subject to any stop
transfer instructions that we may issue to you from time to time, if at all:

 

(I)            TO ISSUE SHARES OF COMMON STOCK UPON TRANSFER OR RESALE OF THE
COMMON SHARES;

 

(II)           TO ISSUE SHARES OF COMMON STOCK UPON CONVERSION OF THE PREFERRED
SHARES (THE “CONVERSION SHARES”) TO OR UPON THE ORDER OF A HOLDER FROM TIME TO
TIME UPON DELIVERY TO YOU OF A PROPERLY COMPLETED AND DULY EXECUTED CONVERSION
NOTICE, IN THE FORM ATTACHED HERETO AS EXHIBIT I, WHICH HAS BEEN ACKNOWLEDGED BY
THE COMPANY AS INDICATED BY THE SIGNATURE OF A DULY AUTHORIZED OFFICER OF THE
COMPANY THEREON; AND

 

(III)          TO ISSUE SHARES OF COMMON STOCK UPON EXERCISE OF THE WARRANTS
(THE “WARRANT SHARES”) TO OR UPON THE ORDER OF A HOLDER FROM TIME TO TIME UPON
DELIVERY TO YOU OF A PROPERLY COMPLETED AND DULY EXECUTED EXERCISE NOTICE, IN
THE FORM ATTACHED HERETO AS EXHIBIT II, WHICH HAS BEEN ACKNOWLEDGED BY THE
COMPANY AS INDICATED BY THE SIGNATURE OF A DULY AUTHORIZED OFFICER OF THE
COMPANY THEREON.

 

You acknowledge and agree that so long as you have previously received (a)
written confirmation from the General Counsel of the Company (or its outside
legal counsel) that either (i) a registration statement covering resales of the
Common Shares, the Conversion Shares and the Warrant Shares has been declared
effective by the Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933, as amended (the “1933 Act”) and you have not received a
notice from the Company that resale of the Common Shares, the Conversion Shares

 

--------------------------------------------------------------------------------

 

and the Warrant Shares under a registration statement are not permitted at that
time (a “No Registered Resale Notice”) pursuant to the terms of the Registration
Rights Agreement dated as of August     , 2006 by and among the Company and the
Holders, or (ii) that sales of the Common Shares, the Conversion Shares and the
Warrant Shares may be made in conformity with Rule 144 under the 1933 Act, and
(b) if applicable, a copy of such registration statement and you have not
received a No Registered Resale Notice, then, within three (3) business days
after your receipt of a notice of transfer, a Conversion Notice or an Exercise
Notice, you shall issue the certificates representing the Common Shares, the
Conversion Shares and/or the Warrant Shares, as applicable, and such
certificates shall not bear any legend restricting transfer of the Common
Shares, the Conversion Shares or the Warrant Shares thereby and should not be
subject to any stop-transfer restriction; provided, however, that if such Common
Shares, Conversion Shares and Warrant Shares are not registered for resale under
the 1933 Act or able to be sold under Rule 144, then the certificates for such
Common Shares, Conversion Shares and/or Warrant Shares shall bear the following
legend:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

A form of written confirmation from the General Counsel of the Company or the
Company’s outside legal counsel that a registration statement covering resales
of the Conversion Shares, the Common Shares and the Warrant Shares has been
declared effective by the SEC under the 1933 Act is attached hereto as Exhibit
III.

 

Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions. Should you have any questions
concerning this matter, please contact me at (817) 869-1061.

 

 

Very truly yours,

 

 

 

CANO PETROLEUM, INC.

 

--------------------------------------------------------------------------------

 

 

 

By:

 

 

 

 

Name:

James K. Teringo, Jr.

 

 

Title:

Senior Vice President and
General Counsel

 

--------------------------------------------------------------------------------

 

THE FOREGOING INSTRUCTIONS ARE
ACKNOWLEDGED AND AGREED TO

 

this         day of August, 2006

 

INTERWEST TRANSFER COMPANY

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

Enclosures

 

cc:

[Lead Investor]

 

[Other Buyers]

 

Eleazer N. Klein, Esq.

 

 

 

--------------------------------------------------------------------------------

 

EXHIBIT I
CANO PETROLEUM, INC. CONVERSION NOTICE

 

Reference is made to the Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock  of Cano Petroleum, Inc. (the “Certificate
of Designations”). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series D Convertible Preferred Stock, no par value per share (the “Preferred
Shares”), of Cano Petroleum, Inc., a Delaware corporation (the “Company”),
indicated below into shares of Common Stock, par value $0.0001 per share (the
“Common Stock”), of the Company, as of the date specified below.

 

Date of Conversion:

 

 

 

Number of Preferred Shares to be converted:

 

 

 

Stock certificate no(s). of Preferred Shares to be converted:

 

 

 

Tax ID Number (If applicable):

 

 

 

Please confirm the following information:

 

 

 

Conversion Price:

 

 

 

Number of shares of Common Stock to be issued:

 

 

Please issue the Common Stock into which the Preferred Shares are being
converted in the following name and to the following address:

 

Issue to:

 

 

 

 

 

 

 

 

Address:

 

 

 

 

 

Telephone Number:

 

 

 

 

 

Facsimile Number:

 

 

 

 

 

Authorization:

 

 

 

 

 

 

By:

 

 

Title:

 

 

 

 

 

Dated:

 

 

 

Account Number (if electronic book entry transfer):

 

 

 

 

 

Transaction Code Number (if electronic book entry transfer):

 

 

 

[NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT

 

--------------------------------------------------------------------------------

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs
Interwest Transfer Company to issue the above indicated number of shares of
Common Stock in accordance with the Irrevocable Transfer Agent Instructions
dated August      , 2006 from the Company and acknowledged and agreed to by
Interwest Transfer Company.

 

CANO PETROLEUM, INC.

 

 

 

By:

 

 

 

 

 

Name:

 

 

 

Title:

 

 

 

--------------------------------------------------------------------------------

 

EXHIBIT II

 

NOTICE OF EXERCISE

 

TO:  CANO PETROLEUM, INC.

 

(1)             The undersigned hereby elects to (check one box only):

 

o              purchase                    shares of the Common Stock of Cano
Petroleum, Inc. (the “Company”) pursuant to the terms of the attached Warrant,
and tenders herewith payment of the exercise price in full for such shares,
together with all applicable transfer taxes, if any.

 

o              purchase the number of shares of Common Stock of the Company by
cashless exercise pursuant to the terms of the Warrant as shall be issuable upon
cashless exercise of the portion of the Warrant relating to                   
shares, and shall tender payment of all applicable transfer taxes, if any.

 

(2)             Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:

 

 

 

 

 

 

 

(Name)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Address)

 

 

(3)             The undersigned represents that (i) the aforesaid shares of
Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares; (ii) the undersigned is aware of the
Company’s business affairs and financial condition and has acquired sufficient
information about the Company to reach an informed and knowledgeable decision
regarding its investment in the Company; (iii) the undersigned is experienced in
making investments of this type and has such knowledge and background in
financial and business matters that the undersigned is capable of evaluating the
merits and risks of this investment and protecting the undersigned’s own
interests; (iv) the undersigned is aware that the aforesaid shares of Common
Stock may not be sold pursuant to Rule 144 adopted under the Securities Act
unless certain conditions are met and until the undersigned has held the shares
for the number of years prescribed by Rule 144, that among the conditions for
use of the Rule is the availability of current information to the public about
the Company and the Company has not made such information available and has no
present plans to do so; and (v) the undersigned agrees not to make any
disposition of all or any part of the aforesaid shares of Common Stock unless
and until there is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with said registration statement, or the undersigned has provided the
Company with an opinion of counsel satisfactory to the Company, stating that
such registration is not required.

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

(Date)

 

(Signature)

 

 

 

 

 

 

 

 

 

(Print name)

 

--------------------------------------------------------------------------------

 

EXHIBIT III

 

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

 

[Transfer Agent]
[Address]
Attention:

 

Re:          Cano Petroleum, Inc.

 

Ladies and Gentlemen:

 

[We are][I am] counsel to Cano Petroleum, Inc., a Delaware corporation (the
“Company”), and have represented the Company in connection with that certain
Securities Purchase Agreement (the “Securities Purchase Agreement”) entered into
by and among the Company and the buyers named therein (collectively, the
“Holders”) pursuant to which the Company issued to the Holders preferred shares
(the “Preferred Shares”) convertible into the Company’s common stock, $0.0001
par value (the ”Common Stock”), shares of Common Stock and warrants exercisable
for shares of Common Stock (the “Warrants”). Pursuant to the Securities Purchase
Agreement, the Company also has entered into a Registration Rights Agreement
with the Holders (the “Registration Rights Agreement”) pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issuable upon conversion of the Preferred Shares, the shares of Common
Stock and the shares of Common Stock issuable upon exercise of the Warrants,
under the Securities Act of 1933, as amended (the “1933 Act”). In connection
with the Company’s obligations under the Registration Rights Agreement, on
                             , 200  , the Company filed a Registration Statement
on Form S-1 (File No. 333-                     ) (the “Registration Statement”)
with the Securities and Exchange Commission (the “SEC”) relating to the
Registrable Securities which names each of the Holders as a selling stockholder
thereunder.

 

In connection with the foregoing, [we][I] advise you that a member of the SEC’s
staff has advised [us][me] by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
knowledge, after telephonic inquiry of a member of the SEC’s staff, that any
stop order suspending its effectiveness has been issued or that any proceedings
for that purpose are pending before, or threatened by, the SEC and the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.

 

Subject to the specific prohibitions contained in the Registration Rights
Agreement regarding the inability to use the Registration Statement under
specific circumstances (the “Registration Statement Limitations”), this letter
shall serve as our standing instruction to you that the shares of Common Stock
are freely transferable by the Holders pursuant to the Registration Statement
provided the prospectus delivery requirements, if any, are complied with.
Subject to the Registration Statement Limitations, you need not require further
letters from us to effect any future legend-free issuance or reissuance of
shares of Common Stock to the Holders as

--------------------------------------------------------------------------------

 

contemplated by the Company’s Irrevocable Transfer Agent Instructions dated
                             , 2006. This letter shall serve as our standing
opinion with regard to this matter.

 

 

Very truly yours,

 

 

 

[ISSUER’S COUNSEL]

 

 

 

By:

 

 

 

CC:          [LIST NAMES OF HOLDERS]

 

--------------------------------------------------------------------------------

EXHIBIT E

CANO PETROLEUM, INC.

SECRETARY’S CERTIFICATE

The undersigned hereby certifies that he is the duly elected, qualified and
acting Secretary of Cano Petroleum, Inc., a Delaware corporation (the
“Company”), and that as such he is authorized to execute and deliver this
certificate in the name and on behalf of the Company and in connection with the
Securities Purchase Agreement, dated as of August 25, 2006, by and among the
Company and the investors listed on the Schedule of Buyers attached thereto (the
“Securities Purchase Agreement”), [g188282ma33i001.gif]and further certifies in
his official capacity, in the name and on behalf of the Company, the items set
forth below.  Capitalized terms used but not otherwise defined herein shall have
the meaning set forth in the Securities Purchase Agreement.

1.                                       ATTACHED HERETO AS EXHIBIT A IS A TRUE,
CORRECT AND COMPLETE COPY OF THE RESOLUTIONS DULY ADOPTED BY THE BOARD OF
DIRECTORS OF THE COMPANY BY UNANIMOUS WRITTEN CONSENT DATED AUGUST 24, 2006
(“BOARD RESOLUTIONS”) AND A TRUE, CORRECT AND COMPLETE COPY OF THE RESOLUTIONS
OF THE NEGOTIATION COMMITTEE (AS DEFINED IN THE BOARD RESOLUTIONS) DULY ADOPTED
BY THE NEGOTIATION COMMITTEE PURSUANT TO A UNANIMOUS WRITTEN CONSENT OF THE
NEGOTIATION COMMITTEE DATED AUGUST      , 2006.  SUCH RESOLUTIONS HAVE NOT IN
ANY WAY BEEN AMENDED, MODIFIED, REVOKED OR RESCINDED, HAVE BEEN IN FULL FORCE
AND EFFECT SINCE THEIR ADOPTION TO AND INCLUDING THE DATE HEREOF AND ARE NOW IN
FULL FORCE AND EFFECT.

2.                                       ATTACHED HERETO AS EXHIBIT B IS A TRUE,
CORRECT AND COMPLETE COPY OF THE CERTIFICATE OF INCORPORATION OF THE COMPANY,
TOGETHER WITH ANY AND ALL AMENDMENTS THERETO CURRENTLY IN EFFECT, AND NO ACTION
HAS BEEN TAKEN TO FURTHER AMEND, MODIFY OR REPEAL SUCH CERTIFICATE OF
INCORPORATION, THE SAME BEING IN FULL FORCE AND EFFECT IN THE ATTACHED FORM AS
OF THE DATE HEREOF.

3.                                       ATTACHED HERETO AS EXHIBIT C IS A TRUE,
CORRECT AND COMPLETE COPY OF THE BYLAWS OF THE COMPANY AND ANY AND ALL
AMENDMENTS THERETO CURRENTLY IN EFFECT, AND NO ACTION HAS BEEN TAKEN TO FURTHER
AMEND, MODIFY OR REPEAL SUCH BYLAWS, THE SAME BEING IN FULL FORCE AND EFFECT IN
THE ATTACHED FORM AS OF THE DATE HEREOF.

--------------------------------------------------------------------------------

 

4.                                       EACH PERSON LISTED BELOW HAS BEEN DULY
ELECTED OR APPOINTED TO THE POSITION(S) INDICATED OPPOSITE HIS NAME AND IS DULY
AUTHORIZED TO SIGN THE SECURITIES PURCHASE AGREEMENT AND EACH OF THE TRANSACTION
DOCUMENTS ON BEHALF OF THE COMPANY, AND THE SIGNATURE APPEARING OPPOSITE SUCH
PERSON’S NAME BELOW IS SUCH PERSON’S GENUINE SIGNATURE.

Name

 

 

 

Position

 

 

Signature

 

 

 

 

 

 

 

S. Jeffrey Johnson

 

Chief Executive Officer

 

 

 

IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of this     day
of August    , 2006.

 

 

 

 

James K. Teringo, Jr.

 

Secretary

 

I, S. Jeffrey Johnson, Chief Executive Officer and Chairman of the Company
hereby certify that James K. Teringo, Jr. is the duly elected, qualified and
acting Secretary of the Company and that the signature set forth above is his
true signature.

 

 

 

 

S. Jeffrey Johnson

 

Chief Executive Officer and

 

Chairman

 

--------------------------------------------------------------------------------

 

EXHIBIT A

Resolutions

--------------------------------------------------------------------------------

 

EXHIBIT B

Certificate of Incorporation

--------------------------------------------------------------------------------

 

EXHIBIT C

Bylaws[g188282ma33i001.gif]

--------------------------------------------------------------------------------

EXHIBIT F

 

CANO PETROLEUM, INC.

OFFICER'S CERTIFICATE

 

The undersigned, Chief Executive Officer of Cano Petroleum, Inc., a Delaware
corporation (the "Company"), pursuant to Section 7(h) of the Securities Purchase
Agreement, dated as of August 25

, 2006, by and among the Company and the investors identified on the Schedule of
Buyers attached thereto (the "Securities Purchase Agreement"), hereby
represents, warrants and certifies to the Buyers as follows (capitalized terms
used but not otherwise defined herein shall have the meaning set forth in the
Securities Purchase Agreement):

 

1.                                       The representations and warranties made
by the Company as set forth in Section 3 of the Securities Purchase Agreement
are true and correct in all material respects (except for those representations
and warranties that are qualified by materiality or Material Adverse Effect,
which are true and correct in all respects) as of the date hereof (except for
representations and warranties that speak as of a specific date which were true
and correct on such specified date).

 

2.                                       The Company has, in all material
respects, performed or complied with all covenants, agreements and conditions
required to be performed or complied with by it at or prior to the date hereof
under the Transaction Documents.

 

IN WITNESS WHEREOF, the undersigned has executed this certificate this [    ]
day of August    , 2006.

 

 

 

 

 

S. Jeffery Johnson

 

Chief Executive Officer

 

--------------------------------------------------------------------------------

Exhibit G

Cano Petroleum, Inc.

Lock-Up Letter Agreement

[               ], 2006

[Buyers]

Ladies and Gentlemen:

This Lock-Up Letter Agreement is being delivered to you in connection with the
Securities Purchase Agreement (the “Purchase Agreement”), dated as of August 25,
2006 by and among Cano Petroleum, Inc. (the “Company”) and the investors party
thereto, with respect to the issuance of (i) shares (the “Common Shares”) of the
Company’s common stock, par value $0.0001 per share (the “Common Stock”) and
(ii) preferred shares of the Company designated as Series D Convertible
Preferred Stock, the terms of which are set forth in the certificate of
designations for such series of preferred shares (the “Certificate of
Designations”) in the form attached as Exhibit A to the Purchase Agreement (the
“Preferred Shares”) which, among other things, will be convertible into shares
of Common Stock.

In order to induce you to enter into the Purchase Agreement, the undersigned
agrees that beginning on the Closing Date (as defined in the Purchase Agreement)
and until the date that is one hundred and twenty (120) days after the
Effectiveness Date (as defined in the Registration Rights Agreement (as defined
in the Purchase Agreement)) (the “Lock-Up Period”), the undersigned will not,
without the prior written consent of the Required Holders (as defined in the
Certificate of Designations), except as provided herein, (i) sell, offer to
sell, contract or agree to sell, hypothecate, hedge, pledge, grant any option to
purchase or otherwise dispose of or agree to dispose of, directly or indirectly,
any shares of Common Stock or warrants or other rights to purchase shares of
Common Stock, or cause the Company to file or cause to be declared effective a
registration statement with the Securities and Exchange Commission (the
“Commission”) relating to the offer and sale of any shares of Common Stock
(other than (a) the Registration Statement contemplated pursuant to the
Registration Rights Agreement and (b) solely with respect to registration
statements filed prior to the date hereof, such amendments that do not, without
the prior written consent of the Required Holders, effect (x) any increase in
the number of securities of the Company issued, issuable or registered for
resale pursuant to such registration statement, (y) any issuance of securities
pursuant to such registration statements or (z) any amendment of any terms of
any offering of securities or the terms of any security registered for resale or
issued pursuant to such registration statement), or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of any shares of Common Stock, or warrants or
other rights to purchase shares of Common Stock, whether any such transaction is
to be settled by delivery of such securities, in cash or otherwise, owned
directly by the undersigned (including holding as a custodian) or with respect
to which the undersigned has beneficial ownership within the rules and
regulations of the

--------------------------------------------------------------------------------

 

Commission (collectively, the “Undersigned Shares”); provided, however, that
after the date that is sixty (60) days after the Effectiveness Date the
Undersigned Shares may be sold at a price equal to or greater than
$            (1), subject to adjustment for stock splits, stock dividends,
reverse stock splits, recapitalizations, reclassifications and similar events. 
The undersigned represents and warrants that the undersigned has not engaged in
any transaction contemplated in the preceding sentence since the offering
contemplated by the Securities Purchase Agreement, or solicitation of interest
with respect thereto, was first commenced by the Company.

The foregoing sentence shall not, with respect to Undersigned Shares, apply to
(a) bona fide gifts, whether to charitable organizations or otherwise, provided
the recipient thereof agrees in writing with each of you to be bound by the
terms of this Lock-Up Letter Agreement, (b) dispositions to any foundation,
trust, partnership or the limited liability company, as the case may be, for the
direct or indirect benefit of the undersigned and/or the immediate family of the
undersigned, provided that such trust agrees in writing with each of you to be
bound by the terms of this Lock-Up Letter Agreement, (c) transfers as required
by law, (d) to dispositions by a partnership to a partner of such partnership,
provided such partner agrees in writing with each of you to be bound by the
terms of this Lock-Up Letter Agreement, (e) the sale of a sufficient amount of
the Undersigned Shares in connection with a “cashless exercise” of stock options
which would otherwise terminate during the Lock-up Period and the satisfaction
of any tax obligation resulting from the exercise of such stock options, (f) the
sale of a sufficient amount of the Undersigned Shares in connection with
satisfying any tax obligations resulting from the vesting of currently
outstanding restricted stock or (g) any obligations regarding the Undersigned
Shares under any existing pledge, margin account or similar agreement,
including, but not limited to, sales and transfers of such Undersigned Shares.  
For purposes of this Lock-Up Agreement, “immediate family” shall mean any
relationship by blood, marriage or adoption, not more remote than first cousin. 
The undersigned now has, and, except as contemplated by clauses (i) and (ii)
above, for the duration of this Lock-Up Agreement will have, good and marketable
title to the Undersigned’s Shares, free and clear of all liens, encumbrances,
and claims whatsoever.  The undersigned also agrees and consents to the entry of
stop transfer instructions with the Company’s transfer agent and registrar
against the transfer of the Undersigned’s Shares except in compliance with the
foregoing restrictions.

The undersigned understands and agrees that this Lock-Up Agreement is
irrevocable and shall be binding upon the undersigned’s heirs, legal
representatives, successors, and assigns.

This Lock-Up Letter Agreement may be executed in two counterparts, each of which
shall be deemed an original but both of which shall be considered one and the
same instrument.

This Lock-Up Letter Agreement will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to any choice of
law or conflicting provision or rule (whether of the State of New York, or any
other jurisdiction) that would cause the laws of any jurisdiction other than the
State of New York to be applied.  In furtherance of the foregoing, the internal
laws of the State of New York will control the interpretation and construction
of this Lock-Up Letter Agreement, even if under such jurisdiction’s choice of
law or conflict of law analysis, the substantive law of some other jurisdiction
would ordinarily apply.

--------------------------------------------------------------------------------

(1)             Insert an amount equal to 175% of the Conversion Price (as
defined in the Certificate of Designations).

--------------------------------------------------------------------------------

 

Yours very truly,

 

 

 

 

 

 

 

 

Name:

 

--------------------------------------------------------------------------------

 

Schedule 3 (a)
Subsidiaries

Pantwist, LLC
Ladder Companies, Inc.
Square One Energy, Inc.
Tri-Flow, Inc.
W.O. Energy of Nevada, Inc.
WO Energy, Inc.
W.O. Operating Company, Ltd.
W.O. Production Company, Ltd.

--------------------------------------------------------------------------------

 

Schedule 3(d)
Conflicts

Union Bank of California pursuant to Credit Agreement – see Schedule 3(r)(iii)

Energy Components SPC EEP Energy Exploration and Production Segregated Portfolio
– see Schedule 3(r)(iii) – to be paid off at Closing

American Stock Exchange

--------------------------------------------------------------------------------

 

Schedule 3(e)
Consents

See Schedule 3(d)

--------------------------------------------------------------------------------

 

Schedule 3(f)
Exception to Buyer Ownership Limitation

Wellington Management Company, llp beneficially owns more than 10% of the
Company’s Common Stock.

--------------------------------------------------------------------------------

 

Schedule 3(l)
Certain Changes

$57.5 million purchase of W.O. Energy of Nevada (11/05)
$23.4 million purchase of oil and gas interests by Pantwist (4/06)
$0.7 million purchase of Davenport net revenue interest (12/05 – 01/06)

--------------------------------------------------------------------------------

 

Schedule 3(q)
Stock Options and Restricted Stock

Options:

 

 

 

Gerald Haddock

 

50,000

 

James Teringo

 

50,000

 

Director Stock Option Plan

 

100,000

 

Outside Directors under 2005 Long-Term Incentive Plan

 

155,000

 

Employees under 2005 Long-Term Incentive Plan

 

182,185

 

 

 

 

 

Awards of Restricted Shares:

 

 

 

John Lacik

 

30,000

 

Patrick McKinney

 

30,000

 

Morris B. “Sam” Smith

 

65,000

 

James K. Teringo, Jr.

 

20,000

 

 

--------------------------------------------------------------------------------

 

Schedule 3(r)
Equity Capitalization

(i)                                    Liens on Company Stock

·                                          All Shares/Interests in Subsidiaries
pledged to Union Bank of California

(ii)                                Options

·                                          517,815 shares available for issuance
under the 2005 Long-Term Incentive Plan

·                                          See Schedule 3(q) for issued
restricted stock which is subject to vesting and issued stock options

(iii)                            Credit Facilities

·                                          Credit Agreement with Union Bank of
California dated November 29, 2005, as amended - $54,250,000 principal
outstanding

·                                          Subordinated Credit Agreement with
Energy Components SPC EEP Energy Exploration and Production Segregated Portfolio
dated November 29, 2005, as amended - $15,000,000 principal outstanding

(iv)                               Financing Statements

·                                          Those filed in connection with (iii)
above

(v)                                   Obligations to Register Securities

·                                          1,791,320 shares held by Scott White
and the Estate of Miles O’Loughlin

(vi)                               None

(vii)                           None

(viii)                       None

Schedule of Shares Beneficially Owned by each Director & Executive Officer:

Officers:

 

 

 

 

 

 

 

S. Jeffrey Johnson

 

3,908,850

 

Michael J. Ricketts

 

464,850

 

Morris B. “Sam” Smith

 

90,000

 

James K Teringo, Jr.

 

70,000

 

John Lacik

 

30,000

 

 

 

 

 

Directors:

 

 

 

 

 

 

 

Gerald Haddock

 

193,000

 

S. Jeffrey Johnson

 

3,908,850

 

Randall Boyd

 

262,210

 

Dennis McCuistion

 

15,000

 

Patrick Tolbert

 

15,000

 

Don Dent

 

150,000

 

James Underwood

 

50,000

 

 

--------------------------------------------------------------------------------

 

Schedule 3(s)
Indebtedness and Other Contracts

Indebtedness:

(i)                                    See Schedule 3(r)(iii)

(ii)                                See Schedule 3(r)(iii)

Commercial General Liability Insurance Policy between Mid-Continent Casualty
Company, as insurer and Cano Petroleum, Inc., et al., as insureds, covering the
period from July 1, 2005 to July 1, 2006 and bearing Policy No. 04-GL-000594906

Commercial Excess Insurance Policy between Mid-Continent Casualty Company, as
insurer and Cano Petroleum, Inc., et al., as insured, covering the period from
July 1, 2005 to July 1, 2006 and bearing Policy No. 04 XS 139536

(iii)                            None

(iv)                               None

Material Terms of Indebtedness:

Credit Agreement with Union Bank of California

See Form 8-K filed December 5, 2005 Item 1.01 “Credit Agreement,” as amended by
Form 8-K filed March 1, 2006 Item 1.01 “Entry into a Material Definitive
Agreement,” as amended by Form 8-K filed May 2, 2006 Item 1.01 “Amendment to
Credit Agreement,” as amended by Form 8-K filed May 15, 2006 Item 1.01
“Amendment to Credit Agreement,” and as amended by Form 8-K filed July 7, 2006
Item 1.01 “Amendment to Credit Agreement.”

Subordinated Credit Agreement with Energy Components SPC EEP Energy Exploration
and Production Segregated Portfolio

See Form 8-K of the Company filed December 5, 2005 Item 1.01 “Subordinated
Credit Agreement,” as amended by Form 8-K of the Company filed May 2, 2006 Item
1.01 “Amendment to Subordinated Credit Agreement,” as amended by Form 8-K of the
Company filed May 15, 2006 Item 1.01 “Amendment to Subordinated Credit
Agreement,” and as amended by Form 8-K of the Company filed July 7, 2006 Item
1.01 “Amendment to Subordinated Credit Agreement.”

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Schedule 3(t)
Litigation

On March 23, 2006, the following lawsuit was filed in the 100th Judicial
District Court in Carson County, Texas; Cause No. 9840, The Tom L. and Anne
Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,
George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne Burnett Windfohr; and
Burnett Ranches, Ltd. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.; W.
O. Operating Company, Ltd., and W.O. Energy, Inc.  The plaintiffs claim that the
electrical wiring and equipment of Cano Petroleum, Inc. or certain of its
subsidiaries relating to its oil and gas operations started a wildfire that
began on March 12, 2006 in Carson County.

The plaintiffs (i) allege negligence and gross negligence and (ii) seek
undisclosed damages, including, but not limited to, damages for damage to their
land and livestock, certain expenses related to fighting the fire and certain
remedial expenses.  In addition, the plaintiffs seek (i) termination of certain
oil and gas leases, (ii) reimbursement for their attorney’s fees and (iii)
exemplary damages.

On April 28, 2006, the following lawsuit was filed in the 31st Judicial District
Court of Roberts County, Texas, Case No. 1922, Robert and Glenda Adcock, et al.
v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O. Operating Company,
Ltd., and W.O. Energy, Inc.  There are 51 plaintiffs that claim that the
electrical wiring and equipment of Cano Petroleum, Inc. or certain of its
subsidiaries relating to its oil and gas operations started a wildfire that
began on March 12, 2006 in Carson County.

The plaintiffs (i) allege negligence, gross negligence, trespass and nuisance
and (ii) seek undisclosed damages, including, but not limited to, damages to
their land, buildings and livestock and certain remedial expenses.  In addition,
the plaintiffs seek (i) reimbursement for their attorney’s fees and (ii)
exemplary damages.

On April 10, 2006, the following lawsuit was filed in the 31st Judicial District
Court of Roberts County, Texas, Case No. 1920, Joseph Craig Hutchison and Judy
Hutchison v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O. Operating
Company, Ltd., and W.O. Energy, Inc.  On May 1, 2006, the following lawsuit was
filed in the 31st Judicial District Court of Roberts County, Texas, Case No.
1923, Chisum Family Partnership, Ltd. v. Cano Petroleum, Inc., W.O. Energy of
Nevada, Inc.; W. O. Operating Company, Ltd., and W.O. Energy, Inc.  The
plaintiffs in both cases claim that the electrical wiring and equipment of Cano
Petroleum, Inc. or certain of its subsidiaries relating to its oil and gas
operations started a wildfire that began on March 12, 2006 in Carson County.

The plaintiffs in both cases (i) allege negligence and trespass and (ii) seek
undisclosed damages, including, but not limited to, damages to their land and
certain remedial expenses.  In addition, the plaintiffs in both cases seek (i)
reimbursement for their attorney’s fees and (ii) exemplary damages.

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On July 3, 2006, the following lawsuit was filed in the 31st Judicial District
Court of Roberts County, Texas, Case No. 1928, Rebecca Lee Martinez and Maria
Concepcion Diaz v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O.
Operating Company, Ltd., and W.O. Energy, Inc.  The plaintiffs claim that the
electrical wiring and equipment of Cano Petroleum, Inc. or certain of its
subsidiaries relating to its oil and gas operations started a wildfire that
began on March 12, 2006 in Carson County, Texas.  The plaintiffs (i) allege
negligence and gross negligence and (ii) seek undisclosed damages for the
wrongful death of two individuals.  In addition, the plaintiffs seek (i)
reimbursement for their attorney’s fees and (ii) exemplary damages.

On July 5, 2006, Cano Petroleum, Inc. received notice from a law firm
representing Norma Chavira, et al. that it would be representing the Chavira
Family in a wrongful death action resulting from, what the Company believes, are
the same facts and circumstances involved in the Martinez suit discussed above. 
The Company has not been served with a petition in this claim.

On August 14, 2006, the following lawsuit was filed in the 23rd Judicial
District Court of Gray County, Texas, Cause No. 34423, Yolanda Villarreal v.
Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O. Operating Company,
Ltd., and W.O. Energy, Inc.  The plaintiffs claim that the electrical wiring and
equipment of Cano Petroleum, Inc. or certain of its subsidiaries relating to its
oil and gas operations started a wildfire that began on March 12, 2006 in Carson
County, Texas.  The plaintiffs (i) allege negligence and gross negligence and
(ii) seek undisclosed damages for the wrongful death of one individual, being
one of the same individuals as addressed in the above described Martinez
action.  In addition, the plaintiffs seek (i) reimbursement for their attorney’s
fees and (ii) exemplary damages.

On June 20, 2006, the following lawsuit was filed in the United States District
Court for the Northern District of Texas, Fort Worth Division, C.A. No.
4-06CV-434-A, Mid-Continent Casualty Company v. Cano Petroleum, Inc., W.O.
Energy of Nevada, Inc., W.O. Operating Company, LTD. and W.O. Energy, Inc.  The
plaintiff seeks a declaratory judgment that it is not responsible for pre-tender
costs incurred by the defendants (less than $25k), that it retains the sole and
exclusive right to select lead defense counsel and that it is not responsible
for costs and expenses in the event that coverage is subsequently not found, all
relating to its commercial general liability policy of insurance issued to the
defendants and the above described litigation regarding the panhandle fire.

The suit has not been served on the defendants.

Beginning on or about June 14, 2006 and continuing to date, Cano Petroleum, Inc.
has received demand letters from Kenneth K. Laughlin, Morris R. Greenhaw and
Morris R. Greenhaw Oil & Gas, Inc. for indemnification under an alleged
Indemnification Agreement between Cano Petroleum, Inc., Square One Energy, Inc.,
Morris R. Greenhaw Oil & Gas, Inc., Kenneth K. Laughlin and Morris R. Greenhaw. 
The demand relates to fees and expenses incurred by Messrs. Laughlin and
Greenhaw in connection with Case No. 03-30422; In re Greenhaw Energy, Inc.; In
the United States Bankruptcy Court for

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the Southern District of Texas – Houston Division and Adv. No. 06-3343; W. Steve
Smith, Trustee v. Morris R. Greenhaw Oil & Gas, Inc., et al.: In the United
States Bankruptcy Court for the Southern District of Texas – Houston Division. 
Cano Petroleum, Inc. is not aware of any litigation being filed at this date.

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Schedule 3(w)
Exceptions to Title

See 3(r)(iii) and (iv) and 3(s) regarding material terms of indebtedness
regarding mortgages on real property.

The net acreage for the Barnett Shale Properties is approximately 9,950 acres

The net acreage for the Rich Valley Properties is approximately 14,100 acres

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Schedule 3(z)
Exceptions to Right to Vote or Dividends

If the Company is in default under the Credit Agreement of Union Bank of
California Subordinated Credit Agreement with Energy Components SPC EEP Energy
Exploration and Production Segregated Portfolio, subsidiaries of the Company
cannot make Restricted Payments as defined under such Credit Agreement or
Subordinated Credit Agreement.

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Schedule 3(bb)
Reported Material Weaknesses

The Company is presently involved in a review by Weaver-Tidwell of its system of
internal controls in connection with upcoming SOX compliance and various
correspondence exists between the Company and Weaver-Tidwell regarding such
effort.

No prior notices or correspondence have been received.

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