**EXHIBIT 10.6**

 

*Execution Version*

 

**$25,000,000**

 

**SUBORDINATED CREDIT AGREEMENT**

 

Among

 

**CANO PETROLEUM, INC.**

 

as Borrower,

 

**THE LENDERS PARTY HERETO FROM TIMETO TIME**

** **

as Lenders,

 

and

 

**UNIONBANCAL EQUITIES, INC.**

 

as Administrative Agent

 

March 17, 2008

 

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**TABLE OF CONTENTS**

 
|              |   |                                             |   | **Page** |
|-------------------|--------|--------------------------------------------------|--------|----------|
| ARTICLE I         |   | DEFINITIONS AND ACCOUNTING TERMS                 |   | 1        |
|              |   |                                             |
| Section 1.01 |   | Certain Defined Terms                            |   | 1        |
| Section 1.02 |   | Computation of Time Periods                      |   | 18       |
| Section 1.03 |   | Accounting Terms; Changes in GAAP                |   | 18       |
| Section 1.04 |   | Types of Advances                                |   | 18       |
| Section 1.05 |   | Miscellaneous                                    |   | 18       |
|              |   |                                             |   |     |
| ARTICLE II        |   | CREDIT FACILITIES                                |   | 19       |
|              |   |                                             |   |     |
| Section 2.01 |   | Commitment for Advances                          |   | 19       |
| Section 2.02 |   | [Reserved]                                       |   | 19       |
| Section 2.03 |   | Method of Borrowing                              |   | 19       |
| Section 2.04 |   | Reduction of the Commitment                      |   | 22       |
| Section 2.05 |   | Prepayment of Advances                           |   | 22       |
| Section 2.06 |   | Repayment of Advances                            |   | 23       |
| Section 2.07 |   | [Reserved]                                       |   | 23       |
| Section 2.08 |   | Fees                                             |   | 23       |
| Section 2.09 |   | Interest                                         |   | 23       |
| Section 2.10 |   | Payments and Computations                        |   | 25       |
| Section 2.11 |   | Sharing of Payments, Etc.                        |   | 26       |
| Section 2.12 |   | Breakage Costs                                   |   | 26       |
| Section 2.13 |   | Increased Costs                                  |   | 26       |
| Section 2.14 |   | Taxes                                            |   | 27       |
| Section 2.15 |   | Extension of Maturity Date                       |   | 29       |
| Section 2.16 |   | Increase in Commitments                          |   | 30       |
|              |   |                                             |   |     |
| ARTICLE III       |   | CONDITIONS OF LENDING                            |   | 32       |
|              |   |                                             |   |     |
| Section 3.01 |   | Conditions Precedent to Initial Credit Extension |   | 32       |
| Section 3.02 |   | Conditions Precedent to All Borrowings           |   | 34       |
|              |   |                                             |   |     |
| ARTICLE IV        |   | REPRESENTATIONS AND WARRANTIES                   |   |     |
|              |   |                                             |   |     |
| Section 4.01 |   | Existence; Subsidiaries                          |   | 35       |
| Section 4.02 |   | Power                                            |   | 35       |
| Section 4.03 |   | Authorization and Approvals                      |   | 36       |
| Section 4.04 |   | Enforceable Obligations                          |   | 36       |
| Section 4.05 |   | Financial Statements                             |   | 36       |
| Section 4.06 |   | True and Complete Disclosure                     |   | 37       |
| Section 4.07 |   | Litigation; Compliance with Laws                 |   | 37       |
| Section 4.08 |   | Use of Proceeds                                  |   | 37       |
| Section 4.09 |   | Investment Company Act                           |   | 37       |
| Section 4.10 |   | Federal Power Act                                |   | 37       |
|                   |        |                                                  |        |          |  |  |

 

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| Section 4.11 |   | Taxes                                                       |   | 38     |
|-------------------|--------|-------------------------------------------------------------|--------|--------|
| Section 4.12 |   | Pension Plans                                               |   | 38     |
| Section 4.13 |   | Condition of Property; Casualties                           |   | 39     |
| Section 4.14 |   | No Burdensome Restrictions; No Defaults                     |   | 39     |
| Section 4.15 |   | Environmental Condition                                     |   | 39     |
| Section 4.16 |   | Permits, Licenses, Etc.                                     |   | 40     |
| Section 4.17 |   | Gas Contracts                                               |   | 40     |
| Section 4.18 |   | Liens; Titles, Leases, Etc.                                 |   | 40     |
| Section 4.19 |   | Solvency and Insurance                                      |   | 41     |
| Section 4.20 |   | Hedging Agreements                                          |   | 41     |
| Section 4.21 |   | Material Agreements                                         |   | 41     |
|              |   |                                                        |   |   |
| ARTICLE V         |   | AFFIRMATIVE COVENANTS                                       |   | 41     |
|              |   |                                                        |   |   |
| Section 5.01 |   | Compliance with Laws, Etc.                                  |   | 42     |
| Section 5.02 |   | Maintenance of Insurance                                    |   | 42     |
| Section 5.03 |   | Preservation of Corporate Existence, Etc.                   |   | 43     |
| Section 5.04 |   | Payment of Taxes, Etc.                                      |   | 43     |
| Section 5.05 |   | Visitation Rights                                           |   | 43     |
| Section 5.06 |   | Reporting Requirements                                      |   | 43     |
| Section 5.07 |   | Maintenance of Property                                     |   | 47     |
| Section 5.08 |   | Agreement to Pledge                                         |   | 47     |
| Section 5.09 |   | Use of Proceeds                                             |   | 47     |
| Section 5.10 |   | Title Evidence and Opinions                                 |   | 47     |
| Section 5.11 |   | Further Assurances; Cure of Title Defects                   |   | 48     |
| Section 5.12 |   | Hedging Arrangements                                        |   | 48     |
| Section 5.13 |   | Bank Accounts                                               |   | 48     |
|              |   |                                                        |   |   |
| ARTICLE VI        |   | NEGATIVE COVENANTS                                          |   | 49     |
|              |   |                                                        |   |   |
| Section 6.01 |   | Liens, Etc.                                                 |   | 49     |
| Section 6.02 |   | Debts, Guaranties, and Other Obligations                    |   | 50     |
| Section 6.03 |   | Agreements Restricting Liens and Distributions              |   | 51     |
| Section 6.04 |   | Merger or Consolidation; Asset Sales                        |   | 52     |
| Section 6.05 |   | Restricted Payments                                         |   | 52     |
| Section 6.06 |   | Investments                                                 |   | 52     |
| Section 6.07 |   | Affiliate Transactions                                      |   | 53     |
| Section 6.08 |   | Compliance with ERISA                                       |   | 53     |
| Section 6.09 |   | Sale-and-Leaseback                                          |   | 54     |
| Section 6.10 |   | Change of Business                                          |   | 54     |
| Section 6.11 |   | Organizational Documents, Name Change                       |   | 54     |
| Section 6.12 |   | Use of Proceeds                                             |   | 54     |
| Section 6.13 |   | Gas Imbalances, Take-or-Pay or Other Prepayments            |   | 54     |
| Section 6.14 |   | Limitation on Speculative Hedging                           |   | 55     |
| Section 6.15 |   | Additional Subsidiaries; Additional Oil and Gas  Properties |   | 55     |
| Section 6.16 |   | Account Payables                                            |   | 55     |
| Section 6.17 |   | Current Ratio                                               |   | 55     |
|                   |        |                                                             |        |        |  |  |

 

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| Section 6.18 |   | Leverage Ratio                              |   | 56                                      |
|-------------------|--------|---------------------------------------------|--------|-----------------------------------------|
| Section 6.19 |   | Interest Coverage Ratio                     |   | 56                                      |
| Section 6.20 |   | Senior Debt                                 |   | 56                                      |
| Section 6.21 |   | Non-Guarantor Subsidiary                    |   | 56                                      |
| Section 6.22 |   | Equity Issuance                             |   | 56                                      |
| Section 6.23 |   | Minimum Asset Coverage Ratio                |   | 56                                      |
|              |   |                                        |   |                                    |
| ARTICLE VII       |   | EVENTS OF DEFAULT; REMEDIES                 |   | 57                                      |
|              |   |                                        |   |                                    |
| Section 7.01 |   | Events of Default                           |   | 57                                      |
| Section 7.02 |   | Optional Acceleration of Maturity           |   | 60                                      |
| Section 7.03 |   | Automatic Acceleration of Maturity          |   | 60                                      |
| Section 7.04 |   | Right of Set-off                            |   | 61                                      |
| Section 7.05 |   | Non-exclusivity of Remedies                 |   | 61                                      |
| Section 7.06 |   | Application of Proceeds                     |   | 61                                      |
|              |   |                                        |   |                                    |
| ARTICLE VIII      |   | THE ADMINISTRATIVE AGENT                    |   | 62                                      |
|              |   |                                        |   |                                    |
| Section 8.01 |   | Authorization and Action                    |   | 62                                      |
| Section 8.02 |   | Administrative Agent’s Reliance, Etc.  |   | 62                                      |
| Section 8.03 |   | The Administrative Agent and Its Affiliates |   | 63                                      |
| Section 8.04 |   | Lender Credit Decision                      |   | 63                                      |
| Section 8.05 |   | Indemnification                             |   | 63                                      |
| Section 8.06 |   | Successor Administrative Agent              |   | 64                                      |
|              |   |                                        |   |                                    |
| ARTICLE IX        |   | MISCELLANEOUS                               |   | 64                                      |
|              |   |                                        |   |                                    |
| Section 9.01 |   | Amendments, Etc.                            |   | 64                                      |
| Section 9.02 |   | Notices, Etc.                               |   | 65                                      |
| Section 9.03 |   | No Waiver; Remedies                         |   | 65                                      |
| Section 9.04 |   | Costs and Expenses                          |   | 65                                      |
| Section 9.05 |   | Binding Effect                              |   | 65                                      |
| Section 9.06 |   | Lender Assignments and Participations       |   | 66                                      |
| Section 9.07 |   | Indemnification; Waiver                     |   | 68                                      |
| Section 9.08 |   | Execution in Counterparts                   |   | 69                                      |
| Section 9.09 |   | Survival of Representations, Etc.           |   | 69                                      |
| Section 9.10 |   | Severability                                |   | 69                                      |
| Section 9.11 |   | Business Loans                              |   | 69                                      |
| Section 9.12 |   | Governing Law; Submission to Jurisdiction   |   | 69                                      |
| Section 9.13 |   | Subordination and Intercreditor Agreement   |   | 70                                      |
| Section 9.14 |   | USA Patriot Act                             |   | 70                                      |
| Section 9.15 |   | WAIVER OF JURY TRIAL                        |   | 70                                      |
| Section 9.16 |   | ORAL AGREEMENTS                             |   | 70                                      |
|              |   |                                        |   |                                    |
| **EXHIBITS:**     |   |
| Exhibit A    |   | -                                           |   | Form of  Assignment and Acceptance |
| Exhibit B    |   | -                                           |   | Form of  Compliance Certificate    |
|                   |        |                                             |        |                                         |  |  |  |  |  |  |  |

 

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| Exhibit C   |   | -      |                     | Form of  Guaranty                             |
|------------------|--------|--------|--------------------------|----------------------------------------------------|
| Exhibit D   |   | -      |                     | Form of  Mortgage                             |
| Exhibit E   |   | -      |                     | Form of  Note                                 |
| Exhibit F   |   | -      |                     | Form of  Notice of Borrowing                  |
| Exhibit G   |   | -      |                     | Form of  Notice of Conversion or Continuation |
| Exhibit H   |   | -      |                     | Form of  Pledge Agreement                     |
| Exhibit I   |   | -      |                     | Form of  Security Agreement                   |
| Exhibit J   |   | -      |                     | Form of  Transfer Letters                     |
| Exhibit K   |   | -      |                     | Form of  Borrower’s Counsel Opinion      |
|             |   |   |                     |                                               |
| **SCHEDULES:**   |   |   |                     |                                               |
| Schedule I  |   | -      |                     | Pricing  Grid                                      |
| Schedule II      |   | -      |                     | Notice  Information and Commitments                |
| Schedule 4.01    |   | -      | ** **               | Subsidiaries  of Borrower                          |
| Schedule 4.05    |   | -      |                     | Existing  Debt                                     |
| Schedule 4.07    |   | -      |                     | Litigation                                         |
| Schedule 4.14(a) | -      |   | Material  Debt Documents |
| Schedule 4.20    |   | -      |                     | Hedging  Contracts                                 |
| Schedule 4.21    |   | -      |                     | Material  Agreements                               |
| Schedule 5.12    |   | -      |                     | Required  Hedging Contracts                        |

 

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**SUBORDINATED CREDIT AGREEMENT**

 

This Subordinated CreditAgreement dated as of March 17, 2008 (the “Effective Date”) is among CanoPetroleum, Inc., a Delaware corporation (“Borrower”), the lenders partyhereto from time to time (“Lenders”), and UnionBanCal Equities, Inc. asadministrative agent for such Lenders (in such capacity, the “AdministrativeAgent”).

 

The parties hereto agree toas follows:

 

**ARTICLE IDEFINITIONS AND ACCOUNTING TERMS**

** **

Section 1.01                Certain Defined Terms.  As used inthis Agreement, the terms defined above shall have the meanings set forththerein and the following terms shall have the following meanings (unlessotherwise indicated, such meanings to be equally applicable to both thesingular and plural forms of the terms defined):

 

“Acceptable SecurityInterest” in any Property means a Lien which (a) exists in favor ofthe Administrative Agent for the benefit of the Secured Parties, (b) issuperior to all Liens or rights of any other Person in the Property encumberedthereby, other than Permitted Prior Liens, (c) secures the Obligations,and (d) is perfected and enforceable.

 

“Acquisition” meansthe purchase by the Borrower or any of its Subsidiaries of any business,including the purchase of all or substantially all the associated assets oroperations or of stock (or other ownership interests) of a Person (other thanof a wholly-owned Subsidiary of the Borrower).

 

“Adjusted Reference Rate”means, for any day, the fluctuating rate per annum of interest equal to thegreater of (a) the Reference Rate in effect on such day and (b) theFederal Funds Rate in effect on such day plus 1⁄2 of 1%.

 

“Administrative Agent”means UnionBanCal Equities, Inc., in its capacity as agent pursuant to Article VIII,and any successor agent pursuant to Section 8.06.

 

“Advance” means anadvance by a Lender to the Borrower pursuant to Section 2.01(a) aspart of a Borrowing and refers to a Reference Rate Advance or a Eurodollar RateAdvance.

 

“Affiliate” means, asto any Person, any other Person that, directly or indirectly, through one ormore intermediaries, controls, is controlled by, or is under common controlwith, such Person or any Subsidiary of such Person.  The term “control” (including the terms “controlledby” or “under common control with”) means the possession, directly orindirectly, of the power to direct or cause the direction of the management andpolicies of a Person, whether through ownership of a Control Percentage, bycontract, or otherwise.  Without limitingthe generality of the foregoing, a Person shall be deemed to be controlled byanother Person if such other Person possesses, directly or indirectly, thepower to vote 10% or more of the securities having ordinary voting power forthe election of directors, managing general partners or the equivalent.

 

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“Agreement” meansthis Subordinated Credit Agreement, as the same may be amended, supplemented,restated, and otherwise modified from time to time.

 

“Applicable Margin”means, with respect to any Advance, (a) during any time when an Event ofDefault exists, 3% per annum plus the rate per annum set forth in the PricingGrid for the relevant Type of such Advance, and (b) at any other time, therate per annum set forth in the Pricing Grid for the relevant Type of suchAdvance.  The Applicable Margin for anyAdvance shall change when and as any such Event of Default commences orterminates and as otherwise set forth in the Pricing Grid and subject tofurther adjustments as set forth Section 2.8(d).

 

“Assignment andAcceptance” means an assignment and acceptance entered into by a Lender andan Eligible Assignee, and accepted by the Administrative Agent, insubstantially the form of the attached Exhibit A.

 

“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 WelexSpectral Density – Dual Spaced Neutron Log dated July 29, 1986 for theHogtown Moore Unit #13-2 Well located in the George E. Moore Survey, EastlandConty, Texas, as such stratigraphic equivalent underlies, comprises a portionof or is attributable to the Oil & Gas Properties held by Square Onein the Desdemona Field.

 

“Borrowing” means aborrowing consisting of Advances made on the same day by the Lenders pursuantto Section 2.01(a).

 

“Borrowing Base”shall have the definition given to such term in the Senior Credit Agreement asin effect on the date hereof of as modified in accordance with theSubordination and Intercreditor Agreement.

 

“Business Day” meansa day of the year on which banks are not required or authorized to close inDallas, Texas and Los Angeles, California and, if the applicable Business Dayrelates to any Eurodollar Rate Advances, on which dealings are carried on bybanks in the London interbank market.

 

“Capital Leases”means, as applied to any Person, any lease of any Property by such Person aslessee which would, in accordance with GAAP, be required to be classified andaccounted for as a capital lease on the balance sheet of such Person.

 

“CERCLA” means theComprehensive Environmental Response, Compensation, and Liability Act of 1980,as amended, state and local analogs, and all rules and regulations andrequirements thereunder in each case as now or hereafter in effect.

 

“Change in Control”shall mean the occurrence of any of the following events: (a) the Borrowerceases to own, either directly or indirectly, 100% of the Equity Interest inany Subsidiary other than as a result of a sale of assets or merger permittedunder Section 6.04, (b) any “person” or “group” (as such terms areused in Sections 13(d) and 14(d) of the Securities Exchange Act of1934) other than a Permitted Holder becomes the “beneficial owner” (as definedin Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, exceptthat a person or group shall be deemed to have “beneficial ownership” of allsecurities that such person or group has the right to 

 

2

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acquire(such right, an “option right”), whether such right is exercisable immediatelyor only after the passage of time), directly or indirectly, of 33% or more ofthe Equity Interest of the Borrower entitled to vote for members of the boardof directors or equivalent governing body of the Borrower on a fully-dilutedbasis (and taking into account all such securities that such person or grouphas the right to acquire pursuant to any option right), or (c) during anyperiod of 12 consecutive months, a majority of the members of the board ofdirectors or other equivalent governing body of the Borrower cease to becomposed of individuals (i) who were members of that board or equivalentgoverning body on the first day of such period, (ii) whose election ornomination to that board or equivalent governing body was approved byindividuals referred to in clause (i) above constituting at the time ofsuch election or nomination at least a majority of that board or equivalentgoverning body or (iii) whose election or nomination to that board orother equivalent governing body was approved by individuals referred to inclauses (i) and (ii) above constituting at the time of such electionor nomination at least a majority of that board or equivalent governingbody.   For purposes of this definition, “PermittedHolder” means any of the following: (A) any Person that is the “beneficialowner” (as referred to above) of an Equity Interest in the Borrower on the datehereof, (B) any such Person’s estate, spouse and lineal descendants andthe legal representative of any of the foregoing, (C) the trustees of anybona fide trusts of which any of the foregoing are the sole beneficiaries andgrantors, and (D) any corporation, limited partnership, limited liabilitycompany, or similar entity, all of the Voting Securities of which is owned byany of the foregoing.

 

“Code” means theInternal Revenue Code of 1986, as amended, and any successor statute.

 

“Collateral”means (a) all “Collateral”, “Pledged Collateral” and “Mortgaged Properties”(as defined in each of the Mortgages, the Security Agreements, and the PledgeAgreement, as applicable) or similar terms used in the Security Instruments,and (b) all amounts contained in the Borrower’s and its Subsidiaries’ bankaccounts.

 

“Commitment” meansthe amount set opposite such Lender’s name on the Schedule II hereof as itsCommitment, or if such Lender has entered into any Assignment and Acceptance,as set forth for such Lender as its Commitment in the Register maintained bythe Administrative Agent pursuant to Section 9.06(c), or if such Lenderhas increased its Commitment under Section 2.16 below, as set forth in theagreement increasing such Commitment or joinder agreement, as applicable, assuch amount may be reduced, increased or terminated pursuant to Section 2.04,2.16 or Article VII or otherwise under this Agreement.

 

“Compliance Certificate”means a compliance certificate in the form of the attached Exhibit Bsigned by a Responsible Officer of the Borrower.

 

“Consolidated Net Income”means, with respect to the Borrower and its consolidated Subsidiaries, for anyperiod, the net income for such period after taxes, as determined in accordancewith GAAP, excluding, however, (a) extraordinary items, including (i) anynet non-cash gain or loss during such period arising from the sale, exchange,retirement or other disposition of capital assets (such term to include allfixed assets and all securities) other than in the ordinary course of business,and (ii) any write-up or write-down of assets and (b) the cumulative effectof any change in GAAP.

 

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“Control Percentage”means, with respect to any Person, the percentage of the outstanding EquityInterest (including any options, warrants or similar rights to purchase such EquityInterest) of such Person having ordinary voting power which gives the direct orindirect holder of such Equity Interest the power to elect a majority of theboard of directors (or other applicable governing body) of such Person.

 

“Controlled Group” meansall members of a controlled group of corporations and all businesses (whetheror not incorporated) under common control which, together with the Borrower,are treated as a single employer under Section 414 of the Code.

 

“Convert,” “Conversion,”and “Converted” each refers to a conversion of Advances of one Type intoAdvances of another Type pursuant to Section 2.03(b).

 

“Credit Extensions”means an Advance made by any Lender.

 

“Debt,” for anyPerson, means without duplication:

 

(a)                                  indebtedness of such Person for borrowedmoney;

 

(b)                                 obligations of such Person evidenced bybonds, debentures, notes or other similar instruments;

 

(c)                                  obligations of such Person to pay thedeferred purchase price of Property or services (including, without limitation,obligations that are non-recourse to the credit of such Person but are securedby the assets of such Person, but excluding trade accounts payable);

 

(d)                                 obligations of such Person as lesseeunder Capital Leases and obligations of such Person in respect of syntheticleases;

 

(e)                                  obligations of such Person under lettersof credit and agreements relating to the issuance of letters of credit oracceptance financing

 

(f)                                    obligations of such Person under anyHedge Contract;

 

(g)                                 obligations of such Person owing in respectof redeemable preferred stock or other preferred Equity Interest of suchPerson;

 

(h)                                 any obligations of such Person owing inconnection with any volumetric or production prepayments;

 

(i)                                     obligations of such Person under director indirect guaranties in respect of, and obligations (contingent or otherwise)of such Person to purchase or otherwise acquire, or otherwise to assure acreditor against loss in respect of, indebtedness or obligations of others ofthe kinds referred to in clauses (a) through (h) above;

 

(j)                                     indebtedness or obligations of others ofthe kinds referred to in clauses (a) through (i) abovesecured by any Lien on or in respect of any Property of such Person; and

 

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(k)                                  all liabilities of such Person in respectof unfunded vested benefits under any Plan.

 

“Debt Issuance” meansthe issuance by the Borrower of Debt in the form of convertible notes.

 

“Debt Issuance Proceeds”means, with respect to any Debt Issuance, all cash and cash equivalentinvestments received by the Borrower from such Debt Issuance after payment of,or provision for, all underwriter fees and expenses, SEC and blue sky fees,printing costs, fees and expenses of accountants, lawyers and otherprofessional advisors, brokerage commissions and other out-of-pocket fees andexpenses actually incurred in connection with such Debt Issuance.

 

“Default” means (a) anEvent of Default or (b) any event or condition which with notice or lapseof time or both would become an Event of Default.

 

“Dollars” and “$”means lawful money of the United States of America.

 

“EBITDA” means, forany period, without duplication, (a) Consolidated Net Income for suchperiod plus (b) to the extent deducted in determining ConsolidatedNet Income, Interest Expense, taxes, depreciation, amortization, depletion andother non-cash charges for such period (including any provision for thereduction in the carrying value of assets recorded in accordance with GAAP andincluding non-cash charges resulting from the requirements of SFAS 133 or 143)for such period minus (c) all non-cash items of income which wereincluded in determining such Consolidated Net Income (including non-cash incomeresulting from the requirements of SFAS 133 or 143).

 

“Eligible Assignee” means(a) any Lender, (b) any Subsidiary or Affiliate of a Lender, and (c) anycommercial bank or other financial institution (i) approved by theAdministrative Agent in its sole discretion, and (ii) unless an Event ofDefault has occurred and is continuing, reasonably acceptable to the Borrower.

 

“Engineering Report”means either an Independent Engineering Report or an Internal EngineeringReport.

 

“Environment” or “Environmental”shall have the meanings set forth in 42 U.S.C. 9601(8) (1988).

 

“Environmental Claim”means any third party (including governmental agencies and employees) action,lawsuit, claim, demand, regulatory action or proceeding, order, decree, consentagreement or notice of potential or actual responsibility or violation(including claims or proceedings under the Occupational Safety and Health Actsor similar laws or requirements relating to health or safety of employees)which seeks to impose liability under any Environmental Law.

 

“Environmental Law”means, as to the Borrower or its Subsidiaries, all Legal Requirements or commonlaw theories applicable to the Borrower or its Subsidiaries arising from,relating to, or in connection with the Environment, health, or safety,including without limitation CERCLA, relating to (a) pollution, contamination,injury, destruction, loss, protection, 

 

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cleanup,reclamation or restoration of the air, surface water, groundwater, land surfaceor subsurface strata, or other natural resources; (b) solid, gaseous orliquid waste generation, treatment, processing, recycling, reclamation,cleanup, storage, disposal or transportation; (c) exposure to pollutants,contaminants, hazardous, or toxic substances, materials or wastes; (d) thesafety or health of employees; or (e) the manufacture, processing,handling, transportation, distribution in commerce, use, storage or disposal ofhazardous or toxic substances, materials or wastes.

 

“Environmental Permit”means any permit, license, order, approval, registration or other authorizationunder Environmental Law.

 

“Equity Interest”means with respect to any Person, any shares, interests, participation, orother equivalents (however designated) of corporate stock, membership interestsor partnership interests (or any other ownership interests) of such Person.

 

“Equity Issuance”means any issuance of equity securities or any other Equity Interests(including any preferred equity securities) by the Borrower or any of itsSubsidiaries other than equity securities issued (i) to the Borrower orone of its Subsidiaries, (ii) pursuant to employee or director and officerstock option plans in the ordinary course of business, and (iii) theconversion of previously issued preferred, convertible Equity Interests orconvertible notes to the extent such Equity Interests and notes were issued incompliance with the terms hereof.

 

“Equity Issuance Proceeds”means, with respect to any Equity Issuance, all cash and cash equivalentinvestments received by the Borrower or any of its Subsidiaries from suchEquity Issuance after payment of, or provision for, all underwriter fees andexpenses, SEC and blue sky fees, printing costs, fees and expenses ofaccountants, lawyers and other professional advisors, brokerage commissions andother out-of-pocket fees and expenses actually incurred in connection with suchEquity Issuance.

 

“ERISA” means theEmployee Retirement Income Security Act of 1974, as amended from time to time.

 

“Eurocurrency Liabilities”has the meaning assigned to that term in Regulation D of the FederalReserve Board (or any successor), as in effect from time to time.

 

“Eurodollar Rate”means, for the Interest Period for each Eurodollar Rate Advance comprising thesame Borrowing, the interest rate per annum (rounded upward to the nearestwhole multiple of 1/100 of 1% per annum) set forth on the applicable Telerate Page asthe London Interbank Offered Rate, for deposits in Dollars at 11:00 a.m.  (London, England time) two Business Daysbefore the first day of such Interest Period and for a period equal to suchInterest Period; provided that, if no such quotation appears on theapplicable Telerate Page, the Eurodollar Rate shall be an interest rate perannum equal to the rate per annum at which deposits in Dollars are offered bythe principal office of Union Bank of California, N.A.  in London, England to prime banks in theLondon interbank market at 11:00 a.m. (London, England time) two Business Days before the first day of suchInterest Period in an amount substantially equal to the Eurodollar Rate Advanceto be maintained by the Lender that is the 

 

6

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AdministrativeAgent in respect of such Borrowing and for a period equal to such InterestPeriod.

 

“Eurodollar Rate Advance”means an Advance which bears interest as provided in Section 2.09(b).

 

“Eurodollar Rate ReservePercentage” of any Lender for the Interest Period for any Eurodollar RateAdvance means the reserve percentage applicable during such Interest Period (orif more than one such percentage shall be so applicable, the daily average ofsuch percentages for those days in such Interest Period during which any suchpercentage shall be so applicable) under regulations issued from time to timeby the Federal Reserve Board for determining the maximum reserve requirement(including, without limitation, any emergency, supplemental, or other marginalreserve requirement) for such Lender with respect to liabilities or assetsconsisting of or including Eurocurrency Liabilities having a term equal to suchInterest Period.

 

“Event of Default”has the meaning specified in Section 7.01.

 

“Federal Funds Rate”means, for any period, a fluctuating interest rate per annum equal for each dayduring such period to the weighted average of the rates on overnight Federalfunds transactions with members of the Federal Reserve System arranged byFederal funds brokers, as published for such day (or, if such day is not aBusiness Day, for the next preceding Business Day) by the Federal Reserve Bankof New York, or, if such rate is not so published for any day which is aBusiness Day, the average of the quotations for any such day on suchtransactions received by the Administrative Agent from three Federal fundsbrokers of recognized standing selected by it.

 

“Federal Reserve Board”means the Board of Governors of the Federal Reserve System or any of itssuccessors.

 

“Financial Statements”means the financial statements included in the Form 10-K filed by theBorrower with the SEC on September 11, 2007, including the auditedconsolidated balance sheet of the Borrower and its consolidated Subsidiaries asof fiscal year ended June 30, 2007, and the related audited consolidatedstatements of income, cash flow, and retained earnings of the Borrower and itsconsolidated Subsidiaries for the fiscal year then ended, copies of which havebeen delivered to the Administrative Agent and the Lenders.

 

“Fire Litigation”means those certain lawsuits and claims now pending or hereafter filed againstBorrower or any of its Subsidiaries related to or arising from fires beginningon March 12, 2006 in the Texas panhandle.

 

“GAAP” means UnitedStates generally accepted accounting principles as in effect from time to time,applied on a basis consistent with the requirements of Section 1.03.

 

“Governmental Authority”means, as to any Person in connection with any subject, any foreign, national,state or provincial governmental authority, or any political subdivision of anystate thereof, or any agency, department, commission, board, authority orinstrumentality, bureau or court, in each case having jurisdiction over suchPerson or such Person’s Property in connection with such subject.

 

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“Guarantor” meanseach Subsidiary of the Borrower executing a Guaranty.

 

“Guaranty” means aGuaranty in substantially the form of the attached Exhibit C and executedby a Guarantor, and “Guaranties” shall mean all such guarantiescollectively.

 

“Hazardous Substance”means the substances identified as such pursuant to CERCLA and those regulatedunder any other Environmental Law, including without limitation pollutants,contaminants, petroleum, petroleum products, radionuclides, radioactivematerials, and medical and infectious waste.

 

“Hazardous Waste”means the substances regulated as such pursuant to any Environmental Law.

 

“Hedge Contract”means (a) any and all rate swap transactions, basis swaps, creditderivative transactions, forward rate transactions, puts, commodity swaps,commodity options, forward commodity contracts, equity or equity index swaps oroptions, bond or bond price or bond index swaps or options or forward bond orforward bond price or forward bond index transactions, interest rate options,forward foreign exchange transactions, cap transactions, floor transactions,collar transactions, currency swap transactions, cross-currency rate swaptransactions, currency options, spot contracts, or any other similartransactions or any combination of any of the foregoing (including any optionsto enter into any of the foregoing), whether or not any such transaction isgoverned by or subject to any master agreement, and (b) any and alltransactions of any kind, and the related confirmations, which are subject tothe terms and conditions of, or governed by, any form of master agreementpublished by the International Swaps and Derivatives Association, Inc.,any International Foreign Exchange Master Agreement, or any other masteragreement (any such master agreement, together with any related schedules, a “MasterAgreement”), including any such obligations or liabilities under any MasterAgreement; provided that, a “Hedge Contract” shall not include any “MasterAgreement” that provides solely for the sale by the Borrower or itsSubsidiaries of physical Hydrocarbons in exchange for cash in the ordinarycourse of its business.

 

“Hydrocarbon HedgeAgreement” means a Hedge Contract which is intended to reduce or eliminatethe risk of fluctuations in the price of Hydrocarbons.

 

“Hydrocarbons” meansoil, gas, coal seam gas, casinghead gas, drip gasoline, natural gasoline,condensate, distillate, and all other liquid and gaseous hydrocarbons producedor to be produced in conjunction therewith from a well bore and all products,by-products, and other substances derived therefrom or the processing thereof,and all other minerals and substances produced in conjunction with suchsubstances, including, but not limited to, sulfur, geothermal steam, water,carbon dioxide, helium, and any and all minerals, ores, or substances of valueand the products and proceeds therefrom.

 

“Independent Engineer”means (a) Forest Garb & Associates, (b) Miller and Lents,Ltd. or (c) any other engineering firm acceptable to the AdministrativeAgent.

 

“Independent EngineeringReport” means a report, in form and substance satisfactory to theAdministrative Agent and each of the Lenders, prepared by an IndependentEngineer, addressed to the Administrative Agent and the Lenders with respect tothe Oil and Gas Properties 

 

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ownedby the Borrower or its Subsidiaries (or to be acquired by the Borrower or anyof its Subsidiaries, as applicable) which are or are to be included in theBorrowing Base, which report shall (a) specify the location, quantity, andtype of the estimated Proven Reserves attributable to such Oil and GasProperties, (b) contain a projection of the rate of production of such Oiland Gas Properties, (c) contain an estimate of the net operating revenuesto be derived from the production and sale of Hydrocarbons from such ProvenReserves based on product price and cost escalation assumptions specified bythe Administrative Agent and the Lenders, and (d) contain such otherinformation as is customarily obtained from and provided in such reports or isotherwise reasonably requested by the Administrative Agent or any Lender.

 

“Interest Expense”means, for the Borrower and its consolidated Subsidiaries for any period, totalinterest, letter of credit fees, and other fees and expenses incurred in connectionwith any Debt for such period, whether paid or accrued, including, withoutlimitation, (i) all commissions, discounts and other fees and charges owedwith respect to letters of credit and bankers’ acceptance financing, imputedinterest under Capital Leases, and net costs under Interest Hedge Agreements,all as determined in conformity with GAAP, and (ii) all interests,dividends, distributions, or other payments made in respect of preferred EquityInterests or Debt Issuances; but excluding (A) dividends payable solely inEquity Interests of the Borrower made in respect of preferred Equity Interestsand (B) the expensing of deferred amortized costs pertaining to thepayment in full of the Subordinated Debt and pertaining to the Obligations.

 

“Interest Hedge Agreement”means a Hedge Contract between the Borrower and one or more financialinstitutions providing for the exchange of nominal interest obligations betweenthe Borrower and such financial institution or the cap of the interest rate onany Debt of the Borrower.

 

“Interest Period”means, for each Eurodollar Rate Advance comprising part of the same Borrowing,the period commencing on the date of such Eurodollar Rate Advance or the dateof the Conversion of any Reference Rate Advance into a Eurodollar Rate Advanceand ending on the last day of the period selected by the Borrower pursuant tothe provisions below and Section 2.03 and, thereafter, each subsequentperiod commencing on the last day of the immediately preceding Interest Periodand ending on the last day of the period selected by the Borrower pursuant tothe provisions below and Section 2.03. The duration of each such Interest Period shall be three months; provided,however, that:

 

(a)                                  the Borrower may not select any InterestPeriod which ends after the Maturity Date;

 

(b)                                 Interest Periods commencing on the samedate for Advances comprising part of the same Borrowing shall be of the sameduration;

 

(c)                                  whenever the last day of any InterestPeriod would otherwise occur on a day other than a Business Day, the last dayof such Interest Period shall be extended to occur on the next succeedingBusiness Day, provided that if such extension would cause the last dayof such Interest Period to occur in the next following calendar month, the lastday of such Interest Period shall occur on the next preceding Business Day; and

 

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(d)                                 any Interest Period which begins on thelast Business Day of a calendar month (or on a day for which there is nonumerically corresponding day in the calendar month at the end of such InterestPeriod) shall end on the last Business Day of the calendar month in which itwould have ended if there were a numerically corresponding day in such calendarmonth.

 

“InterimFinancial Statements” means the financial statements included in the Form 10-Qfiled by the Borrower with the SEC on February 8, 2008 including theunaudited consolidated balance sheet of the Borrower and its consolidatedSubsidiaries dated December 31, 2007, and the related unauditedconsolidated statements of income, cash flow, and retained earnings of theBorrower and its consolidated Subsidiaries for the three months then ended,copies of which have been delivered to the Administrative Agent and theLenders.

 

“Internal EngineeringReport” means a report, in form and substance satisfactory to theAdministrative Agent and each Lender, prepared by the Borrower and certified bya Responsible Officer of the Borrower, addressed to the Administrative Agentand the Lenders with respect to the Oil and Gas Properties owned by theBorrower or any of its Subsidiaries (or to be acquired by the Borrower or anyof its Subsidiaries, as applicable) which are or are to be included in theBorrowing Base, which report shall (a) specify the location, quantity, andtype of the estimated Proven Reserves attributable to such Oil and GasProperties, (b) contain a projection of the rate of production of such Oiland Gas Properties, (c) contain an estimate of the net operating revenuesto be derived from the production and sale of Hydrocarbons from such ProvenReserves based on product price and cost escalation assumptions specified bythe Administrative Agent and the Lenders, and (d) contain such other information as is customarilyobtained from and provided in such reports or is otherwise reasonably requestedby the Administrative Agent or any Lender.

 

“Junior Capital Issuance”means either (a) an Equity Issuance permitted under Section 6.22 or (b) aDebt Issuance.

 

“Leases” means alloil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gasleases or any other instruments, agreements, or conveyances under and pursuantto which the owner thereof has or obtains the right to enter upon lands andexplore for, drill, and develop such lands for the production of Hydrocarbons.

 

“Legal Requirement”means, as to any Person, any law, statute, ordinance, decree, requirement,order, judgment, rule, regulation (or official interpretation of any of theforegoing) of, and the terms of any license or permit issued by, anyGovernmental Authority, including, but not limited to, Regulations D, T,U, and X, which is applicable to such Person.

 

“Lenders” means thelenders listed on the signature pages of this Agreement and each EligibleAssignee that shall become a party to this Agreement pursuant to Section 9.06.

 

“LendingOffice” means, as to any Lender, the office or offices of such Lenderdescribed as such in such Lender’s administrative questionnaire requested bythe Administrative Agent, or such other office or offices as a Lender may fromtime to time notify the Borrower and the Administrative Agent.

 

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“Leverage Ratio”means, as of the end of any fiscal quarter, the ratio of (a) theconsolidated Debt of the Borrower as of such fiscal quarter end to (b) theconsolidated EBITDA of the Borrower for the four fiscal quarter period thenended.

 

“Lien” means anymortgage, lien, pledge, assignment, charge, deed of trust, security interest,hypothecation, preference, deposit arrangement or encumbrance (or other type ofarrangement having the practical effect of the foregoing) to secure or providefor the payment of any obligation of any Person, whether arising by contract,operation of law, or otherwise (including, without limitation, the interest ofa vendor or lessor under any conditional sale agreement, synthetic lease,Capital Lease, or other title retention agreement).

 

“LiquidInvestments” means:

 

(a)           direct obligations of, or obligationsthe principal of and interest on which are unconditionally guaranteed by, theUnited States maturing within 180 days from the date of any acquisitionthereof;

 

(b)           (i) negotiable or nonnegotiablecertificates of deposit, time deposits, or other similar banking arrangementsmaturing within 180 days from the date of acquisition thereof (“bank debtsecurities”), issued by (A) any Lender or any Senior Lender (or anyAffiliate of any Lender or any Senior Lender) or (B) any other bank ortrust company so long as such certificate of deposit is pledged to secure theBorrower’s or any Subsidiaries’ ordinary course of business bondingrequirements, or any other bank or trust company which has primary capital ofnot less than $500,000,000, if at the time of deposit or purchase, such bankdebt securities are rated not less than “AA” (or the then equivalent) bythe rating service of Standard & Poor’s Ratings Group or of Moody’sInvestors Service, Inc., and (ii) commercial paper issued by (A) anyLender or any Senior Lender (or any Affiliate of any Lender or any SeniorLender) or (B) any other Person if at the time of purchase such commercialpaper is rated not less than “A-1” (or the then equivalent) by the ratingservice of Standard & Poor’s Ratings Group or not less than “P-1” (orthe then equivalent) by the rating service of Moody’s Investors Service, Inc.,or upon the discontinuance of both of such services, such other nationallyrecognized rating service or services, as the case may be, as shall be selectedby the Borrower with the consent of the Majority Lenders;

 

(c)           deposits in money market fundsinvesting exclusively in investments described in clauses (a) and (b) above;

 

(d)           repurchase agreements relating toinvestments described in clauses (a) and (b) above with a marketvalue at least equal to the consideration paid in connection therewith, withany Person who regularly engages in the business of entering into repurchaseagreements and has a combined capital surplus and undivided profit of not lessthan $500,000,000, if at the time of entering into such agreement the debtsecurities of such Person are rated not less than “AA” (or the then equivalent)by the rating service of Standard & Poor’s Ratings Group or of Moody’sInvestors Service, Inc.; and

 

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(e)           such other instruments (within themeaning of Article 9 of the Texas Business and Commerce Code) as theBorrower may request and the Administrative Agent may approve in writing.

 

“LoanDocuments” means this Agreement, the Notes, the Guaranties, the SecurityInstruments, the Subordination and Intercreditor Agreement, and each otheragreement, instrument, or document executed by the Borrower, any Guarantor, orany of the Borrower’s or a Guarantor’s Subsidiaries or any of their officers atany time in connection with this Agreement.

 

“Majority Lenders” means, (a) at any timewhen there are more than two Lenders, Lenders holding at least 662/3%of the then aggregate unpaid principal amount of the Notes held by the Lendersat such time; provided that, if no such principal amount is thenoutstanding, “Majority Lenders” shall mean Lenders having at least 662/3%of the aggregate amount of the Commitments at such time and (b) at anytime when there are one or two Lenders, all of the Lenders.

 

“Material Adverse Change”means (a) a material adverse change in the business, assets (including theOil and Gas Properties of the Borrower or any of its Subsidiaries), condition(financial or otherwise), or results of operations of the Borrower or any ofits Subsidiaries or (b) a material adverse effect on the Borrower’s or anySubsidiary’s ability to perform its obligations under this Agreement, any Note,any Guaranty, or any other Loan Document.

 

“Maturity Date”means March 17, 2011 or such later date as determined from time totime under Section 2.15.

 

“Maximum Rate” meansthe maximum nonusurious interest rate under applicable law (determined undersuch laws after giving effect to any items which are required by such laws tobe construed as interest in making such determination, including withoutlimitation if required by such laws, certain fees and other costs).

 

“Mortgage” means eachof the Mortgages, Deeds of Trust, Security Agreements, Assignment of Liens andSecurity Interests, Financing Statements and Assignments of Production or anyother mortgage or deed of trust executed by any one or more of the Borrower, aGuarantor or any of their respective Subsidiaries in favor of theAdministrative Agent for the ratable benefit of the Secured Parties insubstantially the form of the attached Exhibit D or such other form as maybe requested by the Administrative Agent, together with any assumptions orassignments of the obligations thereunder by the Borrower, any Guarantor or anyof their respective Subsidiaries, and “Mortgages” shall mean all of suchMortgages collectively.

 

“Multiemployer Plan”means a “multiemployer plan” as defined in Section 4001(a)(3) ofERISA.

 

“Note” means apromissory note of the Borrower payable to the order of any Lender, insubstantially the form of the attached Exhibit E, evidencing indebtednessof the Borrower to such Lender resulting from Advances owing to such Lender.

 

“Notice of Borrowing”means a notice of borrowing in the form of the attached Exhibit F signedby a Responsible Officer of the Borrower.

 

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“Notice of Conversion orContinuation” means a notice of conversion or continuation in the form ofthe attached Exhibit G signed by a Responsible Officer of the Borrower.

 

**“**NPV**”** means, withrespect to any Proven Reserves expected to be produced from any undividedinterests in oil and gas properties, the net present value, discounted at 10%per annum, of the future net revenues expected to accrue to the Borrower’s orany of its Subsidiary’s interests in such Proven Reserves (after deducting allexisting burdens) during the remaining expected economic lives of such ProvenReserves.  Each calculation of suchexpected future net revenues shall be made in accordance with the then existingstandards of the Society of Petroleum Engineers, provided that in any event (a) appropriatedeductions shall be made for severance and ad valorem taxes, and for operating(including purchasing and injecting water), gathering, transportation andmarketing costs required for the production and sale of such reserves, and (b) thepricing assumptions and escalations used in determining the NPV for any particularreserves shall be the NYMEX Pricing (or any other pricing assumptions to whichthe Borrower and Majority Lenders may agree). NPV shall be calculated hereunder in connection with each EngineeringReport, either by the Borrower, by Administrative Agent, or by the third partyengineering firm who prepares such Engineering Report; in the event of anyconflict, Administrative Agent’s calculation shall be conclusive and final,absent manifest error.

 

“NYMEX Pricing”means, as of any date of determination with respect to any month:

 

(i)            forcrude oil, the closing settlement price for the Light, Sweet Crude Oil futurescontract for the first nearby month, and

 

(ii)           fornatural gas, the closing settlement price for the Henry Hub Natural Gas futurescontract for the first nearby month,

 

in each case as published byNew York Mercantile Exchange (NYMEX) on its website currently located at www.nymex.com,or any successor thereto (as such price may be corrected or revised from timeto time by the NYMEX in accordance with its rules and regulations).

 

“Obligations” meansall principal, interest, fees, reimbursements, indemnifications, and otheramounts payable by the Borrower, any Guarantor or any of their respectiveSubsidiaries to the Administrative Agent, or the Lenders under the LoanDocuments.

 

“Oil and Gas Properties”means fee mineral interests, term mineral interests, Leases, subleases,farm-outs, royalties, overriding royalties, net profit interests, carriedinterests, production payments and similar mineral interests, and all unseveredand unextracted Hydrocarbons in, under, or attributable to such oil and gasProperties and interests.

 

“Patriot Act” meansthe USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26,2001)).

 

“PBGC” means the PensionBenefit Guaranty Corporation or any entity succeeding to any or all of itsfunctions under ERISA.

 

“PDP Reserves” meansProven Reserves which are categorized as both “Developed” and “Producing” inthe definitions promulgated by the Society of Petroleum Evaluation Engineers 

 

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andthe World Petroleum Congress as in effect at the time in question; “PDNPReserves” means Proven Reserves which are categorized as both “Developed”and “Non-Producing” in such definitions; and “PUD Reserves” means ProvedReserves which are categorized as “Undeveloped” in such definitions.

 

“PDNP NPV” means theNPV attributable to all PDNP Reserves from the Oil and Gas Properties of theBorrower and its Subsidiaries and based on an Engineering Report or otherapplicable information relating to the Proven Reserves of the Borrower and itsSubsidiaries provided by Borrower.

 

“PDP Present Value”means the NPV attributable to all PDP Reserves from the Oil and Gas Propertiesof the Borrower and its Subsidiaries and based on an Engineering Report orother applicable information relating to the Proven Reserves of the Borrowerand its Subsidiaries provided by Borrower.

 

“Permit” means anyapproval, certificate of occupancy, consent, waiver, exemption, variance,franchise, order, permit, authorization, right or license of or from anyGovernmental Authority, including without limitation, an Environmental Permit.

 

“Permitted Liens”means the Liens permitted under Section 6.01.

 

“Permitted Prior Liens”means the Liens securing the Senior Debt and Liens permitted under paragraphs (c) through(i) of Section 6.01.

 

“Person” means anindividual, partnership, corporation (including a business trust), joint stockcompany, limited liability corporation or company, limited liabilitypartnership, trust, unincorporated association, joint venture or other entity,or a government or any political subdivision or agency thereof or any trustee,receiver, custodian or similar official.

 

“Plan” means anemployee benefit plan (other than a Multiemployer Plan) maintained foremployees of the Borrower or any member of the Controlled Group and covered byTitle IV of ERISA or subject to the minimum funding standards under Section 412of the Code.

 

“Pledge Agreement”means a Pledge Agreement in substantially the form of the attached Exhibit H,executed by the Borrower or any of its Subsidiaries or any of the Guarantors.

 

“Pricing Grid” meansthe pricing information and rules set forth in Schedule I.

 

“Projections”means, as to the Borrower and for a givenperiod, the Borrower’s forecasted consolidating balance sheets, profitand loss statements, and cash flow statements,and including therein projections for anticipated income, revenues,expenses, taxes, EBITDA and budgeted capital expenditures during such period, all based on good faith estimates and utilizing theassumptions which are set forth in such Projections and prepared in accordancewith GAAP.

 

“Property” of anyPerson means any property or assets (whether real, personal, or mixed, tangibleor intangible) of such Person.

 

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“Proven Reserves”means, at any particular time, the estimated quantities of Hydrocarbons whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs attributable to Oil and GasProperties included or to be included in the Borrowing Base under then existingeconomic and operating conditions (i.e., prices and costs as of the date theestimate is made).

 

“PUD Present Value”means the NPV attributable to all PUD Reserves from the Oil and Gas Propertiesof the Borrower and its Subsidiaries and based on an Engineering Report orother applicable information relating to the Proven Reserves of the Borrowerand its Subsidiaries provided by Borrower.

 

“Pro Rata Share”means, with respect to any Lender, the ratio (expressed as a percentage) ofaggregate Commitments of such Lender to the aggregate Commitments of all theLenders (or if such Commitments have been terminated or cancelled, the ratio(expressed as a percentage) of outstanding Advances owing to such Lender to theaggregate outstanding Advances owing to all such Lenders.

 

“Reference Rate”means a fluctuating interest rate per annum as shall be in effect from time totime equal to the rate of interest publicly announced by Union Bank ofCalifornia, N.A., as its reference rate, whether or not the Borrower has noticethereof.

 

“Reference Rate Advance”means an Advance which bears interest as provided in Section 2.09(a).

 

“Register” has themeaning set forth in paragraph (c) of Section 9.06.

 

“Regulations D, T, U, andX” mean Regulations D, T, U, and X of the Federal Reserve Board, as thesame is from time to time in effect, and all official rulings andinterpretations thereunder or thereof.

 

“Release” shall havethe meaning set forth in CERCLA or under any other Environmental Law.

 

“Response” shall havethe meaning set forth in CERCLA or under any other Environmental Law.

 

“Responsible Officer”means (a) with respect to any Person that is a corporation, such Person’sChief Executive Officer, President, Chief Financial Officer, or Vice President,(b) with respect to any Person that is a limited liability company, amanager or the Responsible Officer of such Person’s managing member or manager,and (c) with respect to any Person that is a general partnership or alimited liability partnership, the Responsible Officer of such Person’s generalpartner or partners.

 

“Restricted Payment”means, with respect to any Person, (a) any direct or indirect dividend ordistribution (whether in cash, securities or other Property) or any direct orindirect payment of any kind or character (whether in cash, securities or otherProperty) in consideration for or otherwise in connection with any retirement,purchase, redemption or other acquisition of any Equity Interest of suchPerson, or any options, warrants or rights to purchase or acquire any 

 

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suchEquity Interest of such Person or (b) principal or interest payments (incash, Property or otherwise) on,  orredemptions of, subordinated debt of such Person; provided that the term“Restricted Payment” shall not include any dividend or distribution payable solelyin Equity Interests of the Borrower or warrants, options or other rights topurchase such Equity Interests.

 

“SEC” means theUnited States Securities and Exchange Commission.

 

“Secured Parties”means the Administrative Agent and the Lenders.

 

“Security Agreements”means the Security Agreements, each in substantially the form of the attached Exhibit I,executed by the Borrower, any of its Subsidiaries, or any of the Guarantors.

 

“Security Instruments”means, collectively, (a) the Mortgages, (b) the Transfer Letters, (c) thePledge Agreements, (d) the Security Agreements, (e) each otheragreement, instrument or document executed at any time in connection with thePledge Agreements, the Security Agreements, or the Mortgages, and (f) eachother agreement, instrument or document executed at any time in connection withsecuring the Obligations.

 

“Senior AdministrativeAgent” means Union Bank of California, N.A., in its capacity as agent underthe Senior Credit Agreement, and any successor agent pursuant thereto.

 

“Senior Credit Agreement”means the Credit Agreement dated as of November 29, 2005 among theBorrower, the Senior Administrative Agent, and the Senior Lenders, asheretofore amended and as hereafter amended, modified, restated or supplementedin accordance with the terms of the Subordination and Intercreditor Agreement.

 

“Senior Debt” meansthe “Obligations” as defined in the Senior Credit Agreement as in effect on thedate hereof of as modified in accordance with the Subordination andIntercreditor Agreement.

 

“Senior Lenders”means the lenders from time to time parties to the Senior Credit Agreement.

 

“Senior Loan Documents”means the Senior Credit Agreement, the promissory notes executed and deliveredpursuant to the Senior Credit Agreement, all agreements, instruments, ordocuments executed at any time in connection with securing the Senior Debt, andeach other agreement, instrument, or document executed by the Borrower or anyof its Subsidiaries or any of their officers in connection with the Senior CreditAgreement.

 

“Solvent” means, withrespect to any Person as of the date of any determination, that on such date (a) thefair value of the Property of such Person (both at fair valuation and atpresent fair saleable value) is greater than the total liabilities, includingcontingent liabilities, of such Person, (b) the present fair saleablevalue of the assets of such Person is not less than the amount that will berequired to pay the probable liability of such Person on its debts as theybecome absolute and matured, (c) such Person is able to realize upon itsassets and pay its debts and other liabilities, contingent obligations, andother commitments as they mature in the normal course of business, (d) suchPerson does not intend to, and does not believe that it will, incur debts or 

 

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liabilitiesbeyond such Person’s ability to pay as such debts and liabilities mature, and (e) suchPerson is not engaged in business or a transaction, and is not about to engagein business or a transaction, for which such Person’s Property would constituteunreasonably small capital after giving due consideration to current andanticipated future capital requirements and current and anticipated futurebusiness conduct and the prevailing practice in the industry in which suchPerson is engaged.  In computing theamount of contingent liabilities at any time, such liabilities shall becomputed at the amount which, in light of the facts and circumstances existingat such time, represents the amount that can reasonably be expected to becomean actual or matured liability.

 

“SquareOne” means Square One Energy, Inc., a Texas corporation and a whollyowned Subsidiary of the Borrower.

 

“Subordination andIntercreditor Agreement” means that certain Subordination and IntercreditorAgreement, which shall be in a form acceptable to the Administrative Agent andthe Lenders, dated as of the date hereof among the Administrative Agent, theBorrower, the Guarantors, the Lenders, the Senior Agent and the Senior Lenders.

 

“Subsidiary” means,with respect to any Person (the “parent”) at any date, any other Personthe accounts of which would be consolidated with those of the parent in theparent’s consolidated financial statements if such financial statements wereprepared in accordance with GAAP as of such date, as well as any Person, amajority of whose outstanding Voting Securities (other than directors’qualifying shares) shall at any time be owned by such parent or one or moreSubsidiaries of such parent*. *Unless otherwise specified,all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to aSubsidiary or Subsidiaries of the Borrower; provided that Tri-Flow *shall not be considered a Subsidiary of theBorrower or any Guarantor.*

 

“Termination Event”means (a) a Reportable Event described in Section 4043 of ERISA andthe regulations issued thereunder (other than a Reportable Event not subject tothe provision for 30-day notice to the PBGC under such regulations), (b) thewithdrawal of the Borrower or any of its Affiliates from a Plan during a planyear in which it was a “substantial employer” as defined in Section 4001(a)(2) ofERISA, (c) the filing of a notice of intent to terminate a Plan or thetreatment of a Plan amendment as a termination under Section 4041 ofERISA, (d) the institution of proceedings to terminate a Plan by the PBGC,or (e) any other event or condition which constitutes grounds under Section 4042of ERISA for the termination of, or the appointment of a trustee to administer,any Plan.

 

“Total Present Value”means an amount, based on the most recent Engineering Report or otherapplicable information provided by Borrower as of the applicable determinationdate, equal to the sum of (i) 100% of the PDP NPV plus (ii) 100% ofthe PDNP NPV plus (iii) 100% of the PUD NPV; provided that, Total PresentValue will be limited to the extent that the amount determined under clause (i) shallalways constitute at least 60% of the Total Present Value.

 

“Transfer Letters”means, collectively, the letters in lieu of transfer orders in substantiallythe form of the attached Exhibit J and executed by the Borrower, anyGuarantor or any of their respective Subsidiaries executing a Mortgage.

 

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“Tri-Flow” meansTri-Flow, Inc., an Oklahoma corporation.

 

“Type” has themeaning set forth in Section 1.04.

 

“Voting Securities”means (a) with respect to any corporation (including any unlimitedliability company), capital stock of such corporation having general votingpower under ordinary circumstances to elect directors of such corporation(irrespective of whether at the time stock of any other class or classes shallhave or might have special voting power or rights by reason of the happening ofany contingency), (b) with respect to any partnership, any partnershipinterest or other ownership interest having general voting power to elect thegeneral partner or other management of the partnership or other Person, and (c) withrespect to any limited liability company, membership certificates or interestshaving general voting power under ordinary circumstances to elect managers ofsuch limited liability company.

 

Section 1.02           Computation of Time Periods.  In this Agreement, with respect to the computationof periods of time from a specified date to a later specified date, the word “from”means “from and including” and the words “to” and “until” each means “to butexcluding”.

 

Section 1.03           Accounting Terms; Changes in GAAP.  Except as otherwise expressly providedherein, all accounting terms used herein shall be interpreted, and allfinancial statements and certificates and reports as to financial mattersrequired to be delivered to the Lenders hereunder shall (unless otherwisedisclosed to the Lenders in writing at the time of delivery thereof) beprepared, in accordance with GAAP applied on a basis consistent with those usedin the preparation of the latest financial statements furnished to the Lendershereunder (which prior to the delivery of the first financial statements under Section 5.06hereof, shall mean the Financial Statements and the Interim FinancialStatements).  All calculations made forthe purposes of determining compliance with this Agreement shall (except asotherwise expressly provided herein) be made by application of GAAP applied ona basis consistent with those used in the preparation of the annual orquarterly financial statements furnished to the Lenders pursuant to Section 5.06hereof most recently delivered prior to or concurrently with such calculations(or, prior to the delivery of the first financial statements under Section 5.06hereof, used in the preparation of the Financial Statements and the InterimFinancial Statements).  In addition, allcalculations and defined accounting terms used herein shall, unless expresslyprovided otherwise, when referring to any Person, refer to such Person on aconsolidated basis and mean such Person and its consolidated subsidiaries.

 

Section 1.04           Types of Advances.  Advances are distinguished by “Type.”  The “Type” of an Advance refers to thedetermination whether such Advance is a Eurodollar Rate Advance or ReferenceRate Advance.

 

Section 1.05           Miscellaneous.  Article, Section, Schedule, and Exhibit referencesare to Articles and Sections of and Schedules and Exhibits to this Agreement,unless otherwise specified.  Allreferences to instruments, documents, contracts, and agreements are referencesto such instruments, documents, contracts, and agreements as the same may beamended, supplemented, and otherwise modified from time to time, unlessotherwise specified.  The words “hereof”,“herein”, and “hereunder” and words of similar import when used in thisAgreement shall refer to this Agreement as a whole and not to any particularprovision of this Agreement.  

 

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The term “including”means “including, without limitation,”. Paragraph headings have been inserted in this Agreement as a matter ofconvenience for reference only and it is agreed that such paragraph headingsare not a part of this Agreement and shall not be used in the interpretation ofany provision of this Agreement.

 

**ARTICLEII**

** **

**CREDITFACILITIES**

** **

Section 2.01     Commitment for Advances.

 

(a)           Advances.  Each Lender severally agrees, on the termsand conditions set forth in this Agreement, to make a single advance term loanwithin one business day of the Effective Date on a non-revolving basis to theBorrower in an amount equal to such Lender’s Commitment.  Any Advances which have been prepaid orrepaid may not be reborrowed.

 

(b)           Advances upon Increase inCommitments.  Each Lender thatincreases its Commitment under Section 2.16 (including any new Lender thatjoins this Agreement as a Lender pursuant to a joinder agreement as provided inSection 2.16) severally agrees, on the terms and conditions set forth inthis Agreement, to make a single advance term loan on the Increase EffectiveDate on a non-revolving basis to the Borrower in an amount equal to itsunfunded Commitment on such Increase Effective Date (after giving effect tosuch increase).  Any Advances which havebeen prepaid or repaid may not be reborrowed.

 

(c)           Notes.  The indebtedness of the Borrower to eachLender resulting from the Advance owing to such Lender shall be evidenced by aNote of the Borrower payable to the order of such Lender.

 

Section 2.02     [Reserved].

 

Section 2.03     Method of Borrowing.

 

(a)           Notice.  Each Borrowing shall be made pursuantto a Notice of Borrowing (or by telephone notice promptly confirmed in writingby a Notice of Borrowing), given not later than 10:00 a.m.  (Dallas, Texas time) (i) on the thirdBusiness Day before the date of the proposed Borrowing, in the case of aBorrowing comprised of Eurodollar Rate Advances (other than the initialBorrowing to be made on the Effective Date) or (ii) on the Business Day ofthe proposed Borrowing, in the case of a Borrowing comprised of Reference RateAdvances (or Eurodollar Rate Advances in the case of the Borrowing to be madeon the Effective Date), by the Borrower to the Administrative Agent, whichshall in turn give to each Lender prompt notice of such proposed Borrowing bytelecopier or telex.  Each Notice of aBorrowing shall be given by telecopier or telex, confirmed immediately inwriting, specifying the information required therein.  In the case of a proposed Borrowing comprisedof Eurodollar Rate Advances, the Administrative Agent shall promptly notifyeach Lender of the applicable interest rate under Section 2.09(b).  Each Lender shall, before 12:00 p.m.  (Dallas, Texas time) on the date of suchBorrowing, make available for the account of its Lending Office to theAdministrative Agent at its address referred to in Section 9.02, or suchother location as the Administrative Agent may specify by notice to theLenders, in same day funds, in the case of a Borrowing, such Lender’s 

 

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Pro Rata Share of suchBorrowing.  After the AdministrativeAgent’s receipt of such funds and upon fulfillment of the applicable conditionsset forth in Article III, the Administrative Agent shall make such fundsavailable to the Borrower at its account with the Administrative Agent.

 

(b)           Conversions and Continuations.  The Borrower may elect to Convert or continueany Borrowing under this Section 2.03 by delivering an irrevocable Noticeof Conversion or Continuation to the Administrative Agent at the AdministrativeAgent’s office no later than 10:00 a.m. (Dallas, Texas time) (i) on the date which is at least threeBusiness Days in advance of the proposed Conversion or continuation date in thecase of a Conversion to or a continuation of a Borrowing comprised ofEurodollar Rate Advances and (ii) on the Business Day of the proposedConversion in the case of a Conversion to a Borrowing comprised of ReferenceRate Advances.  Each such Notice ofConversion or Continuation shall be in writing or by telex or telecopierconfirmed immediately in writing specifying the information required therein.  Promptly after receipt of a Notice of Conversionor Continuation under this Section, the Administrative Agent shall provide eachLender with a copy thereof and, in the case of a Conversion to or acontinuation of a Borrowing comprised of Eurodollar Rate Advances, notify eachLender of the applicable interest rate under Section 2.09(b).

 

(c)           Certain Limitations.  Notwithstanding anything to the contrarycontained in paragraphs (a) and (b) above:

 

(i)            at no time shall there be more thanone Interest Period applicable to outstanding Eurodollar Rate Advances and theBorrower may not select Eurodollar Rate Advances for any Borrowing at any timethat a Default has occurred and is continuing;

 

(ii)           if any Lender shall, at least oneBusiness Day before the date of any requested Borrowing, Conversion, or continuation,notify the Administrative Agent that the introduction of or any change in or inthe interpretation of any law or regulation makes it unlawful, or that anycentral bank or other Governmental Authority asserts that it is unlawful, forsuch Lender or its Lending Office to perform its obligations under thisAgreement to make Eurodollar Rate Advances or to fund or maintain EurodollarRate Advances, the right of the Borrower to select Eurodollar Rate Advancesfrom such Lender shall be suspended until such Lender shall notify theAdministrative Agent that the circumstances causing such suspension no longerexist, and the Advance made by such Lender in respect of such Borrowing,Conversion, or continuation shall be a Reference Rate Advance;

 

(iii)          if the Administrative Agent is unableto determine the Eurodollar Rate for Eurodollar Rate Advances comprising anyrequested Borrowing, the right of the Borrower to select Eurodollar RateAdvances for such Borrowing or for any subsequent Borrowing shall be suspendeduntil the Administrative Agent shall notify the Borrower and the Lenders thatthe circumstances causing such suspension no longer exist, and each Advancecomprising such Borrowing shall be a Reference Rate Advance;

 

(iv)          if the Majority Lenders shall, atleast one Business Day before the date of any requested Borrowing, notify theAdministrative Agent that the Eurodollar Rate for Eurodollar Rate Advancescomprising such Borrowing will not adequately reflect the cost to such Lendersof making or funding their respective Eurodollar Rate Advances, as the case may

 

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be, for such Borrowing,the right of the Borrower to select Eurodollar Rate Advances for such Borrowingor for any subsequent Borrowing shall be suspended until the AdministrativeAgent shall notify the Borrower and the Lenders that the circumstances causingsuch suspension no longer exist, and each Advance comprising such Borrowingshall be a Reference Rate Advance; and

 

(v)           if the Borrower shall fail to selectthe duration or continuation of any Interest Period for any Eurodollar RateAdvances in accordance with the provisions contained in the definition of “InterestPeriod” in Section 1.01 and paragraph (b) above, theAdministrative Agent shall forthwith so notify the Borrower and the Lenders andsuch Advances shall be made available to the Borrower on the date of suchBorrowing as Reference Rate Advances or, if an existing Advance, Convert intoReference Rate Advances.

 

(d)           Notices Irrevocable.  Each Notice of Borrowing and Notice ofConversion or Continuation shall be irrevocable and binding on theBorrower.  In the case of any Borrowingfor which the related Notice of Borrowing specifies is to be comprised ofEurodollar Rate Advances, the Borrower shall indemnify each Lender against anyloss, out-of-pocket cost, or expense incurred by such Lender as a result of anyfailure by the Borrower to fulfill on or before the date specified in suchNotice of Borrowing for such Borrowing the applicable conditions set forth in Article IIIincluding, without limitation, any loss (including any loss of anticipatedprofits), cost, or expense incurred by reason of the liquidation orreemployment of deposits or other funds acquired by such Lender to fund theAdvance to be made by such Lender as part of such Borrowing when such Advance,as a result of such failure, is not made on such date.

 

(e)           Administrative Agent Reliance.  Unless the Administrative Agent shall havereceived notice from a Lender before the date of any Borrowing that such Lendershall not make available to the Administrative Agent such Lender’s Pro RataShare of a Borrowing, the Administrative Agent may assume that such Lender hasmade its Pro Rata Share of such Borrowing available to the Administrative Agenton the date of such Borrowing in accordance with paragraph (a) ofthis Section 2.03 and the Administrative Agent may, in reliance upon suchassumption, make available to the Borrower on such date a correspondingamount.  If and to the extent that suchLender shall not have so made its Pro Rata Share of such Borrowing available tothe Administrative Agent, such Lender and the Borrower severally agree toimmediately repay to the Administrative Agent on demand such correspondingamount, together with interest on such amount, for each day from the date suchamount is made available to the Borrower until the date such amount is repaidto the Administrative Agent, at (i) in the case of the Borrower, theinterest rate applicable on such day to Advances comprising such Borrowing and (ii) inthe case of such Lender, the Federal Funds Rate for such day.  If such Lender shall repay to theAdministrative Agent such corresponding amount and interest as provided above,such corresponding amount so repaid shall constitute such Lender’s Advance aspart of such Borrowing for purposes of this Agreement even though not made onthe same day as the other Advances comprising such Borrowing.

 

(f)            Lender Obligations Several.  The failure of any Lender to make the Advanceto be made by it as part of any Borrowing shall not relieve any other Lender ofits obligation, if any, to make its Advance on the date of such Borrowing.  No Lender shall be responsible for thefailure 

 

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of any other Lender tomake the Advance to be made by such other Lender on the date of any Borrowing.

 

Section 2.04     Reduction of the Commitment.  Upon the making of the Advances on theEffective Date, each Lender’s Commitment shall be reduced to $0.

 

Section 2.05     Prepayment of Advances.

 

(a)           Optional.  The Borrower may prepay the Advances, aftergiving by 10:00 a.m.  (Dallas,Texas, time): (i) in the case of Eurodollar Rate Advances, at least threeBusiness Days’ or (ii) in the case of Reference Rate Advances, sameBusiness Day’s, irrevocable prior written notice to the Administrative Agentstating the proposed date and aggregate principal amount of suchprepayment.  If any such notice is given,the Borrower shall prepay the Advances in whole or ratably in part in anaggregate principal amount equal to the amount specified in such notice,together with (i) the accrued interest to the date of such prepayment onthe principal amount prepaid, (ii) the amounts, if any, required to bepaid pursuant to Section 2.12 as a result of such prepayment being made onsuch date, (iii) if such prepayment is made on or prior to the firstanniversary of the Effective Date, a prepayment premium in an amount equal to2.00% of the principal amount being prepaid; and (iv) if such prepaymentis after the first anniversary of the Effective Date but on or prior to thesecond anniversary of the Effective Date, a prepayment premium in an amountequal to 1.00% of the principal amount being prepaid; provided, however, thateach partial prepayment shall be made in minimum amounts of $2,500,000 and inintegral multiples of $2,500,000 in excess thereof and full prepayments of anyBorrowing are permitted without restriction of amounts.

 

(b)           Mandatory.  If a Change of Control shall occur and theBorrower has not optionally prepaid in full the outstanding principal amount ofthe Advances concurrently with the consummation of such Change of Control, atthe Lenders’ option (which option may be exercised in their sole discretion)the Borrower shall prepay the outstanding principal amount of the Advances, inwhole or in part as elected by the Lenders, together with (i) the accruedinterest to the date of such prepayment on the principal amount prepaid, (ii) theamounts, if any, required to be paid pursuant to Section 2.12 as a resultof such prepayment being made on such date, (iii) if such Change inControl occurs on or prior to the first anniversary of the Effective Date, aprepayment premium in an amount equal to 2.00% of the principal amount requiredto be prepaid; and (iv) if such Change in Control occurs after the firstanniversary of the Effective Date but on or prior to the second anniversary ofthe Effective Date, a prepayment premium in an amount equal to 1.00% of theprincipal amount required to be prepaid. If the Lenders require the Borrower to prepay the Advances as providedabove, the Administrative Agent shall so notify the Borrower in writing, whichnotice shall specify the amount to be paid by the Borrower pursuant to this Section 2.05(b).  The Borrower shall pay all such amounts infull within two Business Days of receipt of such notice.  The foregoing will not be deemed to be aconsent by Lenders to any Change of Control or a waiver of any Defaultresulting therefrom.

 

(c)           Illegality.  If any Lender shall notify the AdministrativeAgent and the Borrower that the introduction of or any change in or in theinterpretation of any law or regulation makes it unlawful, or that any centralbank or other Governmental Authority asserts that it is unlawful for suchLender or its Lending Office to perform its obligations under this Agreement tomaintain 

 

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any Eurodollar RateAdvances of such Lender then outstanding hereunder, (i) the Borrower shall,no later than 10:00 a.m.  (Dallas,Texas time) (A) if not prohibited by law, on the last day of the InterestPeriod for each outstanding Eurodollar Rate Advance made by such Lender or (B) ifrequired by such notice, on the second Business Day following its receipt ofsuch notice, prepay all of the Eurodollar Rate Advances made by such Lenderthen outstanding, together with accrued interest on the principal amountprepaid to the date of such prepayment and amounts, if any, required to be paidpursuant to Section 2.12 as a result of such prepayment being made on suchdate, (ii) such Lender shall simultaneously make a Reference Rate Advanceto the Borrower on such date in an amount equal to the aggregate principalamount of the Eurodollar Rate Advances prepaid to such Lender, and (iii) theright of the Borrower to select Eurodollar Rate Advances from such Lender forany subsequent Borrowing shall be suspended until such Lender gives noticereferred to above shall notify the Administrative Agent that the circumstancescausing such suspension no longer exist.

 

(d)           No Additional Right; RatablePrepayment.  The Borrower shall haveno right to prepay any principal amount of any Advance except as provided inthis Section 2.05, and all notices given pursuant to this Section 2.05shall be irrevocable and binding upon the Borrower.  Each payment of any Advance pursuant to this Section 2.05shall be made in a manner such that all Advances comprising part of the sameBorrowing are paid in whole or ratably in part.

 

Section 2.06           Repayment of Advances.  The Borrower shall repay to theAdministrative Agent for the ratable benefit of the Lenders the outstandingprincipal amount of each Advance, together with any accrued interest thereon,on the Maturity Date or such earlier date pursuant to Section 7.02 or Section 7.03.

 

Section 2.07     [Reserved]***.***

 

Section 2.08     Fees.  The Borrower shall pay the fees as agreed tobetween the Borrower and the Administrative Agent in that certain fee letterdated the date hereof.

 

Section 2.09     Interest.

 

(a)           Rates Based on Applicable Margin.  The Borrower shall pay interest on the unpaidprincipal amount of each Advance made by each Lender from the date of suchAdvance until such principal amount shall be paid in full, at the followingrates per annum:

 

(i)            Reference Rate Advances.  If such Advance is a Reference Rate Advance,a rate per annum equal at all times to the Adjusted Reference Rate in effectfrom time to time plus the Applicable Margin in effect from time totime, payable quarterly in arrears on the last day of each calendar quarter,commencing with the calendar quarter ending March 31, 2008 and on the datesuch Reference Rate Advance shall be paid.

 

(ii)           Eurodollar Rate Advances.  If such Advance is a Eurodollar Rate Advance,a rate per annum equal at all times during the Interest Period for such Advanceto the Eurodollar Rate for such Interest Period plus the ApplicableMargin in effect from time to time, payable on the last day of such InterestPeriod, and, in the case of six, nine or twelve month Interest Periods, on (i) theday which occurs during such Interest Period three months from the first day ofsuch Interest Period, (ii) the day which occurs during such InterestPeriod six months 

 

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from the first day ofsuch Interest Period, and (iii) the day which occurs during such InterestPeriod nine months from the first day of such Interest Period.

 

(b)           Additional Interest on EurodollarRate Advances.  The Borrower shallpay to each Lender, so long as any such Lender shall be required underregulations of the Federal Reserve Board to maintain reserves with respect toliabilities or assets consisting of or including Eurocurrency Liabilities,additional interest on the unpaid principal amount of each Eurodollar RateAdvance of such Lender, from the effective date of such Advance until suchprincipal amount is paid in full, at an interest rate per annum equal at alltimes to the remainder obtained by subtracting (i) the Eurodollar Rate forthe Interest Period for such Advance from (ii) the rate obtained bydividing such Eurodollar Rate by a percentage equal to 100% minus theEurodollar Rate Reserve Percentage of such Lender for such Interest Period,payable on each date on which interest is payable on such Advance.  Such additional interest payable to anyLender shall be determined by such Lender and notified to the Borrower throughthe Administrative Agent (such notice to include the calculation of such additionalinterest, which calculation shall be conclusive in the absence of manifesterror).

 

(c)           Retroactive Adjustments ofApplicable Margin.  In the event that any financial statementor Compliance Certificate delivered pursuant to Section 5.06 is shown tobe inaccurate (regardless of whether this Agreement or the Commitments are ineffect when such inaccuracy is discovered), and such inaccuracy, if corrected,would have led to the application of a higher Applicable Margin for any period(an “Applicable Period”) than the Applicable Margin applied for suchApplicable Period, then (i) the Borrower shall immediately deliver to theAdministrative Agent a corrected Compliance Certificate for such ApplicablePeriod, (ii) the Applicable Margin shall be determined as if the higherApplicable Margin that would have applied were applicable for such ApplicablePeriod (and in any event at Level 6 if the inaccuracy was the result ofdishonesty, fraud or willful misconduct), and (iii) the Borrower shallimmediately, without further action by the Administrative Agent or any Lender,pay to the Administrative Agent for the account of the applicable Lenders, theaccrued additional interest owing as a result of such increased ApplicableMargin for such Applicable Period.  This Section 2.09(c) shallnot limit the rights of the Administrative Agent and Lenders with respect tothe default rate of interest.  TheBorrower’s obligations under this Section 2.09(c) shall survive thetermination of the Commitments and the repayment of all other Obligationshereunder.

 

(d)           Usury Recapture.

 

(i)            If, with respect to any Lender, theeffective rate of interest contracted for under the Loan Documents, includingthe stated rates of interest and fees contracted for hereunder and any otheramounts contracted for under the Loan Documents which are deemed to beinterest, at any time exceeds the Maximum Rate, then the outstanding principalamount of the loans made by such Lender hereunder shall bear interest at a ratewhich would make the effective rate of interest for such Lender under the LoanDocuments equal the Maximum Rate until the difference between the amounts whichwould have been due at the stated rates and the amounts which were due at theMaximum Rate (the “Lost Interest”) has been recaptured by such Lender.

 

(ii)           If,when the loans made hereunder are repaid in full, the Lost Interest has notbeen fully recaptured by such Lender pursuant to the preceding paragraph, then,to the extent

 

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permitted by law, for theloans made hereunder by such Lender the interest rates charged under Section 2.09hereunder shall be retroactively increased such that the effective rate ofinterest under the Loan Documents was at the Maximum Rate since the effectivenessof this Agreement to the extent necessary to recapture the Lost Interest notrecaptured pursuant to the preceding sentence and, to the extent allowed bylaw, the Borrower shall pay to such Lender the amount of the Lost Interestremaining to be recaptured by such Lender.

 

(iii)                               **NOTWITHSTANDING THE FOREGOING ORANY OTHER TERM IN THIS AGREEMENT AND THE LOAN DOCUMENTS TO THE CONTRARY, IT ISTHE INTENTION OF EACH LENDER AND THE BORROWER TO CONFORM STRICTLY TO ANYAPPLICABLE USURY LAWS.  ACCORDINGLY, IFANY LENDER CONTRACTS FOR, CHARGES, OR RECEIVES ANY CONSIDERATION WHICHCONSTITUTES INTEREST IN EXCESS OF THE MAXIMUM RATE, THEN ANY SUCH EXCESS SHALLBE CANCELED AUTOMATICALLY AND, IF PREVIOUSLY PAID, SHALL AT SUCH LENDER’SOPTION BE APPLIED TO THE OUTSTANDING AMOUNT OF THE LOANS MADE HEREUNDER BY SUCHLENDER OR BE REFUNDED TO THE BORROWER**.

 

Section 2.10                Payments and Computations.

 

(a)                                  Payment Procedures. The Borrower shall make each payment under this Agreement and under theNotes not later than 10:00 a.m. (Dallas, Texas time) on the day when due in Dollars to theAdministrative Agent at the location referred to in the Notes (or such otherlocation as the Administrative Agent shall designate in writing to the Borrower)in same day funds without deduction, setoff, or counterclaim of any kind.  The Administrative Agent shall promptlythereafter cause to be distributed like funds relating to the payment ofprincipal, interest or fees ratably (other than amounts payable solely to theAdministrative Agent or a specific Lender pursuant to Section 2.08(c),2.09(d), 2.12, 2.13, 2.14, 8.05, or 9.07, but after taking into accountpayments effected pursuant to Section 9.04) in accordance with each Lender’sPro Rata Share to the Lenders for the account of their respective LendingOffices, and like funds relating to the payment of any other amount payable toany Lender to such Lender for the account of its Lending Office, in each caseto be applied in accordance with the terms of this Agreement.

 

(b)                                 Computations. All computations of interest based on the Reference Rate and of feesshall be made by the Administrative Agent on the basis of a year of 365 or 366days, as the case may be, and all computations of interest based on theEurodollar Rate and the Federal Funds Rate shall be made by the AdministrativeAgent, on the basis of a year of 360 days, in each case for the actual numberof days (including the first day, but excluding the last day) occurring in theperiod for which such interest or fees are payable.  Each determination by the AdministrativeAgent of an interest rate or fee shall be conclusive and binding for allpurposes, absent manifest error.

 

(c)                                  Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than aBusiness Day, such payment shall be made on the next succeeding Business Day,and such extension of time shall in such case be included in the computation ofpayment of interest or fees, as the case may be; provided, however, thatif such extension would cause 

 

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payment of interest on orprincipal of Eurodollar Rate Advances to be made in the next following calendarmonth, such payment shall be made on the next preceding Business Day.

 

(d)                                 Administrative Agent Reliance. Unless the Administrative Agent shall have received written notice fromthe Borrower prior to the date on which any payment is due to the Lenders thatthe Borrower shall not make such payment in full, the Administrative Agent mayassume that the Borrower has made such payment in full to the AdministrativeAgent on such date and the Administrative Agent may, in reliance upon suchassumption, cause to be distributed to each Lender on such date an amount equalto the amount then due such Lender.  Ifand to the extent the Borrower shall not have so made such payment in full tothe Administrative Agent, each Lender shall repay to the Administrative Agentforthwith on demand such amount distributed to such Lender, together withinterest, for each day from the date such amount is distributed to such Lenderuntil the date such Lender repays such amount to the Administrative Agent, atthe Federal Funds Rate for such day.

 

Section 2.11                Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary,through the exercise of any right of set-off, or otherwise) on account of theAdvances made by it in excess of its Pro Rata Share of payments on account ofthe Advances obtained by all the Lenders, such Lender shall notify the AdministrativeAgent and forthwith purchase from the other Lenders such participations in theAdvances made or held by them as shall be necessary to cause such purchasingLender to share the excess payment ratably with each of them; provided,however, that if all or any portion of such excess payment is thereafterrecovered from such purchasing Lender, such purchase from each Lender shall berescinded and such Lender shall repay to the purchasing Lender the purchaseprice to the extent of such Lender’s ratable share (according to the proportionof (a) the amount of the participation sold by such Lender to thepurchasing Lender as a result of such excess payment to (b) the totalamount of such excess payment) of such recovery, together with an amount equalto such Lender’s ratable share (according to the proportion of (i) theamount of such Lender’s required repayment to the purchasing Lender to (ii) thetotal amount of all such required repayments to the purchasing Lender) of anyinterest or other amount paid or payable by the purchasing Lender in respect ofthe total amount so recovered.  TheBorrower agrees that any Lender so purchasing a participation from anotherLender pursuant to this Section 2.11 may, to the fullest extent permittedby law, exercise all its rights of payment (including the right of set-off)with respect to such participation as fully as if such Lender were the directcreditor of the Borrower in the amount of such participation.

 

Section 2.12                Breakage Costs.  If (a) anypayment of principal of any Eurodollar Rate Advance is made other than on thelast day of the Interest Period for such Advance, whether as a result of anypayment pursuant to Section 2.05, the acceleration of the maturity of theNotes pursuant to Article VII, or otherwise, or (b) the Borrowerfails to make a principal or interest payment with respect to any EurodollarRate Advance on the date such payment is due and payable, the Borrower shall,within 10 days of any written demand sent by any Lender to the Borrower throughthe Administrative Agent, pay to the Administrative Agent for the account ofsuch Lender any amounts required to compensate such Lender for any additionallosses, out-of-pocket costs or expenses which it may reasonably incur as aresult of such payment or nonpayment, including, without limitation, any loss(including loss of anticipated profits), cost or 

 

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expense incurred byreason of the liquidation or reemployment of deposits or other funds acquiredby any Lender to fund or maintain such Advance.

 

Section 2.13                Increased Costs.

 

(a)                                  Eurodollar Rate Advances. If, due to either (i) the introduction of or any change (other thanany change by way of imposition or increase of reserve requirements included inthe Eurodollar Rate Reserve Percentage) in or in the interpretation of any lawor regulation or (ii) the compliance with any guideline or request fromany central bank or other Governmental Authority (whether or not having theforce of law), there shall be any increase in the cost to any Lender ofagreeing to make or making, funding, or maintaining Eurodollar Rate Advances,then the Borrower shall from time to time, upon demand by such Lender (with acopy of such demand to the Administrative Agent), immediately pay to theAdministrative Agent for the account of such Lender additional amountssufficient to compensate such Lender for such increased cost.  A certificate as to the amount of suchincreased cost and detailing the calculation of such cost submitted to the Borrowerand the Administrative Agent by such Lender shall be conclusive and binding forall purposes, absent manifest error.

 

(b)                                 Capital Adequacy. If any Lender determines in good faith that compliance with any law orregulation adopted or changed after the date hereof or any guideline or requestfrom any central bank or other Governmental Authority (whether or not havingthe force of law) affects or would affect the amount of capital required orexpected to be maintained by such Lender or any corporation controlling suchLender and that the amount of such capital is increased by or based upon theexistence of such Lender’s commitment to lend and other commitments of thistype, then, upon 30 days’ prior written notice by such Lender (with a copy ofany such demand to the Administrative Agent), the Borrower shall immediatelypay to the Administrative Agent for the account of such Lender, from time totime as specified by such Lender, additional amounts sufficient to compensatesuch Lender, in light of such circumstances, to the extent that such Lenderreasonably determines such increase in capital to be allocable to the existenceof such Lender’s commitment to lend under this Agreement.  A certificate as to such amounts anddetailing the calculation of such amounts submitted to the Borrower by suchLender shall be conclusive and binding for all purposes, absent manifest error.

 

(c)                                  Reserved.

 

(d)                                 Mitigation.  Each Lenderclaiming compensation pursuant to this Section 2.13 shall designate adifferent Lending Office if such designation will avoid the need for, or reducethe amount of, such compensation and will not, in the sole discretion of suchLender, be otherwise disadvantageous to such Lender.

 

Section 2.14                Taxes.

 

(a)                                  No Deduction for Certain Taxes. Any and all payments by the Borrower shall be made, in accordance with Section 2.10,free and clear of and without deduction for any and all present or futuretaxes, levies, imposts, deductions, charges or withholdings, and allliabilities with respect thereto, excluding, in the case of each Lender and theAdministrative Agent, taxes imposed on its income, and franchise taxes imposedon it, by the jurisdiction under the laws of 

 

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which such Lender or theAdministrative Agent (as the case may be) is organized or any politicalsubdivision of the jurisdiction (all such non-excluded taxes, levies, imposts,deductions, charges, withholdings and liabilities being hereinafter referred toas “Taxes”) and, in the case of each Lender, Taxes by the jurisdiction of suchLender’s Lending Office or any political subdivision of such jurisdiction.  If the Borrower shall be required by law todeduct any Taxes from or in respect of any sum payable to any Lender or theAdministrative Agent, (i) the sum payable shall be increased as may benecessary so that, after making all required deductions (including deductionsapplicable to additional sums payable under this Section 2.14), suchLender or the Administrative Agent (as the case may be) receives an amountequal to the sum it would have received had no such deductions been made; provided,however, that if the Borrower’s obligation to deduct or withhold Taxes iscaused solely by such Lender’s, or the Administrative Agent’s failure to providethe forms described in paragraph (d) of this Section 2.14 andsuch Lender or the Administrative Agent could have provided such forms, no suchincrease shall be required; (ii) the Borrower shall make such deductions;and (iii) the Borrower shall pay the full amount deducted to the relevanttaxation authority or other authority in accordance with applicable law.

 

(b)                                 Other Taxes. In addition, the Borrower agrees to pay any present or future stamp ordocumentary taxes or any other excise or property taxes, charges or similarlevies which arise from any payment made or from the execution, delivery orregistration of, or otherwise with respect to, this Agreement, the Notes, orthe other Loan Documents (hereinafter referred to as “Other Taxes”).

 

(c)                                  Indemnification.  **THE BORROWER INDEMNIFIES EACH LENDER AND THE ADMINISTRATIVE AGENT FORTHE FULL AMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANYTAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14)PAID BY SUCH LENDER OR THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) ANDANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITHRESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY ORLEGALLY ASSERTED.  EACH PAYMENT REQUIREDTO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TOTHE ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCHINDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTENDEMAND THEREFOR FROM THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF ASADMINISTRATIVE AGENT OR ANY SUCH LENDER. IF ANY LENDER OR THE ADMINISTRATIVE AGENT RECEIVES A REFUND IN RESPECTOF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER ORTHE ADMINISTRATIVE AGENT, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THEBORROWER THE BORROWER’S SHARE OF SUCH REFUND.**

 

(d)                                 Foreign Lender Withholding Exemption. Each Lender that is not incorporated under the laws of the United Statesof America or a state thereof agrees that it shall deliver to the Borrower andthe Administrative Agent (i) two duly completed copies of United StatesInternal Revenue Service Form W8-ECI or W8-BEN or successor applicableform, as the case may be, 

 

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certifying in each casethat such Lender is entitled to receive payments under this Agreement and theNotes payable to it, without deduction or withholding of any United Statesfederal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8or W-9 or successor applicable form, as the case may be, to establish anexemption from United States backup withholding tax, and (iii) any othergovernmental forms which are necessary or required under an applicable taxtreaty or otherwise by law to reduce or eliminate any withholding tax, whichhave been reasonably requested by the Borrower. Each Lender which delivers to the Borrower and the Administrative Agenta Form W8-ECI or W8-BEN and Form W-8 or W-9 pursuant to the nextpreceding sentence further undertakes to deliver to the Borrower and theAdministrative Agent two further copies of the said letter and Form W8-ECIor W8-BEN and Form W-8 or W-9 , or successor applicable forms, or othermanner of certification, as the case may be, on or before the date that anysuch letter or form expires or becomes obsolete or after the occurrence of anyevent requiring a change in the most recent letter and form previouslydelivered by it to the Borrower and the Administrative Agent, and suchextensions or renewals thereof as may reasonably be requested by the Borrowerand the Administrative Agent certifying in the case of a Form W8-ECI orW8-BEN that such Lender is entitled to receive payments under this Agreementwithout deduction or withholding of any United States federal incometaxes.  If an event (including withoutlimitation any change in treaty, law or regulation) has occurred prior to thedate on which any delivery required by the preceding sentence would otherwisebe required which renders all such forms inapplicable or which would preventany Lender from duly completing and delivering any such letter or form withrespect to it and such Lender advises the Borrower and the Administrative Agentthat it is not capable of receiving payments without any deduction or withholdingof United States federal income tax, and in the case of a Form W-8 or W-9,establishing an exemption from United States backup withholding tax, suchLender shall not be required to deliver such letter or forms.  The Borrower shall withhold tax at the rateand in the manner required by the laws of the United States with respect topayments made to a Lender failing to timely provide the requisite InternalRevenue Service forms.

 

Section 2.15                Extension of Maturity Date.

 

(a)                                  Requests for Extension.  The Borrower may, by notice to theAdministrative Agent (who shall promptly notify the Lenders) not earlier than90 days and not later than 75 days prior to the Maturity Date then in effecthereunder (the “Existing Maturity Date”), request that each Lenderextend such Lender’s Maturity Date for an additional 364 days from the ExistingMaturity Date; provided that, the Borrower may only request two such extensionsduring the term of this Agreement.

 

(b)                                 Lender Elections to Extend. Each Lender, acting in its sole and individual discretion, shall, bynotice to the Administrative Agent given not earlier than 75 days prior to theExisting Maturity Date and not later than the date (the “Notice Date”)that is 45 days prior to the Existing Maturity Date, advise the AdministrativeAgent whether or not such Lender agrees to such extension (and each Lender thatdetermines not to so extend its Maturity Date (a “Non-Extending Lender”)shall notify the Administrative Agent of such fact promptly after suchdetermination (but in any event no later than the Notice Date) and any Lenderthat does not so advise the Administrative Agent on or before the Notice Dateshall be deemed to be a Non-Extending Lender. The election of any Lender to agree to such extension shall not obligateany other Lender to so agree.

 

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(c)                                  Notification by Administrative Agent. The Administrative Agent shall notify the Borrower of each Lender’sdetermination under this Section no later than the date 45 days prior tothe Existing Maturity Date (or, if such date is not a Business Day, on the nextpreceding Business Day).

 

(d)                                 Additional Lenders. The Borrower shall have the right on or before the Existing MaturityDate to replace each Non-Extending Lender with, and add as “Lenders” under thisAgreement in place thereof, one or more Eligible Assignees (each, an “AdditionalLender”) as provided in Section 9.06, each of which Additional Lendersshall have entered into an Assignment and Acceptance pursuant to which suchAdditional Lender shall, effective as of the Existing Maturity Date, haveacquired the Advances owing to the applicable Non-Extending Lender.

 

(e)                                  Minimum Extension Requirement. If (and only if) the total of the Advances owing to the Lenders thathave agreed so to extend their Maturity Date and the Advances owing to theAdditional Lenders shall be more than 662/3 % of theaggregate outstanding amount of the Advances immediately prior to the proposedextension of the Maturity Date, then, effective as of the Existing MaturityDate, the Maturity Date of each Extending Lender and of each Additional Lendershall be extended to the date falling 364 days after the Existing Maturity Date(except that, if such date is not a Business Day, such Maturity Date as soextended shall be the next preceding Business Day) and each Additional Lendershall thereupon become a “Lender” for all purposes of this Agreement.

 

(f)                                    Conditions to Effectiveness of Extensions. Notwithstanding the foregoing, the extension of the Maturity Datepursuant to this Section shall not be effective with respect to any Lenderunless:

 

(i)                                     no Default or Event of Default shall haveoccurred and be continuing on the date of such extension and after givingeffect thereto;

 

(ii)                                  the representations and warrantiescontained in this Agreement are true and correct, in all material respects, onand as of the date of such extension and after giving effect thereto, as thoughmade on and as of such date (or, if any such representation or warranty is expresslystated to have been made as of a specific date, as of such specific date); and

 

(iii)                               on the Maturity Date of each Non-Extending Lenderwhose outstanding Advances were not assigned to an Additional Lender, theBorrower shall prepay any Advances outstanding on such date which is owing tosuch Non-Extending Lender (and pay any additional amounts required pursuant to Section 2.12).

 

(g)                                 Conflicting Provisions. This Section shall supersede any provisions in Section 2.11 or9.01 to the contrary.

 

Section 2.16                Increase in Commitments.

 

(a)                                  Request for Increase. Provided there exists no Default and subject to the Subordination andIntercreditor Agreement, upon notice to the Administrative Agent (which 

 

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shall promptly notify theLenders), the Borrower may from time to time, request an increase in theaggregate Commitments by an amount (for all such requests) not exceeding$10,000,000; provided that (i) any such request for an increase shall bein a minimum amount of $5,000,000, and (ii) the Company may make a maximumof two such requests.  At the time ofsending such notice, the Borrower (in consultation with the AdministrativeAgent) shall specify the time period within which each Lender is requested to respond(which shall in no event be less than ten Business Days from the date ofdelivery of such notice to the Lenders).

 

(b)                                 Lender Elections to Increase. Each Lender shall notify the Administrative Agent within such timeperiod whether or not it agrees to increase its Commitment and, if so, whetherby an amount equal to, greater than, or less than its Pro Rata Share of suchrequested increase.  Any Lender notresponding within such time period shall be deemed to have declined to increaseits Commitment.

 

(c)                                  Notification by Administrative Agent;Additional Lenders.  The Administrative Agent shall notify theBorrower and each Lender of the Lenders’ responses to each request madehereunder.  To achieve the full amount ofa requested increase and subject to the approval of the Administrative Agent,the Borrower may also invite additional Eligible Assignees to become Lenderspursuant to a joinder agreement in form and substance satisfactory to theAdministrative Agent and its counsel.

 

(d)                                 Effective Date and Allocations. If the Commitments are increased in accordance with this Section, theAdministrative Agent and the Borrower shall determine the effective date (the “IncreaseEffective Date”) and the final allocation of such increase.  The Administrative Agent shall promptlynotify the Borrower and the Lenders of the final allocation of such increaseand the Increase Effective Date.

 

(e)                                  Conditions to Effectiveness of Increase. An increase the Commitments provided in this Section 2.16 shallbecome effective on the Increase Effective Date only upon the satisfaction ofthe following conditions precedent on or prior to such Increase EffectiveDate:  the receipt by the AdministrativeAgent of (i) an agreement in form and substance reasonably satisfactory tothe Administrative Agent signed by the Borrower, each Lender and each newlender, setting forth its Commitments, if any, increased pursuant to this Section 2.16and setting forth the agreement of each new lender to become a party to thisAgreement and to be bound by all the terms and provisions hereof binding uponeach Lender, and (ii) a certificate of each Guarantor and the Borrowerdated as of the Increase Effective Date (in sufficient copies for each Lender)signed by a Responsible Officer of such Person certifying and attaching theresolutions adopted by such Person approving or consenting to such increase,and in the case of the Borrower, certifying that, before and after givingeffect to such increase, (A) the representations and warranties containedin Article IV and the other Loan Documents are true and correct, in allmaterial respects, on and as of the Increase Effective Date, except to theextent that such representations and warranties specifically refer to anearlier date, in which case they are true and correct, in all materialrespects, as of such earlier date, and except that for purposes of this Section 2.16,the representations and warranties contained in subsections (b) and (c) ofSection 4.05 shall be deemed to refer to the most recent statementsfurnished pursuant to clauses (a) and (b), respectively, of Section 5.06,and (B) no Default exists.

 

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(f)                                    No Commitment. This Section 2.16 shall not be construed to create any obligationon the Administrative Agent or any of the Lenders to advance or to commit toadvance any credit to the Borrower or to arrange for any other Person toadvance or to commit to advance any credit to the Borrower.

 

(g)                                 Conflicting Provisions. This Section shall supersede any provisions in Section 2.11 or9.01 to the contrary.

 

**ARTICLE III**

** **

**CONDITIONS OF LENDING**

** **

Section 3.01                Conditions Precedent to Initial Credit Extension.  The obligationof each Lender to make its Credit Extension on the Effective Date hereunder issubject to satisfaction of the following conditions precedent:

 

(a)                                  Documentation. The Administrative Agent shall have received the following duly executedby all the parties thereto, in form and substance satisfactory to theAdministrative Agent and the Lenders, and, where applicable, in sufficientcopies for each Lender:

 

(i)                                     this Agreement, a Note payable to theorder of each Lender in the amount of its Commitment, the Guaranties, thePledge Agreement, the Security Agreements, and Mortgages encumbering substantiallyall of the Borrower’s and its Subsidiaries’ Proven Reserves and Oil and GasProperties in which the Senior Administrative Agent has Lien, and each of theother Loan Documents,  and all attachedexhibits and schedules;

 

(ii)                                  a favorable opinion of the Borrower’s,its Subsidiaries’ and the Guarantors’ counsel dated as of the date of thisAgreement and substantially in the form of the attached Exhibit K coveringthe matters discussed in such Exhibit and such other matters as any Lenderthrough the Administrative Agent may reasonably request;

 

(iii)                               copies, certified as of the date of thisAgreement by a Responsible Officer of the Borrower of (A) the resolutionsof the Board of Directors of the Borrower approving the Loan Documents to whichthe Borrower is a party, (B) the certificate of incorporation of theBorrower, (C) the bylaws of the Borrower and (D) all other documentsevidencing other necessary corporate action and governmental approvals, if any,with respect to this Agreement, the Note, and the other Loan Documents;

 

(iv)                              certificates of a Responsible Officer ofthe Borrower certifying the names and true signatures of the officers of theBorrower authorized to sign this Agreement, the Notes, Notices of Borrowing,Notices of Conversion or Continuation, and the other Loan Documents to whichthe Borrower is a party;

 

(v)                                 copies, certified as of the date of thisAgreement by a Responsible Officer or the secretary or an assistant secretaryof each Guarantor of (A) the resolutions of the Board of Directors (orother applicable governing body) of such Guarantor approving the Loan Documentsto which it is a party, (B) the articles or certificate (as applicable) ofincorporation (or organization) and bylaws of such Guarantor, and (C) allother documents evidencing other 

 

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necessary corporateaction and governmental approvals, if any, with respect to the Guaranty, theSecurity Instruments, and the other Loan Documents to which such Guarantor is aparty;

 

(vi)                              a certificate of the secretary or anassistant secretary of each Guarantor certifying the names and true signaturesof officers of such Guarantor authorized to sign the Guaranty, SecurityInstruments and the other Loan Documents to which such Guarantor is a party;

 

(vii)                           a certificate dated as of the date ofthis Agreement from the Responsible Officer of the Borrower stating that theconditions in this Section 3.01 have been met;

 

(viii)                        appropriate UCC-1 Financing Statementscovering the Collateral for filing with the appropriate authorities and anyother documents, agreements or instruments necessary to create an AcceptableSecurity Interest in such Collateral;

 

(ix)                                insurance certificates evidencinginsurance which meets the requirements of this Agreement and the SecurityInstruments, and which is otherwise satisfactory to the Administrative Agent;

 

(x)                                   the initial Independent Engineer’s Reportdated effective as of a date acceptable to the Administrative Agent;

 

(xi)                                the Subordination and Intercreditor Agreement;and

 

(xii)                             such other documents, governmentalcertificates, agreements and lien searches as the Administrative Agent or anyLender may reasonably request.

 

(b)                                 Payment of Fees. On or prior to the date of this Agreement, the Borrower shall have paidthe fees required by Section 2.08(c) and all costs and expenses thathave been invoiced and are payable pursuant to Section 9.04.

 

(c)                                  Delivery of Financial Statements. The Administrative Agent and the Lenders shall have received true andcorrect copies of (i) the Financial Statements, (ii) the InterimFinancial Statements, (iii) Projections through June 30, 2012, (iv) proforma unaudited consolidating financial statements of the Borrower as of theEffective Date after giving effect to the Advances made hereunder and anycredit extensions outstanding on the Effective Date under the Senior CreditAgreement, including therein the Borrower’s consolidated balance sheet andstatements of income, cash flows, and retained earnings, (v) a sources anduses statement outlining the uses to which the proceeds of the Advances will beapplied on the Effective Date, and (vi) such other financial informationas the Lenders may reasonably request.

 

(d)                                 Security Instruments. The Administrative Agent shall have received all appropriate evidencerequired by the Administrative Agent and the Lenders in their sole discretionnecessary to determine that the Administrative Agent (for its benefit and thebenefit of the Secured Parties) shall have an Acceptable Security Interest inthe Collateral and that all actions or filings necessary to protect, preserveand validly perfect such Liens have been made, taken or obtained, as the casemay be, and are in full force and effect.

 

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(e)                                  Due Diligence on Title and Environmental. The Administrative Agent shall be satisfied with the condition of theOil and Gas Properties with respect to the Borrower’s and its Subsidiaries’compliance with Environmental Laws and the Borrower’s and its Subsidiaries’title to such properties.

 

(f)                                    No Default.  No Defaultshall have occurred and be continuing.

 

(g)                                 Representations and Warranties. The representations and warranties contained in Article IV hereofand in each other Loan Document shall be true and correct in all materialrespects.

 

(h)                                 Material Adverse Change. No event or circumstance that could cause a Material Adverse Changeshall have occurred.

 

(i)                                     No Proceeding or Litigation; NoInjunctive Relief.  No action, suit, investigation or other proceeding(including, without limitation, the enactment or promulgation of a statute orrule) by or before any arbitrator or any Governmental Authority shall bethreatened or pending and no preliminary or permanent injunction or order by astate or federal court shall have been entered (i) in connection with thisAgreement or any transaction contemplated hereby or (ii) other than thelitigation proceedings set forth on Schedule 4.07, which in the judgment of theAdministrative Agent, could reasonably be expected to result in a MaterialAdverse Change.

 

(j)                                     Consents, Licenses, Approvals, etc. The Administrative Agent shall have received true copies (certified tobe such by the Borrower or other appropriate party) of all consents, licensesand approvals required in accordance with applicable law, or in accordance withany document, agreement, instrument or arrangement to which the Borrower, theGuarantors and their respective Subsidiaries is a party, in connection with theexecution, delivery, performance, validity and enforceability of this Agreementand the other Loan Documents.  Inaddition, the Borrower, the Guarantors and their respective Subsidiaries shallhave all such material consents, licenses and approvals required in connectionwith the continued operation of the Borrower, the Guarantors and respectiveSubsidiaries, and such approvals shall be in full force and effect, and allapplicable waiting periods shall have expired without any action being taken orthreatened by any competent authority which would restrain, prevent orotherwise impose adverse conditions on this Agreement and the actionscontemplated hereby.

 

(k)                                  Hedging Arrangements. The Borrower shall have entered into the Hydrocarbon Hedge Agreementsand the Interest Hedge Agreements required by Section 5.12.

 

(l)                                     Material Contracts. The Borrower shall have delivered to the Administrative Agent copies ofall material contracts, agreements or instruments listed on the attachedSchedule 4.21.

 

(m)                               Notice of Borrowing. The Administrative Agent shall have received a Notice of Borrowing fromthe Borrower in the form of Exhibit F, with appropriate insertions andexecuted by a duly authorized Responsible Officer of the Borrower.

 

(n)                                 USA Patriot Act. The Borrower has delivered to each Lender that is subject to the PatriotAct such information requested by such Lender in order to comply with thePatriot Act.

 

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Section 3.02                Conditions Precedent to All Borrowings. The obligation of each Lender to make an Advance on the occasion of eachBorrowing shall be subject to the further conditions precedent that on the dateof such Borrowing:

 

(a)                                  the following statements shall be true(and each of the giving of the applicable Notice of Borrowing and Notice of Conversionor Continuation and the acceptance by the Borrower of the proceeds of suchBorrowing shall constitute a representation and warranty by the Borrower thaton the date of such Borrowing such statements are true):

 

(i)                                     the representations and warrantiescontained in Article IV of this Agreement and the representations andwarranties contained in the Security Instruments, the Guaranties, and each ofthe other Loan Documents are true and correct in all material respects on andas of the date of such Borrowing before and after giving effect to suchBorrowing and to the application of the proceeds from such Borrowing, as thoughmade on and as of such date except to the extent that any such representationor warranty expressly relates solely to an earlier date, in which case it shallhave been true and correct in all material respects as of such earlier date;and

 

(ii)                                  no Default has occurred and is continuingor would result from such Borrowing or from the application of the proceedstherefrom, and

 

(b)                                 the Administrative Agent shall havereceived such other approvals, opinions, or documents reasonably deemednecessary or desirable by any Lender as a result of circumstances occurringafter the date of this Agreement, as any Lender through the Administrative Agentmay reasonably request.

 

**ARTICLE IV**

** **

**REPRESENTATIONS AND WARRANTIES**

** **

The Borrower represents andwarrants as follows:

 

Section 4.01                Existence; Subsidiaries.  The Borroweris a corporation duly organized, validly existing and in good standing underthe laws of Delaware and in good standing and qualified to do business in eachother jurisdiction where its ownership or lease of Property or conduct of itsbusiness requires such qualification except where the failure to be soqualified could not, individually or in the aggregate, reasonably be expectedto cause a Material Adverse Change.  EachSubsidiary of the Borrower is duly organized, validly existing, and in goodstanding under the laws of its jurisdiction of formation and in good standingand qualified to do business in each jurisdiction where its ownership or leaseof Property or conduct of its business requires such qualification except wherethe failure to be so qualified could not, individually or in the aggregate,reasonably be expected to cause a Material Adverse Change.  As of the date hereof, the Borrower has noSubsidiaries other than those listed identified in Schedule 4.01.

 

Section 4.02                Power.  Theexecution, delivery, and performance by the Borrower of this Agreement, theNotes, and the other Loan Documents to which it is a party and by theGuarantors of the Guaranties and the other Loan Documents to which they are aparty and the consummation of the transactions contemplated hereby and thereby (a) arewithin the Borrower’s 

 

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and such Guarantors’governing powers, (b) have been duly authorized by all necessary governingaction, (c) do not contravene (i) the Borrower’s or any Guarantor’scertificate or articles of incorporation, bylaws, limited liability companyagreement, or other similar governance documents or (ii) any law or anycontractual restriction binding on or affecting the Borrower or any Guarantor,and (d) will not result in or require the creation or imposition of anyLien prohibited by this Agreement.  Atthe time of each Advance, such Advance and the use of the proceeds of suchAdvance, will be within the Borrower’s governing powers, will have been dulyauthorized by all necessary corporate action, will not contravene (i) theBorrower’s certificate of incorporation and bylaws or other organizationaldocuments or (ii) any law or any contractual restriction binding on oraffecting the Borrower and will not result in or require the creation orimposition of any Lien prohibited by this Agreement.

 

Section 4.03                Authorization and Approvals. No consent, order, authorization, or approval or other action by, and nonotice to or filing with, any Governmental Authority or any other Person isrequired for the due execution, delivery, and performance by the Borrower ofthis Agreement, the Notes, or the other Loan Documents to which the Borrower isa party or by each Guarantor of its Guaranty or the other Loan Documents towhich it is a party or the consummation of the transactions contemplated thereby.  At the time of each Borrowing, noauthorization or approval or other action by, and no notice to or filing with,any Governmental Authority will be required for such Borrowing or the use ofthe proceeds of such Borrowing.

 

Section 4.04                Enforceable Obligations.  ThisAgreement, the Notes, and the other Loan Documents to which the Borrower is aparty have been duly executed and delivered by the Borrower and the Guarantiesand the other Loan Documents to which each Guarantor is a party have been dulyexecuted and delivered by the Guarantors. Each Loan Document is the legal, valid, and binding obligation of theBorrower and each Guarantor which is a party to it enforceable against theBorrower and each such Guarantor in accordance with its terms, except as suchenforceability may be limited by any applicable bankruptcy, insolvency,reorganization, moratorium, or similar law affecting creditors’ rightsgenerally and by general principles of equity.

 

Section 4.05                Financial Statements.

 

(a)                                  The Borrowerhas delivered to the Administrative Agent and the Lenders copies of theFinancial Statements andthe Interim Financial Statements, and the FinancialStatements and theInterim Financial Statements are accurate and complete in all materialrespects and present fairly the financial condition of Borrower and itsconsolidated Subsidiaries for their respective period in accordance withGAAP.  As of the date of the FinancialStatements, there were no material contingent obligations, liabilities fortaxes, unusual forward or long-term commitments, or unrealized or anticipatedlosses of the Borrower or any Subsidiary, except as disclosed therein andadequate reserves for such items have been made in accordance with GAAP.

 

(b)                                 Since the dateof the Financial Statements, no event or circumstance that could cause aMaterial Adverse Change has occurred.

 

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(c)                                  As of the datehereof, the Borrower, the Guarantors and their respective Subsidiaries have noDebt other than the Debt listed on Schedule 4.05.

 

Section 4.06                True and Complete Disclosure. All factual information (excluding estimates) heretofore orcontemporaneously furnished by or on behalf of the Borrower or any of theGuarantors in writing to any Lender or the Administrative Agent for purposes ofor in connection with this Agreement, any other Loan Document or anytransaction contemplated hereby or thereby is, and all other such factualinformation hereafter furnished by or on behalf of the Borrower and theGuarantors in writing to the Administrative Agent or any of the Lenders was orshall be, true and accurate in all material respects on the date as of whichsuch information was or is dated or certified and did not or does not containany untrue statement of a material fact or omit to state any material factnecessary to make the statements contained therein not misleading at suchtime.  All projections, estimates, andpro forma financial information furnished by the Borrower were prepared on thebasis of assumptions, data, information, tests, or conditions believed to bereasonable at the time such projections, estimates, and pro forma financialinformation were furnished.

 

Section 4.07                Litigation; Compliance with Laws.

 

(a)                                  There is no pending or, to the bestknowledge of the Borrower, threatened action or proceeding affecting theBorrower or any of the Guarantors before any court, Governmental Authority orarbitrator which could reasonably be expected to cause a Material AdverseChange other than as set forth in Schedule 4.07 or which purports to affect thelegality, validity, binding effect or enforceability of this Agreement, anyNote, or any other Loan Document. Additionally, there is no pending or, to the best of the knowledge ofthe Borrower, threatened action or proceeding instituted against the Borroweror any of the Guarantors which seeks to adjudicate the Borrower or any of theGuarantors as bankrupt or insolvent, or seeking liquidation, winding up,reorganization, arrangement, adjustment, protection, relief, or composition ofit or its debts under any law relating to bankruptcy, insolvency orreorganization or relief of debtors, or seeking the entry of an order forrelief or the appointment of a receiver, trustee or other similar official forit or for any substantial part of its Property.

 

(b)                                 The Borrower and its Subsidiaries havecomplied in all material respects with all material statutes, rules,regulations, orders and restrictions of any Governmental Authority havingjurisdiction over the conduct of their respective businesses or the ownershipof their respective Property

 

Section 4.08                Use of Proceeds.  The proceedsof the Advances will be used by the Borrower for the purposes described in Section 5.09.  The Borrower is not engaged in the businessof extending credit for the purpose of purchasing or carrying margin stock(within the meaning of Regulation U). No proceeds of any Advance will be used to purchase or carry any marginstock in violation of Regulation T, U or X.

 

Section 4.09                Investment Company Act.  Neither theBorrower nor any of the Guarantors is an “investment company” or a company “controlled”by an “investment company” within the meaning of the Investment Company Act of1940, as amended.

 

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Section 4.10                Federal Power Act.  Neither theAdministrative Agent nor any of the Lenders, solely by virtue of the execution,delivery and performance of, and the consummation of the transactionscontemplated by, the Loan Documents shall be or become subject to regulation (a) underthe Federal Power Act, as amended, (b) as a “public utility” or “publicservice corporation” or the equivalent under the applicable law of any state,or (c) under the applicable laws of any state relating to public utilitiesor public service corporations.

 

Section 4.11                Taxes.

 

(a)                                  Reports and Payments. All Returns (as defined below in clause (c) of this Section)required to be filed by or on behalf of the Borrower, the Guarantors, or anymember of the Controlled Group (hereafter collectively called the “Tax Group”)have been duly filed on a timely basis or appropriate extensions have beenobtained and such Returns are and will be true, complete and correct, exceptwhere the failure to so file would not be reasonably expected to cause aMaterial Adverse Change; and all Taxes shown to be payable on the Returns or onsubsequent assessments with respect thereto will have been paid in full on atimely basis, and no other Taxes will be payable by the Tax Group with respectto items or periods covered by such Returns, except in each case to the extentof (i) reserves reflected in the Financial Statements and the InterimFinancial Statements, or (ii) taxes that are being contested in goodfaith.  The reserves for accrued Taxesreflected in the financial statements delivered to the Lenders under thisAgreement are adequate in the aggregate for the payment of all unpaid Taxes,whether or not disputed, for the period ended as of the date thereof and forany period prior thereto, and for which the Tax Group may be liable in its ownright, as withholding agent or as a transferee of the assets of, or successorto, any Person.

 

(b)                                 Taxes Definition.  “Taxes”in this Section 4.11 shall mean all taxes, charges, fees, levies, or otherassessments imposed by any federal, state, local, or foreign taxing authority,including without limitation, income, gross receipts, excise, real or personalproperty, sales, occupation, use, service, leasing, environmental, value added,transfer, payroll, and franchise taxes (and including any interest, penalties,or additions to tax attributable to or imposed on with respect to any suchassessment).

 

(c)                                  Returns Definition.  “Returns”in this Section 4.11 shall mean any federal, state, local, or foreignreport, estimate, declaration of estimated Tax, information statement or returnrelating to, or required to be filed in connection with, any Taxes, includingany information return or report with respect to backup withholding or otherpayments of third parties.

 

Section 4.12                Pension Plans.  All Plans arein compliance in all material respects with all applicable provisions ofERISA.  No Termination Event has occurredwith respect to any Plan, and each Plan has complied with and been administeredin all material respects in accordance with applicable provisions of ERISA andthe Code.  No “accumulated fundingdeficiency” (as defined in Section 302 of ERISA) has occurred and therehas been no excise tax imposed under Section 4971 of the Code.  No Reportable Event under Section 4043of ERISA and the regulations issued thereunder has occurred with respect to anyMultiemployer Plan, and each Multiemployer Plan has complied with and beenadministered in all material respects with applicable provisions of ERISA andthe Code.  The present value of allbenefits vested under each Plan (based on the assumptions used to fund suchPlan) did not, as of the last annual 

 

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valuation date applicablethereto, exceed the value of the assets of such Plan allocable to such vestedbenefits.  Neither the Borrower nor anymember of the Controlled Group has had a complete or partial withdrawal fromany Multiemployer Plan for which there is any withdrawal liability.  As of the most recent valuation date applicablethereto, neither the Borrower nor any member of the Controlled Group wouldbecome subject to any liability under ERISA if the Borrower or any member ofthe Controlled Group has received notice that any Multiemployer Plan isinsolvent or in reorganization.  Basedupon GAAP existing as of the date of this Agreement and current factualcircumstances, the Borrower has no reason to believe that the annual costduring the term of this Agreement to the Borrower or any member of theControlled Group for post-retirement benefits to be provided to the current andformer employees of the Borrower or any member of the Controlled Group underPlans that are welfare benefit plans (as defined in Section 3(1) ofERISA) could, in the aggregate, reasonably be expected to cause a MaterialAdverse Change.

 

Section 4.13                Condition of Property; Casualties. Each of the Borrower and the Guarantors has good and marketable title toall of its Oil and Gas Properties as is customary in the oil and gas industryin all material respects, free and clear of all Liens except for PermittedLiens.  Each Borrower and the Guarantorshas good and indefeasible title to all of its other Properties, free and clearof all Liens except for Permitted Liens. The material Properties used or to be used in the continuing operationsof the Borrower and each of the Guarantors are in good repair, working orderand condition.  Since the date of theFinancial Statements, neither the business nor the material Properties of theBorrower and each of the Guarantors, taken as a whole, has been materially andadversely affected as a result of any fire, explosion, earthquake, flood,drought, windstorm, accident, strike or other labor disturbance, embargo,requisition or taking of Property or cancellation of contracts, Permits, orconcessions by a Governmental Authority, riot, activities of armed forces, oracts of God or of any public enemy.

 

Section 4.14                No Burdensome Restrictions; No Defaults.

 

(a)                                  Other than those identified on Schedule4.14(a), neither the Borrower nor any Guarantor is a party to any indenture,loan, or credit agreement or any lease or other agreement or instrument orsubject to any charter or corporate restriction or provision of applicable lawor governmental regulation that could reasonably be expected to cause aMaterial Adverse Change.  Neither theBorrower nor any of its Subsidiaries is in default under or with respect to anycontract, agreement, lease, or other instrument to which the Borrower or anySubsidiary is a party and which could reasonably be expected to cause aMaterial Adverse Change or under any agreement in connection with anyDebt.  Neither the Borrower nor any ofits Subsidiaries has received any notice of default under any material contract,agreement, lease, or other instrument to which the Borrower or such Subsidiaryis a party a copy of which has not been delivered to the Administrative Agent.

 

(b)                                 No Default has occurred and iscontinuing.

 

Section 4.15                Environmental Condition.

 

(a)                                  Permits, Etc. The Borrower and the Guarantors (i) have obtained all EnvironmentalPermits necessary for the ownership and operation of their respectiveProperties 

 

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and the conduct of theirrespective businesses; (ii) have at all times been and are in materialcompliance with all terms and conditions of such Permits and with all othermaterial requirements of applicable Environmental Laws; (iii) have notreceived notice of any material violation or alleged violation of anyEnvironmental Law or Permit; and (iv) are not subject to any actual orcontingent Environmental Claim, which could reasonably be expected to cause aMaterial Adverse Change.

 

(b)                                 Certain Liabilities. To the Borrower’s actual knowledge, none of the present or previously ownedor operated Property of the Borrower or any Guarantor or of any of their formerSubsidiaries, wherever located, (i) has been placed on or proposed to beplaced on the National Priorities List, the Comprehensive EnvironmentalResponse Compensation Liability Information System list, or their state orlocal analogs, or have been otherwise investigated, designated, listed, oridentified as a potential site for removal, remediation, cleanup, closure,restoration, reclamation, or other response activity under any EnvironmentalLaws; (ii) is subject to a Lien, arising under or in connection with anyEnvironmental Laws, that attaches to any revenues or to any Property owned oroperated by the Borrower or any of the Guarantors, wherever located, whichcould reasonably be expected to cause a Material Adverse Change; or (iii) hasbeen the site of any Release of Hazardous Substances or Hazardous Wastes frompresent or past operations which has caused at the site or at any third-partysite any condition that has resulted in or could reasonably be expected toresult in the need for Response that would cause a Material Adverse Change.

 

(c)                                  Certain Actions. Without limiting the foregoing, (i) all necessary notices have beenproperly filed, and no further action is required under current EnvironmentalLaw as to each Response or other restoration or remedial project undertaken bythe Borrower or the Guarantors or any of their former Subsidiaries on any oftheir presently or formerly owned or operated Property and (ii) the presentand, to the Borrower’s best knowledge, future liability, if any, of theBorrower and the Guarantors which could reasonably be expected to arise inconnection with requirements under Environmental Laws will not result in aMaterial Adverse Change.

 

Section 4.16                Permits, Licenses, Etc.  The Borrowerand the Guarantors possess all authorizations, Permits, licenses, patents,patent rights or licenses, trademarks, trademark rights, trade names rights andcopyrights which are material to the conduct of their business.  The Borrower and the Guarantors manage andoperate their business in all material respects in accordance with allapplicable Legal Requirements and good industry practices.

 

Section 4.17                Gas Contracts.  Neither theBorrower nor any of the Guarantors, as of the date hereof, (a) isobligated in any material respect by virtue of any prepayment made under anycontract containing a “take-or-pay” or “prepayment” provision or under anysimilar agreement to deliver hydrocarbons produced from or allocated to any ofthe Borrower’s and its Subsidiaries’ Oil and Gas Properties at some future datewithout receiving full payment therefor at the time of delivery, or (b) exceptas has been disclosed to the Administrative Agent, has produced gas, in anymaterial amount, subject to, and none of the Borrower’s and the Guarantors’ Oiland Gas Properties is subject to, balancing rights of third parties or subjectto balancing duties under governmental requirements.

 

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Section 4.18     Liens; Titles, Leases, Etc.  None of the Property of the Borrower or anyof the Guarantors is subject to any Lien other than Permitted Liens.  On the date of this Agreement, allgovernmental actions and all other filings, recordings, registrations, thirdparty consents and other actions which are necessary to create and perfect theLiens provided for in the Security Instruments will have been made, obtainedand taken in all relevant jurisdictions. All leases and agreements for the conduct of business of the Borrowerand the Guarantors are valid and subsisting, in full force and effect and thereexists no default or event of default or circumstance which with the giving ofnotice or lapse of time or both would give rise to a default under any suchleases or agreements which could reasonably be expected to cause a MaterialAdverse Change.  Neither the Borrower norany of the Guarantors is a party to any agreement or arrangement (other thanthis Agreement and the Security Instruments), or subject to any order,judgment, writ or decree, which either restricts or purports to restrict itsability to grant Liens to secure the Obligations against their respectiveassets or Properties.

 

Section 4.19     Solvency and Insurance.  Before and after giving effect to the makingof the initial Advances, each of the Borrower and its Subsidiaries is Solvent.  Additionally, each of the Borrower and itsSubsidiaries carry insurance required under Section 5.02 of thisAgreement.

 

Section 4.20     Hedging Agreements.  Schedule 4.20 sets forth, as of the datehereof, a true and complete list of all Interest Hedge Agreements, HydrocarbonHedge Agreements, and Hedge Contracts of the Borrower and its Subsidiaries, thematerial terms thereof (including the type, term, effective date, terminationdate and notional amounts or volumes), the net mark to market value thereof,all credit support agreements relating thereto (including any margin requiredor supplied), and the counterparty to each such agreement.

 

Section 4.21     Material Agreements.  Schedule 4.21 sets forth a complete andcorrect list of all material agreements, leases, indentures, purchaseagreements, obligations in respect of letters of credit, guarantees, jointventure agreements, and other instruments in effect or to be in effect as ofthe date hereof (other than the agreements set forth in Schedule 4.20)providing for, evidencing, securing or otherwise relating to any Debt of theBorrower or any of the Guarantors, and all obligations of the Borrower or anyof the Guarantors to issuers of surety or appeal bonds issued for account ofthe Borrower or any such Guarantor, and such list correctly sets forth thenames of the debtor or lessee and creditor or lessor with respect to the Debtor lease obligations outstanding or to be outstanding and the Property subjectto any Lien securing such Debt or lease obligation.  Also set forth on Schedule 4.21 hereto is acomplete and correct list of all material agreements and other instruments ofthe Borrower and the Guarantors relating to the purchase, transportation bypipeline, gas processing, marketing, sale and supply of natural gas and otherHydrocarbons.  The Borrower hasheretofore delivered to the Administrative Agent and the Lenders a complete andcorrect copy of all such material credit agreements, indentures, purchaseagreements, contracts, letters of credit, guarantees, joint venture agreements,or other instruments, including any modifications or supplements thereto, as ineffect on the date hereof.

 

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**ARTICLE V**

** **

**AFFIRMATIVE COVENANTS**

 

So long as any Note or anyamount under any Loan Document shall remain unpaid, or any Lender shall haveany Commitment hereunder, the Borrower agrees, unless the Majority Lendersshall otherwise consent in writing, to comply with the following covenants.

 

Section 5.01     Compliance with Laws, Etc.  The Borrower shall comply, and cause each ofits Subsidiaries to comply, in all material respects with all material LegalRequirements.  Without limiting thegenerality and coverage of the foregoing, the Borrower shall comply, and shallcause each of its Subsidiaries to comply, in all material respects, with allmaterial Environmental Laws and all laws, regulations, or directives withrespect to equal employment opportunity and employee safety in alljurisdictions in which the Borrower, or any of its Subsidiaries do business; provided,however, that this Section 5.01 shall not prevent the Borrower or any ofits Subsidiaries from, in good faith and with reasonable diligence, contestingthe validity or application of any such laws or regulations by appropriatelegal proceedings.  Without limitation ofthe foregoing, the Borrower shall, and shall cause each of its Subsidiaries to,(a) maintain and possess all authorizations, Permits, licenses,trademarks, trade names, rights and copyrights which are necessary to theconduct of its business and (b) obtain, as soon as practicable, allconsents or approvals required from any states of the United States (or other GovernmentalAuthorities) necessary to grant the Administrative Agent an Acceptable SecurityInterest in the Borrower’s and its Subsidiaries’ Oil and Gas Properties.

 

Section 5.02     Maintenance of Insurance.

 

(a)           The Borrower shall, and shall causeeach of its Subsidiaries to, procure and maintain or shall cause to be procuredand maintained continuously in effect policies of insurance in form and amountsand issued by companies, associations or organizations reasonably satisfactoryto the Administrative Agent covering such casualties, risks, perils,liabilities and other hazards reasonably required by the AdministrativeAgent.  In addition, the Borrower shall,and shall cause each of its Subsidiaries to, comply with all requirementsregarding insurance contained in the Security Instruments.

 

(b)           All certified copies of policies orcertificates thereof, and endorsements and renewals thereof shall be deliveredto and retained by the Administrative Agent. Unless the Senior Credit Agreement requires otherwise, all policies ofinsurance shall either have attached thereto a Lender’s loss payableendorsement for the benefit of the Administrative Agent, as loss payee in formreasonably satisfactory to the Administrative Agent or shall name theAdministrative Agent as an additional insured, as applicable.  The Borrower shall furnish the AdministrativeAgent with a certificate of insurance or a certified copy of all policies ofinsurance required.  All policies orcertificates of insurance shall set forth the coverage, the limits ofliability, the name of the carrier, the policy number, and the period ofcoverage.  Unless the Senior CreditAgreement requires otherwise, all policies of insurance required under theterms hereof shall contain an endorsement or agreement by the insurer that anyloss shall be payable in accordance with the terms of such policynotwithstanding any act of negligence of the Borrower, or a Subsidiary or anyparty holding under the Borrower or a Subsidiary which might otherwise resultin a forfeiture of the insurance and the further agreement of the insurerwaiving all rights of setoff, counterclaim or deductions against the Borrowerand its Subsidiaries.  Unless the SeniorCredit Agreement requires otherwise, all such policies shall contain a provisionthat notwithstanding any contrary agreements between the Borrower, itsSubsidiaries, and the 

 

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applicable insurancecompany, such policies will not be canceled, allowed to lapse without renewal,surrendered or amended (which provision shall include any reduction in thescope or limits of coverage) without at least 30 days’ prior written notice tothe Administrative Agent.  In the eventthat, notwithstanding the “lender’s loss payable endorsement” requirement ofthis Section 5.02, the proceeds of any insurance policy described aboveare paid to the Borrower or a Subsidiary, any Obligations are outstanding andthe Senior Debt has been indefeasibly paid in full, the Borrower shall deliversuch proceeds to the Administrative Agent immediately upon receipt.  Notwithstanding the foregoing, the Borroweris not required to turn over to the Administrative Agent the casualty insuranceproceeds received by the Borrower and its Subsidiaries in connection with thefires beginning on March 12, 2006 in the Texas Panhandle; provided that (i) theaggregate amount of insurance proceeds the Borrower is permitted to retainpursuant to the preceding provision shall not exceed $6,000,000, (ii) theBorrower shall deposit all such insurance proceeds into a deposit account withthe Senior Administrative Agent in which the Senior Administrative Agent shallhave a first priority security interest, and (iii) the Borrower shall usesuch proceeds to pay the attorneys’ fees, settlement amounts and otherlitigation expenses incurred by the Borrower and its Subsidiaries in defendingor settling the Fire Litigation and for general corporate purposes.

 

Section 5.03     Preservation of Corporate Existence, Etc.  The Borrower shall preserve and maintain, andcause each of its Subsidiaries to preserve and maintain, its corporate orlimited liability company, as applicable, existence, rights, franchises, andprivileges in the jurisdiction of its incorporation or organization, asapplicable, and qualify and remain qualified, and cause each such Subsidiary toqualify and remain qualified, as a foreign corporation in each jurisdiction inwhich qualification is necessary or desirable in view of its business andoperations or the ownership of its Properties, and, in each case, where failureto qualify or preserve and maintain its rights and franchises could reasonablybe expected to cause a Material Adverse Change.

 

Section 5.04     Payment of Taxes, Etc.  The Borrower shall pay and discharge, andcause each of its Subsidiaries to pay and discharge, before the same shallbecome delinquent, (a) all taxes, assessments, and governmental charges orlevies imposed upon it or upon its income or profits or Property that arematerial in amount, prior to the date on which penalties attach thereto and (b) alllawful claims that are material in amount which, if unpaid, might by law becomea Lien upon its Property; provided, however, that neither the Borrowernor any such Subsidiary shall be required to pay or discharge any such tax,assessment, charge, levy, or claim which is being contested in good faith andby appropriate proceedings, and with respect to which reserves in conformitywith GAAP have been provided.

 

Section 5.05     Visitation Rights.  At any reasonable time and from time to time,upon reasonable notice, the Borrower shall, and shall cause its Subsidiariesto, permit the Administrative Agent and any Lender or any of their respectiveagents or representatives thereof, to (a) examine and make copies of andabstracts from the records and books of account of, and visit and inspect attheir reasonable discretion the Properties of, the Borrower and any suchSubsidiary, and (b) discuss the affairs, finances and accounts of theBorrower and any such Subsidiary with any of their respective officers ordirectors.

 

Section 5.06     Reporting Requirements.  The Borrower shall furnish to theAdministrative Agent and each Lender:

 

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(a)           Annual Financials.  As soon as available and in any event notlater than 90 days after the end of each fiscal year of the Borrower andits consolidated Subsidiaries, commencing with fiscal year ending June 30,2008, (i) to the extent not otherwise provided in the Form 10-K filedby the Borrower with the SEC for such fiscal year end, a copy of the annualaudit report for such year for the Borrower and its consolidated Subsidiaries,including therein the Borrower’s and its consolidated Subsidiaries’ balancesheets as of the endof such fiscal year and the Borrower’s and its consolidated Subsidiaries’statements of income, cash flows, and retained earnings, in each case certifiedby an independent certified public accountants of national standing reasonablyacceptable to the Administrative Agent and including any management lettersdelivered by such accountants to the Borrower or any Subsidiary in connectionwith such audit, (ii) any management letters delivered by such accountantsto the Borrower, (iii) the Form 10-K filed with the SEC for suchfiscal year end, (iv) a Compliance Certificate executed by a ResponsibleOfficer of the Borrower and (v) a copy of the unaudited annualconsolidating financial statements of each of its Subsidiaries, includingtherein such Subsidiary’s balance sheet and statements of income, cash flows,and retained earnings for such fiscal year;

 

(b)           Quarterly Financials.  As soon as available and in any event notlater than 45 days after the end of each of the first three fiscal quarters ofeach fiscal year of the Borrower and its consolidated Subsidiaries, commencingwith the fiscal quarter ending March 31, 2008, (i) to the extent nototherwise provided in the Form 10-Q for such fiscal quarter end, theunaudited balance sheet and the statements of income, cash flows, and retainedearnings of each such Person for the period commencing at the end of theprevious year and ending with the end of such fiscal quarter, all in reasonabledetail and duly certified with respect to such consolidated statements (subjectto year-end audit adjustments) by a Responsible Officer of the Borrower ashaving been prepared in accordance with GAAP, (ii) the Form 10-Qfiled with the SEC for such fiscal quarter end, and (iii) a ComplianceCertificate executed by the Responsible Officer of the Borrower;

 

(c)           Oil and Gas Reserve Reports.

 

(i)            As soon as available but in anyevent on or before each September 30 of each year, an IndependentEngineering Report dated effective as of July 1 for such year;

 

(ii)           As soon as available but in any eventon or before March 31 of each year an Internal Engineering Report datedeffective as of the immediately preceding January 1;

 

(iii)          Such other information as may bereasonably requested by the Administrative Agent or any Lender with respect tothe Oil and Gas Properties included or to be included in the Borrowing Base;

 

With the delivery of each Engineering Report, acertificate from a Responsible Officer of the Borrower certifying that, to thebest of his knowledge and in all material respects: (A) the informationcontained in the Engineering Report and any other information delivered inconnection therewith is true and correct, (B) the Borrower or itsSubsidiary, as applicable, owns good and marketable title to the Oil and GasProperties evaluated in such Engineering Report, as is customary in the oil andgas industry, and such Oil and Gas Properties are subject to an AcceptableSecurity Interest and free of all Liens except for Permitted Liens, (C) exceptas set 

 

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forth on an exhibit to the certificate, on a net basisthere are no gas imbalances, take or pay or other prepayments with respect toits Oil and Gas Properties evaluated in such Engineering Report which wouldrequire the Borrower or any of its Subsidiaries to deliver Hydrocarbonsproduced from such Oil and Gas Properties at some future time without then orthereafter receiving full payment therefor, (D) none of its Oil and GasProperties have been sold since the date of the last Borrowing Basedetermination except as set forth on an exhibit to the certificate, whichcertificate shall list all of its Oil and Gas Properties sold and in suchdetail as reasonably required by the Majority Lenders, (E) attached to thecertificate is a list of its Oil and Gas Properties added to and deleted fromthe immediately prior Engineering Report and a list showing any change inworking interest or net revenue interest in its Oil and Gas Propertiesoccurring and the reason for such change, (F) attached to the certificateis a list of all Persons disbursing proceeds to the Borrower or to itsSubsidiary, as applicable, from its Oil and Gas Properties, (G) except asset forth on a schedule attached to the certificate, all of the Oil and GasProperties evaluated by such Engineering Report are pledged as Collateral forthe Obligations, and (H) attached to the certificate is a quarterly cashflow budget for the four quarters following the delivery of such certificatesetting forth the Borrower’s projections for production volumes, revenues, expenses,taxes and budgeted capital expenditures during such period.

 

(d)           Production and HedgingReports.  As soon as available and inany event within 45 days after the end of each quarter, commencing with thequarter ending March 31, 2008, a report certified by a Responsible Officerof the Borrower in form and substance satisfactory to the Administrative Agentprepared by the Borrower (i) covering each of the Oil and Gas Propertiesof the Borrower and its Subsidiaries (including the Barnett Shale Properties)and detailing on a quarterly basis (A) the production, revenue, and priceinformation and associated operating expenses for each such quarter, (B) anychanges to any producing reservoir, production equipment, or producing wellduring each such quarter, which changes could cause a Material Adverse Change,and (C) any sales of the Borrower’s or any Subsidiaries’ Oil and GasProperties during each such quarter, (ii) setting forth a true andcomplete list of all Hedge Contracts of the Borrower and its Subsidiaries anddetailing the material terms thereof (including the type, term, effective date,termination date and notional amounts or volumes), the net mark to market valuethereof, all credit support agreements relating thereto (including any marginrequired or supplied), and the counterparty to each such agreement, and (iii) certifyingthe Borrower’s compliance with Section 5.12 hereof;

 

(e)           Defaults.  As soon as possible and in any event withinfive days after (i) the occurrence of any Default or (ii) the occurrenceof any default under any instrument or document evidencing Debt of the Borroweror any Subsidiary, in each case known to any officer of the Borrower or any ofits Subsidiaries which is continuing on the date of such statement, a statementof a Responsible Officer of the Borrower setting forth the details of suchDefault or default, as applicable, and the actions which the Borrower or suchSubsidiary has taken and proposes to take with respect thereto;

 

(f)            Termination Events.  As soon as possible and in any event (i) within30 days after the Borrower or any member of the Controlled Group knows or hasreason to know that any Termination Event described in clause (a) of thedefinition of Termination Event with respect to any Plan has occurred, and (ii) within10 days after the Borrower or any of its Affiliates knows or has reason to knowthat any other Termination Event with respect to any Plan has occurred, a 

 

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statement of aResponsible Officer of the Borrower describing such Termination Event and theaction, if any, which the Borrower or such Affiliate proposes to take withrespect thereto;

 

(g)           Termination of Plans.  Promptly and in any event within two BusinessDays after receipt thereof by the Borrower or any member of the ControlledGroup from the PBGC, copies of each notice received by the Borrower or any suchmember of the Controlled Group of the PBGC’s intention to terminate any Plan orto have a trustee appointed to administer any Plan;

 

(h)           Other ERISA Notices.  Promptly and in any event within fiveBusiness Days after receipt thereof by the Borrower or any member of theControlled Group from a Multiemployer Plan sponsor, a copy of each noticereceived by the Borrower or any member of the Controlled Group concerning theimposition or amount of withdrawal liability pursuant to Section 4202 ofERISA;

 

(i)            Environmental Notices.  Promptly upon the receipt thereof by theBorrower or any of its Subsidiaries, a copy of any form of request, notice, summonsor citation received from the Environmental Protection Agency, or any otherGovernmental Authority, concerning (i) violations or alleged violations ofEnvironmental Laws, which seeks to impose liability therefor and could cause aMaterial Adverse Change, (ii) any action or omission on the part of theBorrower or any Subsidiary or any of their former Subsidiaries in connectionwith Hazardous Waste or Hazardous Substances which could reasonably result inthe imposition of liability therefor that could cause a Material AdverseChange, including without limitation any information request related to, ornotice of, potential responsibility under CERCLA, or (iii) concerning thefiling of a Lien upon, against or in connection with the Borrower or anySubsidiary or their former Subsidiaries, or any of their leased or ownedProperty, wherever located;

 

(j)            Other Governmental Notices.  Promptly and in any event within fiveBusiness Days after receipt thereof by the Borrower or any Subsidiary, a copyof any notice, summons, citation, or proceeding seeking to modify in anymaterial respect, revoke, or suspend any material contract, license, permit oragreement with any Governmental Authority;

 

(k)           Material Changes.  Prompt written notice of any condition orevent of which the Borrower has knowledge, which condition or event hasresulted or may reasonably be expected to result in (i) a Material AdverseChange or (ii) a breach of or noncompliance with any material term,condition, or covenant of any material contract to which the Borrower or any ofits Subsidiaries is a party or by which they or their Properties may be bound;

 

(l)            Disputes, Etc.  Prompt written notice of (i) any claims,legal or arbitration proceedings, proceedings before any GovernmentalAuthority, or disputes pending, or to the knowledge of the Borrower threatened,or affecting the Borrower, or any of its Subsidiaries which, if adverselydetermined, could reasonably be expected to cause a Material Adverse Change, orany material labor controversy of which the Borrower or any of its Subsidiarieshas knowledge resulting in or reasonably considered to be likely to result in astrike against the Borrower or any of its Subsidiaries and (ii) any claim,judgment, Lien or other encumbrance (other than a Permitted Lien) affecting anyProperty of the Borrower or any Subsidiary if the 

 

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value of the claim,judgment, Lien, or other encumbrance affecting such Property shall exceed$500,000.

 

(m)          Other Accounting Reports.  Promptly upon receipt thereof, a copy of eachother report or letter submitted to the Borrower or any Subsidiary byindependent accountants in connection with any annual, interim or special auditmade by them of the books of the Borrower and its Subsidiaries, and a copy ofany response by the Borrower or any Subsidiary of the Borrower, or the Board ofDirectors (or other applicable governing body) of the Borrower or anySubsidiary of the Borrower, to such letter or report;

 

(n)           Notices Under Other LoanAgreements.  Promptly after thefurnishing thereof, copies of any statement, report or notice furnished to anyPerson pursuant to the terms of any indenture, loan or credit or other similaragreement, other than this Agreement and not otherwise required to be furnishedto the Lenders pursuant to any other provision of this Section 5.06;

 

(o)           SEC Filings.  Promptly after the sending or filing thereof,copies of all proxy material, reports and other information which the Borroweror any of its Subsidiaries sends to or files with the SEC or sends to any shareholder of the Borrower or of any ofits Subsidiaries;

 

(p)           USA Patriot Act.  Promptly, following a request by any Lender,all documentation and other information that such Lender reasonably requests inorder to comply with its ongoing obligations under applicable “know yourcustomer” and anti-money laundering rules and regulations, including theUSA Patriot Act; and

 

(q)           Other Information.  Such other information respecting thebusiness or Properties, or the condition or operations, financial or otherwise,of the Borrower or any of its Subsidiaries, as any Lender through theAdministrative Agent may from time to time reasonably request.  The Administrative Agent agrees to providethe Lenders with copies of any material notices and information deliveredsolely to the Administrative Agent pursuant to the terms of this Agreement.

 

Section 5.07     Maintenance of Property.  The Borrower shall, and shall cause each ofits Subsidiaries to, maintain their owned, leased, or operated Property in goodcondition and repair; and shall abstain, and cause each of its Subsidiaries toabstain from, knowingly or willfully permitting the commission of waste orother injury, destruction, or loss of natural resources, or the occurrence ofpollution, contamination, or any other condition in, on or about the owned oroperated Property involving the Environment that could reasonably be expectedto result in Response activities and that could reasonably be expected to causea Material Adverse Change.

 

Section 5.08     Agreement to Pledge.  The Borrower shall, and shall cause eachSubsidiary to, grant to the Administrative Agent an Acceptable SecurityInterest in any Property of the Borrower or any Subsidiary now owned orhereafter acquired promptly after receipt of a written request from theAdministrative Agent.

 

Section 5.09     Use of Proceeds.  The Borrower shall use theproceeds of the Advances to pay to the Senior Lenders a portion of the SeniorDebt outstanding under the Senior Credit Agreement.

 

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Section 5.10     Title Evidence and Opinions.  The Borrower shall from time to time upon thereasonable request of the Administrative Agent, take such actions and executeand deliver such documents and instruments as the Administrative Agent shallrequire to ensure that the Administrative Agent shall, at all times, havereceived satisfactory title evidence, which title evidence shall be in form andsubstance acceptable to the Administrative Agent in its sole discretion andshall include information regarding the before payout and after payoutownership interests held by the Borrower and the Borrower’s Subsidiaries, forall wells located on the Oil and Gas Properties, covering at least 80% of thepresent value of the Proven Reserves of the Borrower and its Subsidiaries andat least 80% of the present value of the proved developed producing reserves ofthe Borrower and its Subsidiaries as determined by the Administrative Agent.

 

Section 5.11     Further Assurances; Cure of TitleDefects.  The Borrower shall, andshall cause each Subsidiary to, cure promptly any defects in the creation andissuance of the Notes and the execution and delivery of the SecurityInstruments and this Agreement.  TheBorrower hereby authorizes the Administrative Agent to file any financingstatements without the signature of the Borrower to the extent permitted byapplicable law in order to perfect or maintain the perfection of any securityinterest granted under any of the Loan Documents.  The Borrower at its expense will, and willcause each Subsidiary to, promptly execute and deliver to the AdministrativeAgent upon request all such other documents, agreements and instruments tocomply with or accomplish the covenants and agreements of the Borrower or anySubsidiary, as the case may be, in the Security Instruments and this Agreement,or to further evidence and more fully describe the collateral intended assecurity for the Notes, or to correct any omissions in the Security Instruments,or to state more fully the security obligations set out herein or in any of theSecurity Instruments, or to perfect, protect or preserve any Liens createdpursuant to any of the Security Instruments, or to make any recordings, to fileany notices or obtain any consents, all as may be necessary or appropriate inconnection therewith or to enable the Administrative Agent to exercise andenforce its rights and remedies with respect to any Collateral.  Within 30 days after a request by theAdministrative Agent or the Lenders to cure any title defects or exceptionswhich are not Permitted Liens raised by such information, the Borrower shall (i) curesuch title defects or exceptions which are not Permitted Liens or substituteacceptable Oil and Gas Properties with no title defects or exceptions exceptfor Permitted Liens covering Collateral of an equivalent value and (ii) deliverto the Administrative Agent satisfactory title evidence (including supplementalor new title opinions meeting the foregoing requirements) in form and substanceacceptable to the Administrative Agent in its reasonable business judgment asto the Borrower’s and its Subsidiaries’ ownership of such Oil and GasProperties and the Administrative Agent’s Liens and security interests thereinas are required to maintain compliance with Section 5.10.

 

Section 5.12     Hedging Arrangements.  The Borrower shall maintain (a) eachHydrocarbon Hedge Agreement described in Schedule 5.12 until the statedmaturity of such Hydrocarbon Hedge Agreement and (b)  Hydrocarbon HedgeAgreements covering no less than 50% and no more than 85% of the productionvolumes attributable to “proved, developed and producing” Proven Reserves ofthe Borrower’s and its Subsidiaries’ Oil and Gas Properties for a minimumperiod of at least three years as of the end of December 31, 2006 and asof the end of each six month period ending thereafter, and at a minimum pricefloor as required by the Majority Lenders from time to time.

 

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Section 5.13     Bank Accounts.  The Borrower shall, and shall cause each ofits Subsidiaries to, (a) maintain their principal operating accounts andother deposit accounts with the Senior Administrative Agent or any SeniorLender or any other bank that has executed an account control agreementreasonably acceptable in form and substance to the Senior Administrative Agent,or (b) within 30 days from the date hereof, provide an account controlagreement reasonably acceptable in form and substance to the Senior AdministrativeAgent and executed by each depository bank that holds any operating accounts ordeposit accounts of the Borrower or any Guarantor and in existence on the datehereof.

 

**ARTICLE VI**

** **

**NEGATIVE COVENANTS**

** **

So long as any Note or anyamount under any Loan Document shall remain unpaid or any Lender shall have anyCommitment, the Borrower agrees, unless the Majority Lenders otherwise consentin writing, to comply with the following covenants.

 

Section 6.01     Liens, Etc.  The Borrower shall not create, assume, incur,or suffer to exist, or permit any of its Subsidiaries to create, assume, incur,or suffer to exist, any Lien on or in respect of any of its Property whethernow owned or hereafter acquired, or assign any right to receive income, exceptthat the Borrower and its Subsidiaries may create, incur, assume, or suffer toexist:

 

(a)           Liens created by the SecurityInstruments;

 

(b)           purchase money Liens or purchasemoney security interests upon or in any equipment acquired or held by theBorrower or any of its Subsidiaries in the ordinary course of business prior toor at the time of the Borrower’s or such Subsidiary’s acquisition of suchequipment; provided that, the Debt secured by such Liens (i) wasincurred solely for the purpose of financing the acquisition of such equipment,and does not exceed the aggregate purchase price of such equipment, (ii) issecured only by such equipment and not by any other assets of the Borrower andits Subsidiaries, and (iii) is not increased in amount;

 

(c)           Liens for taxes, assessments, orother governmental charges or levies not yet due or that (provided foreclosure,sale, or other similar proceedings shall not have been initiated) are beingcontested in good faith by appropriate proceedings, and such reserve as may berequired by GAAP shall have been made therefor;

 

(d)           Liens in favor of vendors, carriers,warehousemen, repairmen, mechanics, workmen, materialmen, construction, orsimilar Liens arising by operation of law in the ordinary course of business inrespect of obligations that are not yet due or that are being contested in goodfaith by appropriate proceedings, provided such reserve as may be required byGAAP shall have been made therefor;

 

(e)           Liens to operators and non-operatorsunder joint operating agreements arising in the ordinary course of the businessof the Borrower or the relevant Subsidiary to secure amounts owing, whichamounts are not yet due or are being contested in good faith by appropriateproceedings, if such reserve as may be required by GAAP shall have been madetherefor;

 

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(f)            royalties, overriding royalties, netprofits interests, production payments, reversionary interests, calls onproduction, preferential purchase rights and other burdens on or deductionsfrom the proceeds of production, that do not secure Debt for borrowed money andthat are taken into account in computing the net revenue interests and workinginterests of the Borrower or any of its Subsidiaries warranted in the SecurityInstruments;

 

(g)           Liens arising in the ordinary courseof business out of pledges or deposits under workers’ compensation laws,unemployment insurance, old age pensions or other social security or retirementbenefits, or similar legislation or to secure public or statutory obligationsof the Borrower;

 

(h)           operating agreements, unitization andpooling agreements and orders, farmout agreements, gas balancing agreements andother agreements, in each case that are customary in the oil, gas and mineralproduction business and that are entered into in the ordinary course ofbusiness that are taken into account in computing the net revenue interests andworking interests of the Borrower or any of its Subsidiaries warranted in theSecurity Instruments, to the extent that any such Lien referred to in thisclause does not materially impair the use of the Property covered by such Lienfor the purposes for which such Property is held by the Borrower or anySubsidiary or materially impair the value of such Property subject thereto;

 

(i)            easements, rights-of-way,restrictions, and other similar encumbrances, and minor defects in the chain oftitle that are customarily accepted in the oil and gas financing industry, noneof which interfere with the ordinary conduct of the business of Borrower or anySubsidiary or materially detract from the value or use of the Property to whichthey apply; and

 

(j)            Liens securing the Senior Debt.

 

Section 6.02     Debts, Guaranties, and Other Obligations.  The Borrower shall not, and shall not permitany of its Subsidiaries to, create, assume, suffer to exist, or in any mannerbecome or be liable in respect of, any Debt except:

 

(a)           Debt of the Borrower and itsSubsidiaries under the Loan Documents;

 

(b)           Senior Debt;

 

(c)           Debt in the form of obligations forthe deferred purchase price of Property or services incurred in the ordinarycourse of business which are not yet due and payable or are being contested ingood faith by appropriate proceedings and for which adequate reserves inaccordance with GAAP have been established;

 

(d)           Debt secured by the Liens permittedunder paragraph (b) of Section 6.01 in an aggregate amount notto exceed $3,000,000 at any time;

 

(e)           Debt under Hydrocarbon HedgeAgreements which are not prohibited by the terms of Section 6.14;

 

(f)            Debt consisting of sureties or bondsprovided to any Governmental Authority or other Person and assuring payment ofcontingent liabilities of the Borrower in connection with 

 

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the operation of the Oiland Gas Properties, including with respect to plugging, facility removal andabandonment of its Oil and Gas Properties;

 

(g)           Debt of the Borrower or anySubsidiary owing to the Borrower or to any other Subsidiary; provided that suchDebt is subordinated to the Obligations on terms acceptable to theAdministrative Agent in its sole discretion; and

 

(h)           Debt that constitutes a renewal,refinancing or extension of any Debt referred to clause (d) of this Section 6.02;provided that (i) no Lien existing at the time of such renewal,refinancing or extension shall be extended to cover any property not alreadysubject to such Lien, and (ii) the principal amount of any Debt renewed,refinanced or extended shall not exceed the amount of such Debt outstanding immediatelyprior to such renewal, refinancing or extension;

 

(i)            Debt Issuance by the Borrower; providedthat (i) such issuance, together with any Equity Issuance of convertible,preferred stock in accordance with Section 6.22, shall not exceed$60,000,000 in the aggregate; (ii) such Debt shall have (A) amaturity date that is no earlier than February 28, 2011 or such later “MaturityDate” in effect at the time such Debt is issued, (B) covenants andrestrictions that are no more restrictive than those set forth in thisAgreement and the other Loan Documents and which are, in any event,satisfactory to the Administrative Agent, (C) no restriction on theability of the Borrower or any of its Subsidiaries to amend, modify orotherwise supplement this Agreement or the other Loan Documents, (D) nocollateral or other security for such Debt, (E) no restriction on theability of the Borrower or any of its Subsidiaries to guarantee the Obligationsor pledge assets as collateral security for the Obligations, (F) a bulletrepayment and not provide for amortization (other than amortization resultingfrom any mandatory prepayments required in respect of such Debt in connectionwith the occurrence of an event of default under such Debt), (G) conversionterms acceptable to the Administrative Agent, and (H) such other terms,conditions and provisions that are satisfactory to the Administrative Agent; (iii) suchDebt shall be subordinated, in right of payment and otherwise, to the paymentof the Obligations and the rights and remedies available to the AdministrativeAgent, the Lenders and the Swap Counterparties hereunder or under any otherLoan Document, in a manner, and pursuant to documentation, satisfactory to theAdministrative Agent in its sole discretion, including without limitation,payment blockage provisions and standstill periods of no less than 180 days; (iv) theDebt Issuance Proceeds shall be applied, first to satisfy the outstandingSubordinated Debt in full and second to prepay the Obligations as calculatedunder Section 2.05(f); and (v) such Debt Issuance shall not otherwisecause the occurrence of a Default or Event of Default after giving effect tothe issuance of such Debt; and

 

(j)            Debt consisting of preferred EquityInterests of the Borrower; provided that such Equity Interests are issued incompliance with Section 6.22.

 

Section 6.03     Agreements Restricting Liens andDistributions.  The Borrower shallnot, nor shall it permit any of its Subsidiaries to, create, incur, assume orpermit to exist any contract, agreement or understanding (other than thisAgreement, the Senior Loan Documents and the Security Instruments) which in anyway prohibits or restricts the granting, conveying, creation or imposition ofany Lien on any of its Property, whether now owned or hereafter acquired, tosecure the Obligations or restricts any Subsidiary from paying dividends to theBorrower, or which requires the consent of or notice to other Persons inconnection therewith.

 

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Section 6.04     Merger or Consolidation; Asset Sales.  The Borrower shall not, nor shall it permitany of its Subsidiaries to (a) merge or consolidate with or into any otherPerson without the prior consent of all of the Lenders; provided that theBorrower or any Subsidiary may merge or may be consolidated into the Borroweror any Guarantor if the Borrower or such Guarantor is the surviving entity; or (b) sell,lease, transfer, assign, farm-out, convey, or otherwise dispose of any of itsProperty (including, without limitation, any working interest, overridingroyalty interest, production payments, net profits interest, royalty interest,or mineral fee interest) other than: (i) the sale of Hydrocarbons in theordinary course of business, and (ii) the sale or transfer of equipmentthat is (A) obsolete, worn out, depleted or uneconomic and disposed of inthe ordinary course of business, (B) no longer necessary for the businessof such Person or (C) contemporaneously replaced by equipment of at leastcomparable value and use.

 

Section 6.05     Restricted Payments.  The Borrower shall not, norshall it permit any of its Subsidiaries to, make any Restricted Payments exceptthat if no Default has occurred both before and after giving effect to themaking of such Restricted Payment, (a) the Subsidiaries may makeRestricted Payments to the Borrower, (b) the Borrower may make RestrictedPayments to officers, directors, consultants and employees of the Borrower orany Guarantor in any form other than cash or other assets of the Borrower, (c) theBorrower may make Restricted Payments to officers, directors, consultants andemployees of the Borrower or any Guarantor in the form of cash in an aggregateamount not to exceed $1,000,000 per fiscal year, (d) the Borrower may makeRestricted Payments in respect of preferred Equity Interests which were issuedin compliance with Section 6.22, and (e) the Borrower may makeRestricted Payments in respect of Debt Issuances which were issued incompliance with Section 6.02(j) to the extent such payments would bepermitted under the subordination terms in effect in favor of the Obligationsand covering such Debt Issuances.

 

Section 6.06     Investments.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, make or permit to exist any loans, advances, orcapital contributions to, or make any investment in (including, withoutlimitation, the making of any Acquisition), or purchase or commit to purchaseany stock or other securities or evidences of indebtedness of or interests inany Person or any Oil and Gas Properties or activities related to Oil and GasProperties, except:

 

(a)           Liquid Investments;

 

(b)           trade and customer accountsreceivable which are for goods furnished or services rendered in the ordinarycourse of business and are payable in accordance with customary trade terms;

 

(c)           creation of any additionalSubsidiaries or acquisition of Oil and Gas Properties in compliance with Section 6.15;

 

(d)           the loans, advances, capitalcontributions, investments, and commitments**made prior tothe date hereof and identified in the Interim Financial Statements; providedthat, the respective amounts of such loans, advances, capital contributions,investments, and commitments shall not be increased (other than byappreciation);

 

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(e)           investments received in connectionwith the bankruptcy or reorganization of, or settlement of delinquent accountsand disputes with, customers and suppliers, in each case in the ordinary courseof business; provided that, the aggregate amount of such investment shall notexceed $1,000,000 (other than by appreciation); and

 

(f)            investments consisting of anydeferred portion of the sales price received by the Borrower or any Subsidiaryin connection with any sale of assets permitted hereunder.

 

Section 6.07     Affiliate Transactions.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, directly or indirectly, enter into or permit toexist any transaction or series of transactions (including, but not limited to,the purchase, sale, lease or exchange of Property, the making of anyinvestment, the giving of any guaranty, the assumption of any obligation or therendering of any service) with any of their Affiliates unless such transactionor series of transactions is on terms no less favorable to the Borrower or theSubsidiary, as applicable, than those that could be obtained in a comparablearm’s length transaction with a Person that is not such an Affiliate.

 

Section 6.08     Compliance with ERISA.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, directly or indirectly, (a) engage in, orpermit any Subsidiary or ERISA Affiliate to engage in, any transaction inconnection with which the Borrower, any Subsidiary or any ERISA Affiliate couldbe subjected to either a civil penalty assessed pursuant to section 502(c), (i) or(l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) terminate,or permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner,or take any other action with respect to any Plan, which could result in anyliability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) failto make, or permit any Subsidiary or ERISA Affiliate to fail to make, fullpayment when due of all amounts which, under the provisions of any Plan,agreement relating thereto or applicable law, the Borrower, a Subsidiary or anyERISA Affiliate is required to pay as contributions thereto; (d) permit toexist, or allow any Subsidiary or ERISA Affiliate to permit to exist, anyaccumulated funding deficiency within the meaning of Section 302 of ERISAor section 412 of the Code, whether or not waived, with respect to any Plan; (e) permit,or allow any Subsidiary or ERISA Affiliate to permit, the actuarial presentvalue of the benefit liabilities (as “actuarial present value of the benefitliabilities” shall have the meaning specified in section 4041 of ERISA) underany Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliatewhich is regulated under Title IV of ERISA to exceed the current value of theassets (computed on a plan termination basis in accordance with Title IV ofERISA) of such Plan allocable to such benefit liabilities; (f) contributeto or assume an obligation to contribute to, or permit any Subsidiary or ERISAAffiliate to contribute to or assume an obligation to contribute to, anyMultiemployer Plan; (g) acquire, or permit any Subsidiary or ERISAAffiliate to acquire, an interest in any Person that causes such Person tobecome an ERISA Affiliate with respect to the Borrower, any Subsidiary or anyERISA Affiliate if such Person sponsors, maintains or contributes to, or at anytime in the six-year period preceding such acquisition has sponsored,maintained, or contributed to, (1) any Multiemployer Plan, or (2) anyother Plan that is subject to Title IV of ERISA under which the actuarialpresent value of the benefit liabilities under such Plan exceeds the currentvalue of the assets (computed on a plan termination basis in accordance with TitleIV of ERISA) of such Plan allocable to such benefit liabilities; (h) incur,or permit any Subsidiary or ERISA Affiliate to incur, a liability to or onaccount of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 

 

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of ERISA; (i) contributeto or assume an obligation to contribute to, or permit any Subsidiary or ERISAAffiliate to contribute to or assume an obligation to contribute to, anyemployee welfare benefit plan, as defined in section 3(1) of ERISA,including, without limitation, any such plan maintained to provide benefits toformer employees of such entities, that may not be terminated by such entitiesin their sole discretion at any time without any material liability; (j) amendor permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in anincrease in current liability such that the Borrower, any Subsidiary or anyERISA Affiliate is required to provide security to such Plan under section401(a)(29) of the Code; or (k) permit to exist any occurrence of anyReportable Event (as defined in Title IV of ERISA), or any other event orcondition, which presents a material (in the opinion of the Majority Lenders)risk of such a termination by the PBGC of any Plan.

 

Section 6.09     Sale-and-Leaseback.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, sell or transfer to a Person any Property, whethernow owned or hereafter acquired, if at the time or thereafter the Borrower or aSubsidiary shall lease as lessee such Property or any part thereof or otherProperty which the Borrower or a Subsidiary intends to use for substantiallythe same purpose as the Property sold or transferred.

 

Section 6.10     Change of Business.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, make any material change in the character of itsbusiness as an independent oil and gas exploration and production company, norwill the Borrower or any Subsidiary operate any business in any jurisdictionother than the United States, including the Gulf of Mexico.

 

Section 6.11     Organizational Documents, Name Change.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, amend, supplement, modify or restate their articlesor certificate of incorporation, bylaws, limited liability company agreements,or other equivalent organizational documents where such amendment, supplement,modification or restatement could have an adverse effect on the Lenders asdetermined by the Administrative Agent in its sole reasonable discretion, or amend its name or change its jurisdiction ofincorporation, organization or formation without prior written noticeto, and prior consent of, the Administrative Agent.

 

Section 6.12     Use of Proceeds.  The Borrower will not permit the proceeds ofany Advance to be used for any purpose other than those permitted by Section 5.09.  The Borrower will not engage in the businessof extending credit for the purpose of purchasing or carrying margin stock(within the meaning of Regulation U). Neither the Borrower nor any Person acting on behalf of the Borrower hastaken or shall take, nor permit any of the Borrower’s Subsidiaries to take anyaction which might cause any of the Loan Documents to violate Regulation T, Uor X or any other regulation of the Board of Governors of the Federal ReserveSystem or to violate Section 7 of the Securities Exchange Act of 1934 orany rule or regulation thereunder, in each case as now in effect or as thesame may hereinafter be in effect, including without limitation, the use of theproceeds of any Advance to purchase or carry any margin stock in violation ofRegulation T, U or X.

 

Section 6.13     Gas Imbalances, Take-or-Pay or OtherPrepayments.  The Borrower shall not,nor shall it permit any of its Subsidiaries to, allow gas imbalances,take-or-pay or other prepayments with respect to the Oil and Gas Properties ofthe Borrower or any Subsidiary which 

 

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would require theBorrower or any Subsidiary to deliver their respective Hydrocarbons produced ona monthly basis from such Oil and Gas Properties at some future time withoutthen or thereafter receiving full payment therefor.

 

Section 6.14     Limitation on Speculative Hedging.  Other than the Hedge Contracts required to beentered into and maintained pursuant to Section 5.12 hereof, the Borrowershall not, nor shall it permit any of its Subsidiaries to, (a) purchase,assume, or hold a speculative position in any commodities market or futuresmarket or enter into any Hydrocarbon Hedge Agreement, Interest Hedge Agreementor similar hedge arrangement for speculative purposes, or (b) be party toor otherwise enter into any Hedge Contract which (i) is entered into forreasons other than as a part of its normal business operations as a risk managementstrategy and/or hedge against changes resulting from market conditions relatedto the Borrower’s operations, (ii) covers notional volumes in excess of85% of the anticipated production volumes attributable to Proven Reserves ofthe Borrower and its Subsidiaries during the period such hedge arrangement isin effect, or (iii) is longer than three years in duration.

 

Section 6.15     Additional Subsidiaries; Additional Oiland Gas Properties.  The Borrowershall not, nor shall it permit any of its Subsidiaries to, create or acquireany additional Subsidiaries or acquire any additional Oil and Gas Propertieswithout (a) such new Subsidiary executing and delivering to theAdministrative Agent, at its request, a Guaranty, a Pledge Agreement, aSecurity Agreement and a Mortgage, and such other Security Instruments as theAdministrative Agent or the Majority Lenders may reasonably request, (b) thedelivery by the Borrower of any certificates, opinions of counsel, titleopinions or other documents as the Administrative Agent may reasonably request,and (c) the Borrower or such Subsidiary acquiring such Oil and GasProperties executing and delivering to the Administrative Agent a new Mortgageor a supplement to an existing Mortgage encumbering such Oil and Gas Properties;provided that, in any event, no Subsidiary may be created or acquired and noOil and Gas Properties may be acquired if a Default has occurred before orafter giving effect to such creation or acquisition of the new Subsidiary orthe acquisition of the additional Oil and Gas Properties.

 

Section 6.16     Account Payables.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, allow (a) any of its trade payables or otheraccounts payable to be outstanding for more than 90 days (except in cases whereany such trade payable is being disputed in good faith and adequate reservesunder GAAP have been established) and (b) the weighted average maturity ofall such trade payables to exceed 120 days.

 

Section 6.17     Current Ratio.  The Borrower shall not permit the ratio of,as of the end of each fiscal quarter of the Borrower, beginning with the fiscalquarter ending March 31, 2008, (a) its current assets to (b) itscurrent liabilities, to be less 1.00 to 1.00. For purposes of this calculation (i) “current assets” shallinclude, as of the date of calculation, the aggregate Unused Commitment Amounts(as defined under the Senior Credit Agreement) but shall exclude (A) anycash deposited with or at the request of a counterparty to any Hedge Contract orany other similar hedge arrangement and (B) any assets representing avaluation account arising from the application of SFAS 133 and 143, and (ii) “current liabilities” shallexclude, as of the date of calculation, the current portion of long-term Debt existingunder this Agreement and the current portion of long-term Debt existing underthe Senior Credit Agreement, and any liabilities representing a valuationaccount arising from the application of SFAS 133 and 143.

 

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Section 6.18                Leverage Ratio.  The Borrower (a) shallnot permit the Leverage Ratio at the end of each fiscal quarter ending prior toJune 30, 2008 to be greater than 5.50 to 1.00; and (b) shall notpermit the Leverage Ratio at the end of each fiscal quarter ending on or after June 30,2008 to be greater than 5.00 to 1.00; provided that, solely for purposes ofcalculating Leverage Ratio under this clause, “consolidated Debt” shall notinclude Debt outstanding under preferred Equity Interests issued in compliancewith Section 6.22.

 

Section 6.19                Interest Coverage Ratio.  The Borrowershall not permit the ratio of, as of the end of each fiscal quarter ending onor after March 31, 2008, (a) the consolidated EBITDA of the Borrowercalculated for the four fiscal quarters then ended, to (b) theconsolidated Interest Expense of the Borrower for the four fiscal quarters thenended, to be less than 1.50 to 1.00.

 

Section 6.20                Senior Debt.  Except as otherwise permitted by the terms ofthe Subordination and Intercreditor Agreement none of the Borrower or any ofits Subsidiaries shall amend, supplement or otherwise modify the terms of the SeniorDebt unless otherwise consented to by the Majority Lender, including but notlimited to, any increases in the Borrowing Base above $100,000,000.

 

Section 6.21                Non-Guarantor Subsidiary. Notwithstanding anything to the contrary contained herein, including anyprovision of this Article VI, the Borrower shall not, nor shall it permitany of its Subsidiaries to, (a) create, assume, incur or suffer to existany Lien on or in respect of any of its Property for the benefit of Tri-Flow, (b) sell,assign, pledge, or otherwise transfer any of its Properties to Tri-Flow, or (c) makeor permit to exist any loans, advances, or capital contributions to, or makeany investment in, or purchase or commit to purchase any stock or othersecurities or evidences of indebtedness of or interests in, Tri-Flow or in anyProperties of Tri-Flow other than the loans, advances, capital contributions,investments, and commitments made prior to the date hereof in Tri-Flow; providedthat, the respective amounts of such loans, advances, capital contributions,investments, and commitments shall not be increased (other than byappreciation).

 

Section 6.22                Equity Issuance.  The Borrowershall not, nor shall it permit any of its Subsidiaries to, issue any preferred,convertible equity securities or other Equity Interests unless (a) thematurity thereof shall not be earlier than February 28, 2011, (b) theother terms thereof, including any conversion terms, are satisfactory to theAdministrative Agent, (c) the Equity Issuance Proceeds thereof areapplied, first to satisfy the outstanding Subordinated Debt in full and secondto prepay the Obligations as calculated under Section 2.05(g), and (d) suchissuance of preferred or convertible Equity Interests, together with any DebtIssuance permitted under Section 6.02(j), does not exceed $60,000,000 inthe aggregate.

 

Section 6.23                Minimum Asset Coverage Ratio.

 

(a)                                  The Borrower shall not permit at any timethe ratio of (i) the Total Present Value as of such date to (ii) theconsolidated Debt of the Borrower as of the applicable determination date to beless than 1.50 to 1.0.

 

(b)                                 Upon any change to Total Present Valuepursuant to a Scheduled Redetermination or an Interim Redetermination (as suchterms are defined below), the Borrower will promptly, 

 

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but in any event withinfifteen (15) days after any such redetermination, deliver to the AdministrativeAgent a certificate of a Responsible Officer of the Borrower setting forth theconsolidated Debt of the Borrower and the Total Present Value and demonstratingcompliance with Section 6.23(a).

 

(c)                                  The Total Present Value shall becalculated semi-annually in accordance with this Section 6.23 on or about April 15thand October 15th of each year, commencing April 15, 2008 (each suchsemi-annual calculation, a “Scheduled Redetermination”).  In addition, the Total Present Value shall becalculated between Scheduled Redeterminations at the time of any interim oradditional redetermination of the Borrowing Base under the Senior CreditAgreement (each such interim or additional calculation, an “InterimRedetermination”) in accordance with this Section 6.23.  Promptly after receiving each EngineeringReport or other applicable information relating to the Proven Reserves of theBorrower and its Subsidiaries delivered in connection with a ScheduledRedetermination or Interim Redetermination, and using the calculations of PDPNPV, PDNP NPV and PUD NPV contained therein (as well as any recalculationsthereof made by Administrative Agent as provided for in the definitions of PDPNPV, PDNP NPV and PUD NPV) the Administrative Agent shall notify the Borrowerand each Lender of the resulting Total Present Value.  Such Total Present Value shall thereupon beused for the purposes of Section 6.23(a) until a new Total PresentValue is calculated or estimated pursuant to this Section 6.23.  Each determination of Total Present Valueshall be made as of the date of the applicable Engineering Report or otherapplicable information delivered in connection with a Scheduled Redeterminationor Interim Redetermination.

 

(d)                                 In the event that the Borrower does notfurnish to the Administrative Agent and the Lenders the Independent EngineeringReport, Internal Engineering Report or other information specified in Sections5.06(c)(i), 5.06(c)(ii), or 5.06(c)(iii), as applicable, by the date specifiedin such clauses, the Administrative Agent may, based on the informationavailable to it, estimate in good faith the Total Present Value from time totime thereafter until the Administrative Agent and the Lenders receive therelevant Independent Engineering Report, Internal Engineering Report, or otherinformation, as applicable.  Suchestimated Total Present Value shall thereupon be used for the purposes of Section 6.23(a) untila new Total Present Value is calculated or estimated pursuant to thisAgreement.

 

**ARTICLE VII**

**EVENTS OF DEFAULT; REMEDIES**

** **

Section 7.01                Events of Default.  Theoccurrence of any of the following events shall constitute an “Event of Default”under any Loan Document:

 

(a)                                  Payment.  The Borrowershall (i) fail to pay when due any principal or interest payable hereunderor under the Notes or (ii) fail to pay, within 3 Business Days of whendue, any other amounts (including fees, reimbursements, and indemnifications)payable hereunder, under the Notes, or under any other Loan Document;

 

(b)                                 Representation and Warranties. Any representation or warranty made or deemed to be made (i) by theBorrower, any Guarantor or any of their respective Subsidiaries (or any of 

 

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their respectiveofficers) in this Agreement or in any other Loan Document, or (ii) by theBorrower, any Guarantor or any of their respective Subsidiaries (or any oftheir respective officers) in connection with this Agreement or any other LoanDocument, shall prove to have been incorrect in any material respect when madeor deemed to be made;

 

(c)                                  Covenant Breaches. The Borrower, any Guarantor or any of their respective Subsidiariesshall fail to (i) perform or observe any covenant contained in Section 5.02(a),Section 5.03, Section 5.06(e), Section 5.09, Section 5.12,or Article VI of this Agreement or (ii) fail to perform or observeany other term or covenant set forth in this Agreement or in any other LoanDocument which is not covered by clause (i) above or any otherprovision of this Section 7.01 if such failure shall remain unremedied for30 days after the occurrence of such breach or failure;

 

(d)                                 Cross-Defaults.  (i) TheBorrower, any Guarantor or any of their respective Subsidiaries shall fail topay any principal of or premium or interest on its Debt which is outstanding ina principal amount of at least $1,000,000 individually or when aggregated withall such Debt of the Borrower, any Guarantor or any of their respectiveSubsidiaries so in default (but excluding Debt evidenced by the Notes) when thesame becomes due and payable (whether by scheduled maturity, requiredprepayment, acceleration, demand or otherwise), and such failure shall continueafter the applicable grace period, if any, specified in the agreement orinstrument relating to such Debt; (ii) any other event shall occur orcondition shall exist under any agreement or instrument relating to Debt(including, without limitation, the Senior Credit Agreement) which isoutstanding in a principal amount of at least $1,000,000 individually or whenaggregated with all such Debt of the Borrower, such Subsidiary, or suchGuarantor so in default, and shall continue after the applicable grace period,if any, specified in such agreement or instrument, if the effect of such eventor condition is to accelerate, or to permit the acceleration of, the maturityof such Debt; or (iii) any such Debt shall be declared to be due andpayable, or required to be prepaid (other than by a regularly scheduledrequired prepayment), prior to the stated maturity thereof; provided that, forpurposes of this subsection 7.01(d), the “principal amount” of the obligationsin respect of any Hedging Contracts at any time shall be the maximum aggregateamount (giving effect to any netting agreements) that would be required to bepaid if such Hedging Contracts were terminated at such time

 

(e)                                  Insolvency.  The Borrower,any Guarantor or any of their respective Subsidiaries shall generally not payits debts as such debts become due, or shall admit in writing its inability topay its debts generally, or shall make a general assignment for the benefit ofcreditors; or any proceeding shall be instituted by or against the Borrower,any of its Subsidiaries, or any Guarantor seeking to adjudicate it as bankruptor insolvent, or seeking liquidation, winding up, reorganization, arrangement,adjustment, protection, relief, or composition of it or its debts under any lawrelating to bankruptcy, insolvency or reorganization or relief of debtors, orseeking the entry of an order for relief or the appointment of a receiver,trustee or other similar official for it or for any substantial part of itsProperty and, in the case of any such proceeding instituted against theBorrower, any such Subsidiary or any such Guarantor either such proceedingshall remain undismissed for a period of 60 days or any of the actions soughtin such proceeding shall occur; or the Borrower, any of its Subsidiaries, orany Guarantor shall take any corporate action to authorize any of the actionsset forth above in this paragraph (e);

 

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(f)                                    Judgments.  Any judgmentor order for the payment of money in excess of $1,000,000 shall be renderedagainst the Borrower, any Guarantor or any of their respective Subsidiaries andeither (i) enforcement proceedings shall have been commenced by anycreditor upon such judgment or order or (ii) there shall be any period of30 consecutive days during which a stay of enforcement of such judgment ororder, by reason of a pending appeal or otherwise, shall not be in effect;

 

(g)                                 Termination Events. Any Termination Event with respect to a Plan shall have occurred, and,30 days after notice thereof shall have been given to the Borrower by theAdministrative Agent, (i) such Termination Event shall not have beencorrected and (ii) the then present value of such Plan’s vested benefitsexceeds the then current value of assets accumulated in such Plan by more thanthe amount of $1,000,000 (or in the case of a Termination Event involving thewithdrawal of a “substantial employer” (as defined in Section 4001(a)(2) ofERISA), the withdrawing employer’s proportionate share of such excess shallexceed such amount);

 

(h)                                 Plan Withdrawals. The Borrower or any member of the Controlled Group as employer under aMultiemployer Plan shall have made a complete or partial withdrawal from suchMultiemployer Plan and the plan sponsor of such Multiemployer Plan shall havenotified such withdrawing employer that such employer has incurred a withdrawalliability in an annual amount exceeding $1,000,000.

 

(i)                                     Change in Control. The Borrower shall have discontinued its usual business or a Change inControl shall have occurred;

 

(j)                                     Reserved.

 

(k)                                  Loan Documents. Any material provision of any Loan Document shall for any reason ceaseto be valid and binding on the Borrower or a Guarantor or any of theirrespective Subsidiaries or any such Person shall so state in writing;

 

(l)                                     Security Instruments.  (i) TheAdministrative Agent shall fail to have an Acceptable Security Interest in anymaterial portion of the Collateral as determined in the sole discretion of theAdministrative Agent, (ii) the Administrative Agent shall fail to have anAcceptable Security Interest in any immaterial portion of the Collateral asdetermined in the sole discretion of the Administrative Agent and such failurecontinues for more than 30 days after the Administrative Agent shall have givennotice thereof, and a request to cure such failure, to the Borrower, or (iii) anySecurity Instrument shall at any time and for any reason cease to create theLien on the Property purported to be subject to such agreement in accordancewith the terms of such agreement, or cease to be in full force and effect, orshall be contested by the Borrower, any Guarantor or any of their respectiveSubsidiaries;

 

(m)                               Potential Failure of Title. The title of the Borrower, any Guarantor or any of their respectiveSubsidiaries to any of the Oil and Gas Properties subject to the Mortgages, orany material part thereof, shall become the subject matter of litigation beforeany Governmental Authority or arbitrator which could reasonably be expected toresult in a Material Adverse 

 

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Change with respect tothe Borrower’s, such Guarantor’s or such Subsidiary’s title to such Oil and GasProperties;

 

(n)                                 Material Adverse Change. An event resulting in a Material Adverse Change shall have occurred;

 

(o)                                 Casualty.  Loss, theft,substantial damage or destruction of a material portion of the Collateral thesubject of any Security Instrument and not fully covered by insurance (exceptfor deductibles and allowing for the depreciated value of such Collateral)shall have occurred;

 

Section 7.02                Optional Acceleration of Maturity. If any Event of Default (other than an Event of Default pursuant toparagraph (e) of Section 7.01) shall have occurred and becontinuing, then, and in any such event,

 

(a)                                  the Administrative Agent (i) shallat the request, or may with the consent, of the Majority Lenders, by notice tothe Borrower, declare the obligation, if any, of each Lender to make extensionsof credit hereunder to be terminated, whereupon the same shall forthwithterminate, and (ii) shall at the request, or may with the consent, of theMajority Lenders, by notice to the Borrower, declare all principal, interest,fees, reimbursements, indemnifications, and all other amounts payable underthis Agreement, the Notes, and the other Loan Documents to be forthwith due andpayable, whereupon all such amounts shall become and be forthwith due andpayable in full, without notice of intent to demand, demand, presentment forpayment, notice of nonpayment, protest, notice of protest, grace, notice ofdishonor, notice of intent to accelerate, notice of acceleration, and all othernotices, all of which are hereby expressly waived by the Borrower; and

 

(b)                                 the Administrative Agent shall at therequest of, or may with the consent of, the Majority Lenders (but subject tothe Subordination and Intercreditor Agreement) proceed to enforce its rightsand remedies under the Security Instruments, the Guaranties, and any other LoanDocuments for the ratable benefit of the Secured Parties by appropriateproceedings.

 

Section 7.03                Automatic Acceleration of Maturity. If any Event of Default pursuant to paragraph (e) of Section 7.01shall occur,

 

(a)                                  (i) the obligation, if any, of eachLender to make extensions of credit hereunder shall terminate, and (ii) allprincipal, interest, fees, reimbursements, indemnifications, and all otheramounts payable under this Agreement, the Notes, and the other Loan Documentsshall become and be forthwith due and payable in full, without notice of intentto demand, demand, presentment for payment, notice of nonpayment, protest,notice of protest, grace, notice of dishonor, notice of intent to accelerate,notice of acceleration, and all other notices, all of which are herebyexpressly waived by the Borrower; and

 

(b)                                 the Administrative Agent shall at therequest of, or may with the consent of, the Majority Lenders (but subject tothe Subordination and Intercreditor Agreement) proceed to enforce its rightsand remedies under the Security Instruments, the Guaranties, and any other LoanDocument for the ratable benefit of the Secured Parties by appropriateproceedings.

 

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Section 7.04                Right of Set-off.  Upon theoccurrence and during the continuance of any Event of Default, theAdministrative Agent and each Lender is hereby authorized at any time and from timeto time, to the fullest extent permitted by law, to set off and apply any andall deposits (general or special, time or demand, provisional or final) at anytime held and other indebtedness at any time owing by the Administrative Agentor such Lender to or for the credit or the account of the Borrower against anyand all of the obligations of the Borrower now or hereafter existing under thisAgreement, the Notes held by the Administrative Agent or such Lender, and theother Loan Documents, irrespective of whether or not the Administrative Agentor such Lender shall have made any demand under this Agreement, such Notes, orsuch other Loan Documents, and although such obligations may be unmatured.  The Administrative Agent and each Lenderagrees to promptly notify the Borrower after any such set-off and applicationmade by the Administrative Agent or such Lender, provided that the failure togive such notice shall not affect the validity of such set-off andapplication.  The rights of theAdministrative Agent and each Lender under this Section 7.04 are inaddition to any other rights and remedies (including, without limitation, otherrights of set-off) that the Administrative Agent or such Lender may have.

 

Section 7.05                Non-exclusivity of Remedies. No remedy conferred upon the Administrative Agent and the Lenders isintended to be exclusive of any other remedy, and each remedy shall becumulative of all other remedies existing by contract, at law, in equity, bystatute or otherwise.

 

Section 7.06                Application of Proceeds.

 

(a)                                  Prior to the Payment in Full of SeniorDebt (as defined in the Subordination and Intercreditor Agreement) and otherthan as otherwise permitted by the Subordination and Intercreditor Agreement,any monies or Property actually received by the Administrative Agent pursuantto this Agreement or any other Loan Document as a result of the exercise of anyrights or remedies under any Security Instrument or any other agreement withthe Borrower, any Guarantor or any of their respective Subsidiaries whichsecures any of the Obligations, shall in any event be held in trust by theAdministrative Agent for the benefit of Senior Agent and Senior Secured Parties(as defined in the Subordination and Intercreditor Agreement) and promptly paidor delivered to Senior Agent in the form received; and

 

(b)                                 after the Payment in Full of Senior Debtand the termination of the Subordination and Intercreditor Agreement, anymonies or Property actually received by the Administrative Agent pursuant tothis Agreement or any other Loan Document as a result of the exercise of anyrights or remedies under any Security Instrument or any other agreement withthe Borrower, any Guarantor or any of their respective Subsidiaries whichsecures any of the Obligations, shall be applied in the following order:

 

(i)                                     First, to the payment of all amounts,including costs and expenses incurred in connection with the collection of suchproceeds and the payment of any part of the Obligations, due to theAdministrative Agent under any of the expense reimbursement or indemnityprovisions of this Agreement or any other Loan Document, any SecurityInstrument or other collateral documents, and any applicable law;

 

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(ii)                                  Second, ratably, according to the thenunpaid amounts thereof, without preference or priority of any kind among them,to the payment of the Obligations then due and payable; and

 

(iii)                               Third, the remainder, if any, to theBorrower, its Subsidiaries, their respective successors or assigns, or suchother Person as may be lawfully entitled to receive the same or as a court ofcompetent jurisdiction may direct.

 

(c)                                  All rights of the Administrative Agentand the Lenders in this Article VII shall be subject to the terms andconditions of the Subordination and Intercreditor Agreement.  In the event of a conflict between the termsof this Article VII and the Subordination and Intercreditor Agreement, theSubordination and Intercreditor Agreement shall control.

 

**ARTICLE VIII**THE ADMINISTRATIVE AGENT

** **

Section 8.01                Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent totake such action as agent on its behalf and to exercise such powers under thisAgreement as are delegated to the Administrative Agent by the terms hereof andof the other Loan Documents, together with such powers as are reasonablyincidental thereto.  As to any mattersnot expressly provided for by this Agreement or any other Loan Document (including,without limitation, enforcement or collection of the Notes), the AdministrativeAgent shall not be required to exercise any discretion or take any action, butshall be required to act or to refrain from acting (and shall be fullyprotected in so acting or refraining from acting) upon the instructions of theMajority Lenders, and such instructions shall be binding upon all Lenders andall holders of Notes; provided, however, that the Administrative Agentshall not be required to take any action which exposes the Administrative Agentto personal liability or which is contrary to this Agreement, any other LoanDocument, or applicable law.

 

Section 8.02                Administrative Agent’s Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers,agents, or employees shall be liable for any action taken or omitted to betaken **(INCLUDING THE ADMINISTRATIVE AGENT’S OWNNEGLIGENCE)** by it or them under or in connection with this Agreementor the other Loan Documents, except for its or their own gross negligence orwillful misconduct.  Without limitationof the generality of the foregoing, the Administrative Agent:  (a) may treat the payee of any Note asthe holder thereof until the Administrative Agent receives written notice ofthe assignment or transfer thereof signed by such payee and in formsatisfactory to the Administrative Agent; (b) may consult with legalcounsel (including counsel for the Borrower), independent public accountants,and other experts selected by it and shall not be liable for any action takenor omitted to be taken in good faith by it in accordance with the advice ofsuch counsel, accountants, or experts; (c) makes no warranty orrepresentation to any Lender and shall not be responsible to any Lender for anystatements, warranties, or representations made in or in connection with thisAgreement or the other Loan Documents; (d) shall not have any duty toascertain or to inquire as to the performance or observance of any of theterms, covenants or conditions of this Agreement or any other Loan Document onthe part of the Borrower or its Subsidiaries or to inspect the Property(including the books and records) of the Borrower or its 

 

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Subsidiaries; (e) shallnot be responsible to any Lender for the due execution, legality, validity,enforceability, genuineness, sufficiency, or value of this Agreement or anyother Loan Document; and (f) shall incur no liability under or in respectof this Agreement or any other Loan Document by acting upon any notice,consent, certificate, or other instrument or writing (which may be bytelecopier or telex) believed by it to be genuine and signed or sent by theproper party or parties.

 

Section 8.03                The Administrative Agent and Its Affiliates. With respect to its Commitment, the Advances made by it and the Notesissued to it, the Administrative Agent shall have the same rights and powersunder this Agreement as any other Lender and may exercise the same as though itwere not the Administrative Agent.  Theterm “Lender” or “Lenders” shall, unless otherwise expressly indicated, includethe Administrative Agent in its individual capacity.  The Administrative Agent and its Affiliatesmay accept deposits from, lend money to, act as trustee under indentures of,and generally engage in any kind of business with, the Borrower or any of itsSubsidiaries, and any Person who may do business with or own securities of theBorrower or any such Subsidiary, all as if the Administrative Agent were not anagent hereunder and without any duty to account therefor to the Lenders.

 

Section 8.04                Lender Credit Decision.  Each Lenderacknowledges that it has, independently and without reliance upon theAdministrative Agent or any other Lender and based on the Financial Statementsand the Interim Financial Statements and such other documents and informationas it has deemed appropriate, made its own credit analysis and decision toenter into this Agreement.  Each Lenderalso acknowledges that it shall, independently and without reliance upon theAdministrative Agent or any other Lender and based on such documents andinformation as it shall deem appropriate at the time, continue to make its owncredit decisions in taking or not taking action under this Agreement.

 

Section 8.05                Indemnification.  **THE LENDERS SEVERALLY AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT ANDEACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ANDAGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIRRESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES,OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BEIMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANYWAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTEDBY THE ADMINISTRATIVE AGENT UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT(INCLUDING THE ADMINISTRATIVE AGENT’S OWN NEGLIGENCE), AND INCLUDING, WITHOUTLIMITATION, ENVIRONMENTAL LIABILITIES, PROVIDED THAT NO LENDER SHALL BE LIABLEFOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THEADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  WITHOUT LIMITATION OF THE FOREGOING, EACHLENDER AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FORITS RATABLE SHARE OF ANY**

 

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**OUT-OF-POCKET EXPENSES (INCLUDINGCOUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THEPREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, ORENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF,OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENTOR ANY OTHER LOAN DOCUMENT, TO THE EXTENT THAT THE ADMINISTRATIVE AGENT IS NOTREIMBURSED FOR SUCH BY THE BORROWER.**

 

Section 8.06                Successor Administrative Agent. The Administrative Agent may resign at any time by giving written noticethereof to the Lenders and the Borrower and may be removed at any time with orwithout cause by the Majority Lenders upon receipt of written notice from theMajority Lenders to such effect.  Uponreceipt of notice of any such resignation or removal, the Majority Lendersshall have the right to appoint a successor Administrative Agent with, if anyEvent of Default has not occurred and is not continuing, the consent of theBorrower, which consent shall not be unreasonably withheld.  If no successor Administrative Agent shallhave been so appointed by the Majority Lenders with the consent of theBorrower, and shall have accepted such appointment, within 30 days after theretiring Administrative Agent’s giving of notice of resignation or the MajorityLenders’ removal of the retiring Administrative Agent then the retiringAdministrative Agent may, on behalf of the Lenders and the Borrower, appoint asuccessor Administrative Agent, which shall be, in the case of a successoragent, a commercial bank organized under the laws of the United States ofAmerica or of any State thereof and having a combined capital and surplus of atleast $500,000,000.00.  Upon theacceptance of any appointment as Administrative Agent by a successorAdministrative Agent, such successor Administrative Agent shall thereuponsucceed to and become vested with all the rights, powers, privileges, andduties of the retiring Administrative Agent, and the retiring AdministrativeAgent shall be discharged from its duties and obligations under this Agreementand the other Loan Documents.  After anyretiring Administrative Agent’s resignation or removal hereunder asAdministrative Agent, the provisions of this Article VIII shall inure toits benefit as to any actions taken or omitted to be taken by it while it wasAdministrative Agent under this Agreement and the other Loan Documents.

 

**ARTICLE IX**MISCELLANEOUS

** **

Section 9.01                Amendments, Etc.  No amendmentor waiver of any provision of this Agreement, the Notes, or any other LoanDocument, nor consent to any departure by the Borrower or any Subsidiarytherefrom, shall in any event be effective unless the same shall be in writingand signed by the Majority Lenders and the Borrower, and then such waiver orconsent shall be effective only in the specific instance and for the specificpurpose for which given; provided, however, that no amendment, waiver,or consent shall, unless in writing and signed by all the Lenders, do any ofthe following:  (a) waive any of theconditions specified in Section 3.01, (b) increase the Commitments ofthe Lenders other than as provide in Section 2.16, (c) reduce theprincipal of, or interest on, the Notes or any fees or other amounts payablehereunder or under any other Loan Document, (d) postpone any date fixed forany payment of principal of, or interest on, the Notes or any fees or otheramounts payable hereunder or extend 

 

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the Maturity Date (otherthan as provided in Section 2.15), (e) change the percentage ofLenders which shall be required for the Lenders or any of them to take anyaction hereunder or under any other Loan Document, (f) amend Section 2.11or this Section 9.01, (g) amend the definition of “Majority Lenders,”(h) release any Guarantor from its obligations under any Guaranty, (i) permitthe Borrower or any Subsidiary to enter into any merger or consolidation withor into any other Person or amend Section 6.04(a), (j) release anyCollateral securing the Obligations, except for releases of Collateral sold aspermitted by this Agreement or (k) amend or waive any provision of, norconsent to any departure by any party thereto from, the Collateral Trust andIntercreditor Agreement; and provided, further, that no amendment,waiver or consent shall, unless in writing and signed by the AdministrativeAgent in addition to the Lenders required above to take such action, affect therights or duties of the Administrative Agent under this Agreement or any otherLoan Document.

 

Section 9.02                Notices, Etc.  All noticesand other communications shall be in writing (including, without limitation,telecopy or telex) and mailed by certified mail, return receipt requested,telecopied, telexed, hand delivered, or delivered by a nationally recognizedovernight courier, at the address for the appropriate party specified inSchedule II or at such other address as shall be designated by such party in awritten notice to the other parties.  Allsuch notices and communications shall, when so mailed, telecopied, telexed, orhand delivered or delivered by a nationally recognized overnight courier, beeffective when received if mailed, when telecopy transmission is completed,when confirmed by telex answer-back, or when delivered by such messenger orcourier, respectively, except that notices and communications to theAdministrative Agent pursuant to Article II or VIII shall not be effectiveuntil received by the Administrative Agent.

 

Section 9.03                No Waiver; Remedies.  No failure onthe part of any Lender, or the Administrative Agent, to exercise, and no delayin exercising, any right hereunder or under any Note shall operate as a waiverthereof; nor shall any single or partial exercise of any such right precludeany other or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulativeand not exclusive of any remedies provided by law.

 

Section 9.04                Costs and Expenses.  The Borroweragrees to pay on demand (a) all reasonable out-of-pocket costs andexpenses of the Administrative Agent in connection with the preparation,execution, delivery, administration, modification, and amendment of thisAgreement, the Notes, the Guaranties, and the other Loan Documents includingthe reasonable fees and out-of-pocket expenses of counsel for the AdministrativeAgent with respect to advising the Administrative Agent as to its rights andresponsibilities under this Agreement and (b) all out-of-pocket costs andexpenses, if any, of the Administrative Agent and each Lender (including,without limitation, reasonable counsel fees and expenses of the AdministrativeAgent and each Lender) in connection with the enforcement (whether throughnegotiations, legal proceedings, or otherwise) of this Agreement, the Notes,the Guaranties, and the other Loan Documents.

 

Section 9.05                Binding Effect.  ThisAgreement shall become effective when it shall have been executed by theBorrower and the Administrative Agent, and when the Administrative Agent shallhave, as to each Lender, either received a counterpart hereof executed by suchLender or been notified by such Lender that such Lender has executed it andthereafter shall be 

 

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binding upon and inure tothe benefit of the Borrower, the Administrative Agent and each Lender and theirrespective successors and assigns, except that the Borrower shall not have theright to assign its rights or delegate its duties under this Agreement or anyinterest in this Agreement without the prior written consent of each Lender.

 

Section 9.06                Lender Assignments and Participations.

 

(a)                                  Assignments. Any Lender may assign to one or more Eligible Assignees all or anyportion of its rights and obligations under this Agreement (including, withoutlimitation, all or a portion of its Commitments, if any, the Advances owing toit, and the Notes held by it); provided, however, that (i) eachsuch assignment shall be of a constant, and not a varying, percentage ofsuch Lender’s rights and obligations assigned under this Agreement and shall bean equal percentage with respect to both its obligations owing in respect ofthe Commitments, if any, and the related Advances, (ii) the amount of theCommitments and Advances of such Lender being assigned pursuant to each suchassignment (determined as of the date of the Assignment and Acceptance withrespect to such assignment) shall be, if to an entity other than a Lender, notless than $5,000,000 and shall be an integral multiple of $1,000,000 in excessthereof, (iii) each such assignment shall be to an Eligible Assignee, (iv) theparties to each such assignment shall execute and deliver to the AdministrativeAgent, for its acceptance and recording in the Register, an Assignment andAcceptance, together with the Notes subject to such assignment, and (v) eachEligible Assignee (other than the Eligible Assignee of the Administrative Agentor an Affiliate of a Lender) shall pay to the Administrative Agent a $3,500administrative fee.  Upon such execution,delivery, acceptance and recording, from and after the effective date specifiedin each Assignment and Acceptance, which effective date shall be at least threeBusiness Days after the execution thereof, (A) the assignee thereundershall be a party hereto for all purposes and, to the extent that rights andobligations hereunder have been assigned to it pursuant to such Assignment andAcceptance, have the rights and obligations of a Lender hereunder and (B) suchLender thereunder shall, to the extent that rights and obligations hereunderhave been assigned by it pursuant to such Assignment and Acceptance, relinquishits rights and be released from its obligations under this Agreement (and, inthe case of an Assignment and Acceptance covering all or the remaining portionof such Lender’s rights and obligations under this Agreement, such Lender shallcease to be a party hereto).

 

(b)                                 Term of Assignments. By executing and delivering an Assignment and Acceptance, the Lenderthereunder and the assignee thereunder confirm to and agree with each other andthe other parties hereto as follows:  (i) otherthan as provided in such Assignment and Acceptance, such Lender makes norepresentation or warranty and assumes no responsibility with respect to anystatements, warranties or representations made in or in connection with thisAgreement or the execution, legality, validity, enforceability, genuineness,sufficiency of value of this Agreement or any other instrument or documentfurnished pursuant hereto; (ii) such Lender makes no representation orwarranty and assumes no responsibility with respect to the financial conditionof the Borrower or its Subsidiaries or the performance or observance by theBorrower or its Subsidiaries of any of their obligations under this Agreementor any other instrument or document furnished pursuant hereto; (iii) suchassignee confirms that it has received a copy of this Agreement, together withcopies of the Financial Statements and Interim Financial Statements referred toin Section 4.05 and such other documents and information as it has deemedappropriate to make its own credit analysis and decision to enter into such 

 

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Assignment andAcceptance; (iv) such assignee will, independently and without relianceupon the Administrative Agent, such Lender or any other Lender and based onsuch documents and information as it shall deem appropriate at the time,continue to make its own credit decisions in taking or not taking action underthis Agreement; (v) such assignee appoints and authorizes theAdministrative Agent to take such action as agent on its behalf and to exercisesuch powers under this Agreement as are delegated to the Administrative Agentby the terms hereof, together with such powers as are reasonably incidentalthereto; and (vi) such assignee agrees that it will perform in accordancewith their terms all of the obligations which by the terms of this Agreementare required to be performed by it as a Lender.

 

(c)                                  The Register. The Administrative Agent shall maintain at its address referred to in Section 9.02a copy of each Assignment and Acceptance delivered to and accepted by it and aregister for the recordation of the names and addresses of the Lenders and theCommitments of, and principal amount of the Advances owing to, each Lender fromtime to time (the “Register”).  Theentries in the Register shall be conclusive and binding for all purposes,absent manifest error, and the Borrower, the Administrative Agent and theLenders may treat each Person whose name is recorded in the Register as aLender hereunder for all purposes of this Agreement.  The Register shall be available forinspection by the Borrower or any Lender at any reasonable time and from timeto time upon reasonable prior notice.

 

(d)                                 Procedures.  Upon itsreceipt of an Assignment and Acceptance executed by a Lender and an EligibleAssignee, together with the Notes subject to such assignment, theAdministrative Agent shall, if such Assignment and Acceptance has beencompleted and is in substantially the form of the attached Exhibit A, (i) acceptsuch Assignment and Acceptance, (ii) record the information containedtherein in the Register, and (iii) give prompt notice thereof to theBorrower.  Within five Business Daysafter its receipt of such notice, the Borrower shall execute and deliver to theAdministrative Agent in exchange for the surrendered Notes (A) a new Noteto the order of such Eligible Assignee in an amount equal to the Advancespurchased by it pursuant to such Assignment and Acceptance and (B) if suchLender has retained any portion of the Advances owing to it, a new Note to theorder of such Lender in an amount equal to the portion retained by ithereunder.  Such new Notes shall be datedthe effective date of such Assignment and Acceptance and shall otherwise be insubstantially the form of the attached Exhibit E.

 

(e)                                  Participations. Each Lender may sell participations to one or more banks or otherentities in or to all or a portion of its rights and obligations under thisAgreement (including, without limitation, all or a portion of the Advancesowing to it); provided, however, that (i) such Lender’s obligationsunder this Agreement shall remain unchanged, (ii) such Lender shall remainsolely responsible to the other parties hereto for the performance of suchobligations, (iii) such Lender shall remain the holder of any such Notesfor all purposes of this Agreement, (iv) the Borrower, the AdministrativeAgent and the other Lenders shall continue to deal solely and directly withsuch Lender in connection with such Lender’s rights and obligations under thisAgreement, and (v) such Lender shall not require the participant’s consentto any matter under this Agreement, except for change in the principal amountof the Notes, reductions in fees or interest, releasing all or substantiallyall of any Collateral, permitting the Borrower or any Subsidiary to enter intoany merger or consolidation with or into any other,  postponement of any date fixed for anypayment of principal of, or interest on, the Notes or any fees or other amounts

 

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payable hereunder, orextensions of the Maturity Date (other than as provided in Section 2.15).  The Borrower hereby agrees that participantsshall have the same rights under Sections 2.12, 2.13, 2.14(c), and 9.07 asa Lender to the extent of their respective participations.

 

Section 9.07                Indemnification; Waiver.

 

(a)                                  Indemnification.  THE BORROWERSHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENTTHEREOF), EACH LENDER AND EACH OFFICER, DIRECTOR, EMPLOYEE, AGENT,ATTORNEY-IN-FACT AND AFFILIATE****OF ANY OF THE FOREGOINGPERSONS (EACH SUCH PERSON BEING CALLED AN “INDEMNITEE”) AGAINST, ANDHOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES,LIABILITIES AND RELATED EXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTSOF ANY COUNSEL FOR ANY INDEMNITEE), INCURRED BY ANY INDEMNITEE OR ASSERTEDAGAINST ANY INDEMNITEE BY ANY THIRD PARTY OR BY THE BORROWER OR ANY SUBSIDIARYOF THE BORROWER ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THEEXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANYAGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THEPARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THECONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THECASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR,EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE THEREOF) THE ADMINISTRATION OFTHIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANY ADVANCE OR THE USEOR PROPOSED USE OF THE PROCEEDS THEREFROM, (III) ANY ACTUAL OR ALLEGEDPRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OROPERATED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR ANY ENVIRONMENTALLIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR (IV) ANYACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATINGTO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY,WHETHER BROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY GUARANTOR, ANDREGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO**, IN ALL CASES, WHETHER OR NOT CAUSED BY ORARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLENEGLIGENCE OF THE INDEMNITEE****;**PROVIDEDTHAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THEEXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES AREDETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENTTO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCHINDEMNITEE**.**

 

(b)                                 **Waiverof Damages****.  Tothe fullest extent permitted by applicable law, the Borrower shall not assert,and hereby waives, any claim against any Indemnitee, on any theory ofliability, for special, indirect, consequential or punitive damages (as opposedto direct or actual damages) arising out of, in connection with, or as a resultof, this**

 

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**Agreement, any other LoanDocument or any agreement or instrument contemplated hereby, the transactionscontemplated hereby or thereby, any Advance or the use of the proceedsthereof.  No Indemnitee referred to insubsection (b) above shall be liable for any damages arising from the useby unintended recipients of any information or other materials distributed byit through telecommunications, electronic or other information transmissionsystems in connection with this Agreement or the other Loan Documents or thetransactions contemplated hereby or thereby.**

 

Section 9.08                Execution in Counterparts. This Agreement may be executed in any number of counterparts and bydifferent parties hereto in separate counterparts, each of which when soexecuted shall be deemed to be an original and all of which taken togethershall constitute one and the same agreement. Delivery of an executed counterpart signature page of thisAgreement by facsimile is as effective as executing and delivering thisAgreement in the presence of the other parties to this Agreement.

 

Section 9.09                Survival of Representations, Etc. All representations and warranties contained in this Agreement or madein writing by or on behalf of the Borrower in connection herewith shall survivethe execution and delivery of this Agreement and the Loan Documents, the makingof the Advances and any investigation made by or on behalf of the Lenders, noneof which investigations shall diminish any Lender’s right to rely on suchrepresentations and warranties.  Allobligations of the Borrower provided for in Sections 2.12, 2.09(c), 2.13,2.14(c), 9.04, and 9.07 and all of the obligations of the Lenders in Section 8.05shall survive any termination of this Agreement and repayment in full of theObligations.

 

Section 9.10                Severability.  In case oneor more provisions of this Agreement or the other Loan Documents shall beinvalid, illegal or unenforceable in any respect under any applicable law, thevalidity, legality, and enforceability of the remaining provisions containedherein or therein shall not be affected or impaired thereby.

 

Section 9.11                Business Loans.  The Borrowerwarrants and represents that the Loans evidenced by the Notes are and shall befor business, commercial, investment, or other similar purposes and notprimarily for personal, family, household, or agricultural use, as such termsare used in Chapter One (“Chapter One”) of the Texas Credit Code.  At all such times, if any, as Chapter Oneshall establish a Maximum Rate, the Maximum Rate shall be the “indicated rateceiling” (as such term is defined in Chapter One) from time to time in effect.

 

Section 9.12                Governing Law; Submission to Jurisdiction. This Agreement, the Notes and the other Loan Documents shall be governedby, and construed and enforced in accordance with, the laws of the State ofTexas.  Without limiting the intent ofthe parties set forth above, (a) Chapter 346 of the Texas Finance Code, asamended (relating to revolving loans and revolving tri-party accounts (formerlyTex.  Rev. Civ.  Stat. Ann.  Art.  5069, Ch. 15)), shall not apply to this Agreement, the Notes, or the transactionscontemplated hereby and (b) to the extent that any Lender may be subjectto Texas law limiting the amount of interest payable for its account, suchLender shall utilize the indicated (weekly) rate ceiling from time to time ineffect.  The Borrower hereby irrevocablysubmits to the jurisdiction of any Texas state or federal court sitting inDallas, Texas in any action or proceeding arising out of or relating to thisAgreement or the other Loan Documents, and the Borrower hereby irrevocablyagrees that all claims in respect of such action 

 

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or proceeding may beheard and determined in such court.  TheBorrower hereby unconditionally and irrevocably waives, to the fullest extentit may effectively do so, any right it may have to the defense of aninconvenient forum to the maintenance of such action or proceeding.  The Borrower hereby agrees that service ofcopies of the summons and complaint and any other process which may be servedin any such action or proceeding may be made by mailing or delivering a copy ofsuch process to such Borrower at its address set forth in this Agreement.  The Borrower agrees that a final judgment inany such action or proceeding shall be conclusive and may be enforced in otherjurisdictions by suit on the judgment or in any other manner provided bylaw.  Nothing in this Section shallaffect the rights of any Lender to serve legal process in any other mannerpermitted by the law or affect the right of any Lender to bring any action orproceeding against the Borrower or its Property in the courts of any otherjurisdiction.

 

Section 9.13                Subordination and Intercreditor Agreement. The Administrative Agent is hereby authorized on behalf of the Lendersfor the Lenders to enter into the Subordination and IntercreditorAgreement.  A copy of such Subordinationand Intercreditor Agreement will be made available to each Lender on theEffective Date and thereafter upon request. Each Lender agrees to the terms of such Subordination and IntercreditorAgreement and agrees that the terms thereof shall be binding on such Lender andits successors and assigns, as if it were a party thereto.

 

Section 9.14                USA Patriot Act.  Each Lenderthat is subject to the Patriot Act and the Administrative Agent (for itself andnot on behalf of any Lender) hereby notifies the Borrower that pursuant to therequirements of the Patriot Act it is required to obtain, verify and recordinformation that identifies the Borrower, which information includes the nameand address of the Borrower and other information that will allow such Lenderor the Administrative Agent, as applicable, to identify the Borrower inaccordance with the Patriot Act.

 

Section 9.15                **WAIVER OF JURY TRIAL****. THE BORROWER, THE LENDERS AND THE ADMINISTRATIVE AGENT HEREBYACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED BY AND HAVE CONSULTED WITH COUNSELOF THEIR CHOICE, AND HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLYWAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDINGARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANYOF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.**

 

Section 9.16                **ORAL AGREEMENTS****. THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS, AS DEFINED IN THISAGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

 

**[Remainder of this page intentionally left blank.  Signature page follows.]**

 

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EXECUTEDas of the date first above written.

 
|   | **BORROWER****:**                           |
|--------|---------------------------------------------|
|   |                                        |
|   | CANO PETROLEUM, INC. a Delaware corporation |
|   |                                        |
|   |                                        |
|   | By:                                         | /s/  Morris B. Smith |
|   |                                        | Morris  B. Smith, |
|   |                                        | Senior  Vice President and |
|   |                                        | Chief  Financial Officer |

 

 

*Signature page to Subordinated Credit Agreement(Cano Petroleum)*

 

----

 
|   | **ADMINISTRATIVE  AGENT/LENDERS:**  |
|--------|-------------------------------------|
|   |                                |
|   | UNIONBANCAL  EQUITIES, INC.,        |
|   | as  Administrative Agent and Lender |
|   |                                |
|   |                                |
|   | By:                                 | /s/  Henry Park |
|   |                                | Henry  Park |
|   |                                | Senior  Vice President |
|   |                                |
|   |                                |
|   | By:                                 | /s/  Tom Thompson |
|   |                                | Tom  Thompson |
|   |                                | Senior  Vice President |

 

 

*Signature page to Subordinated Credit Agreement(Cano Petroleum)*

 

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**SCHEDULE I**

** **

**PRICING GRID**

** **

**Applicable Margins**

 

TheApplicable Margin shall be determined in accordance with the following Tablebased on the Borrower’s Leverage Ratio as reflected in the ComplianceCertificate delivered in connection with the Financial Statements most recentlydelivered pursuant to Section 5.06. Adjustments, if any, to such Applicable Margin shall be effective on thedate the Administrative Agent receives the applicable Financial Statements andcorresponding Compliance Certificate as required by the terms of thisAgreement.  If the Borrower fails todeliver the Financial Statements and corresponding Compliance Certificate tothe Administrative Agent at the time required pursuant to Section 5.06,then effective as of the date such Financial Statements and ComplianceCertificate were required to the delivered pursuant to Section 5.06, theApplicable Margin shall be determined at Level II and shall remain at suchlevel until the date such Financial Statements and corresponding ComplianceCertificate are so delivered by the Borrower.  Notwithstanding the foregoing, the Borrower shall be deemed to be atLevel I described below until delivery of its unaudited Financial Statementsand corresponding Compliance Certificate for the fiscal quarter ending March 31,2008.  Notwithstanding anything to thecontrary contained herein, the determination of the Applicable Margin for anyperiod shall be subject to the provisions of Section 2.09(c).

 
| **Applicable  Margin** | ** ** | **Leverage Ratio**                | ** ** | **Eurodollar  Advances** | ** ** | **Reference Rate   Advances** | ** ** |
|------------------------|------------|----------------------------------------|------------|--------------------------|------------|-----------------------------------------|------------|
| Level I                |       | Is less than or equal to  4.00 to 1.00 |       | 5.75                     | %          | 4.75                                    | %          |
| Level II               |       | Is greater than 4.00 to  1.00          |       | 6.00                     | %          | 5.00                                    | %          |

 

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**SCHEDULE II**

**NOTICE INFORMATION AND COMMITMENTS**

 

Eachof the commitments to lend set forth herein is governed by the terms of theCredit Agreement which provides for, among other things, borrowing baselimitations which may restrict the Borrower’s ability to request (and theLenders’ obligation to provide) Credit Extensions to a maximum amount which isless than the commitments set forth in this Schedule II.

 

**Administrative Agent:**

 

UnionBanCalEquities, Inc.

445South Figueroa Street, 13th Floor

LosAngeles, California 90071

Attention:  Maggie Elower

Phone:  213-236-7881

Fax:  213-236-7619

 

**Borrower:**

 

CanoPetroleum, Inc.

801Cherry Street, Suite 3200

ForthWorth, Texas 76102

Attention:Morris B. Smith, CFO

Facsimile:(817) 334-0222

 
| **Lenders:**                    | ** ** | **Commitments** | ** **        |
|---------------------------------|------------|-----------------|-------------------|
| UnionBanCal Equities, Inc. |       | $               | 15,000,000.00     |   |
| **Total:**                      | ** ** | **$**           | **15,000,000.00** | ** ** |

 

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**SCHEDULE 4.01**

 

**SUBSIDIARIES OF BORROWER**

 

**Ladder Companies, Inc.**

 

SoleJurisdiction of Formation / Filing:             Delaware

Typeof Organization:   Corporation

 

**Square One Energy, Inc.**

 

SoleJurisdiction of Formation / Filing:             Texas

Typeof Organization:   Corporation

 

**W.O. Energy of Nevada, Inc.**

 

SoleJurisdiction of Formation / Filing:             Nevada

Typeof Organization:   Corporation

 

**WO Energy, Inc.**

 

SoleJurisdiction of Formation / Filing:             Texas

Typeof Organization:   Corporation

 

**W.O. Operating Company, Ltd.**

 

SoleJurisdiction of Formation / Filing:             Texas

Typeof Organization:   Limited Partnership

 

**W.O. Production Company, Ltd.**

 

SoleJurisdiction of Formation / Filing:             Texas

Typeof Organization:   Limited Partnership

 

**Tri-Flow, Inc.**

 

SoleJurisdiction of Formation / Filing:             Oklahoma

 

Typeof Organization:   Corporation

 

**Pantwist,LLC**

 

SoleJurisdiction of Formation / Filing:             Texas

 

Typeof Organization:   Limited Liability Company

 

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**CanoPetro of New Mexico**

 

SoleJurisdiction of Formation / Filing:             Texas

 

Typeof Organization:   Corporation

 

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**SCHEDULE 4.05**

 

**CanoPetroleum, Inc.**

 

Senior Debt as presentedbelow, as of 3/12/08.

 
| **Value  Date** | ** ** | **Maturity  Date** | ** ** | **Eurodollar  Rate Loan   Amount** | ** ** | **Rate** | ** ** | **Days** | ** ** |
|-----------------|------------|--------------------|------------|----------------------------------------------|------------|----------|------------|----------|------------|
| 2/22/08         |       | 3/25/08            |       | $                                            | 18,000,000 |     | 5.37       | %        | 32         |   |
| 2/29/08         |       | 3/31/08            |       | $                                            | 22,000,000 |     | 5.37       | %        | 31         |   |
| 2/14/08         |       | 3/14/08            |       | $                                            | 9,500,000  |  *  | 5.38       | %        | 31         |   |
|            |       |               |       | $                                            | 49,500,000 |     |       |     |       |   |

 

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* Provided notice to convertto a Reference Rate Loan on 3/14/08

 

The balances due for the Series D convertiblepreferred stock, as of 3/12/08, are as follows:

 
| GLG North American Opportunity Fund                       |       | $          | 107,670        |       |
|-----------------------------------------------------------|------------|------------|----------------|------------|
| GLG North American Opportunity Fund                       |       | 1,137,640  |           |
|                                                      |       |       |           |
| GLG North American Opportunity Fund                       |       |       |           |
|                                                      |       | 291,520    |           |
| D.E. Shaw Laminar Portfolios, L.L.C.                      |       | 11,202,161 |           |
| Dynamis Energy Fund, LTD                                  |       | 182,835    |           |
| Dynamis Energy Fund, LP                                   |       | 832,915    |           |
| GLG North American Opportunity Fund                       |       | 5,256,506  |           |
|                                                      |       |       |           |
| Investcorp Interlachen Multi-Strategy Master Fund Limited |       |       |           |
|                                                      |       | 1,404,049  |           |
| Kellogg Capital Group LLC                                 |       | 2,044,705  |           |
| William Herbert Hunt Trust Estate                         |       | 3,219,012  |           |
| Radcliffe SPC, Ltd. for and on behalf of the Class A      |       |       |           |
| Convertible Crossover Segregated Portfolio                |       | 2,044,705  |           |
| Touradji DeepRock Master Fund, Ltd.                       |       | 1,015,750  |           |
| Trapeze Capital Corp.                                     |       | 3,557,157  |           |
| O’Connor PIPEs Corporate Strategies Master Limited   |       | 1,273,751  |           |
| Spindrift Partners, L.P.                                  |       | 6,535,434  |           |
| Spindrift Investors (Bermuda) L.P.                        |       | 7,949,559  |           |
| **Total Convertible Preferred Stock**                     | ** ** | **$**      | **48,055,367** | ** ** |

 

**Ladder Companies, Inc.(d/b/a Ladder Energy Company)**

 

Senior Debt – refer todetail under Cano Petroleum, Inc.

 

**Square One Energy, Inc.**

 

Senior Debt – refer todetail under Cano Petroleum, Inc.

 

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**W.O. Energy of Nevada, Inc.**

 

Senior Debt – refer todetail under Cano Petroleum, Inc.

 

**WO Energy, Inc.**

 

Senior Debt – refer todetail under Cano Petroleum, Inc.

 

**W.O. Operating Company, Ltd.**

 

Senior Debt – refer todetail under Cano Petroleum, Inc.

 

**W.O. Production Company, Ltd.**

 

Senior Debt – refer todetail under Cano Petroleum, Inc.

 

2

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**Schedule 4.07**

 

**Litigation**

 

**Burnett:**

 

OnMarch 23, 2006, the following lawsuit was filed in the 100th JudicialDistrict Court in Carson County, Texas; Cause No. 9840, The Tom L. andAnne Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne BurnettWindfohr; and Burnett Ranches, Ltd. v. Cano Petroleum, Inc., W.O.Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.  The plaintiffs claim that the electricalwiring and equipment of Cano or certain of its subsidiaries relating to oil andgas operations started a wildfire that began on March 12, 2006 in CarsonCounty.  The owner of the remainder ofthe mineral estate, Texas Christian University, has intervened in the suitjoining the plaintiffs’ request to terminate certain oil and natural gasleases.

 

Theplaintiffs in the above action (i) allege negligence and (ii) seekdamages, including, but not limited to, damages for damage to their land andlivestock, certain expenses related to fighting the fire and certain remedialexpenses totaling approximately $1.7 million to $1.8 million.  In addition, the plaintiffs seek (i) terminationof certain oil and natural gas leases, (ii) reimbursement for theirattorney’s fees (in the amount of at least $549,000) and (iii) exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or a general partnership or de facto partnership.

 

OnJune 21, 2007, the Judge of the 100th Judicial District Courtissued a Final Judgment (a) granting motions for summary judgment in favorof Cano and certain of its subsidiaries on plaintiffs’ claims for (i) breachof contract/termination of an oil and gas lease; and (ii) negligence; and (b) grantingthe plaintiffs’ no-evidence motion for summary judgment on contributorynegligence, assumption of risk, repudiation and estoppel affirmative defensesasserted by Cano and certain of its subsidiaries.  The Final Judgment has been appealed.

 

**Adcock:**

 

OnApril 28, 2006, the following lawsuit was filed in the 31stJudicial District Court of Roberts County, Texas, Cause No. 1922, Robertand Glenda Adcock, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd, and WO Energy, Inc. (“Adcock”).  There are 47 plaintiffs and three groups ofintervenors that claim that the electrical wiring and equipment of Cano orcertain of its subsidiaries relating to oil and gas operations started awildfire that began on March 12, 2006 in Carson County.

 

Theplaintiffs and intervenors (i) allege negligence, res ipsa loquitor,trespass and nuisance and (ii) seek damages, including, but not limitedto, damages to their land, buildings and livestock and certain remedialexpenses totaling $11,297,684.  Inaddition, the plaintiffs and intervenors seek (i) reimbursement for theirattorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and itssubsidiaries are jointly and severally liable as a single business enterpriseand/or a general partnership or de facto partnership.  On August 28, 2007, one of theintervenors, Travelers Lloyds Insurance Company, filed a Notice of Nonsuitrequesting the court to sign an 

 

1

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orderdismissing its claims, which seek approximately $367,627 of total damages,without prejudice.   The Court grantedthe Nonsuit on September 12, 2007.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Adcock case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 31stDistrict Court until the 200th District Court resolves all pretrialmatters and remands this case to the 31st District Court for trial.

 

**Hutchison:**

 

OnApril 10, 2006, the following lawsuit was filed in the 31st JudicialDistrict Court of Roberts County, Texas, Cause No. 1920, Joseph CraigHutchison and Judy Hutchison v. Cano Petroleum, Inc., W.O. Energy ofNevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.(“Hutchison”).  The plaintiffsclaim that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County. The plaintiffs (i) allege negligence and trespass and (ii) seekdamages including, but not limited to, damages to their land and certainremedial expenses.  In addition, theplaintiffs seek exemplary damages.

 

OnSeptember 25, 2007, the Texas Judicial Panel on MultidistrictLitigation granted the Company’s motion to transfer and transferredthis case to the Honorable Paul Davis, retired judge of the 200th DistrictCourt of Travis County, Texas.  No further action will be taken in the31st District Court until the 200th District Court resolves all pretrialmatters and remands this case to the 31st District Court for trial.

 

OnOctober 3, 2007, Firstbank Southwest, as Trustee for the John and EddaleeHaggard Trust, intervened in the consolidated case in the 200th District Courtof Travis County, Texas as part of the Hutchinson case.  The intervenorclaims that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County. The intervenor (i) alleges negligence and (ii) seeks damages,including, but not limited to, damages to its land and certain remedialexpenses.  In addition, the intervenorseeks exemplary damages.

 

**Chisum:**

 

OnMay 1, 2006, the following lawsuit was filed in the 31st Judicial DistrictCourt of Roberts County, Texas, Cause No. 1923, Chisum FamilyPartnership, Ltd. v. Cano, W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc. (“Chisum”).  The plaintiff claims that the electricalwiring and equipment of Cano or certain of its subsidiaries relating to oil andgas operations started a wildfire that began on March 12, 2006 in CarsonCounty.  The plaintiff (i) allegesnegligence and trespass and (ii) seeks damages, including, but not limitedto, damages to its land and certain remedial expenses.  In addition, the plaintiff seeks exemplarydamages.

 

OnSeptember 25, 2007, the Texas Judicial Panel on MultidistrictLitigation granted the Company’s motion to transfer and transferredthis case to the Honorable Paul Davis, retired judge of the 200th DistrictCourt of Travis County, Texas.  No further action will be taken in the 

 

2

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31st DistrictCourt until the 200th District Court resolves all pretrial matters and remandsthis case to the 31st District Court for trial.

 

**Martinez:**

 

OnJuly 3, 2006, the following lawsuit was filed in the 31st JudicialDistrict Court of Roberts County, Texas, Cause No. 1928, Rebecca LeeMartinez, et al v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd., and WO Energy, Inc. (“Martinez”).  The plaintiffs claim that the electrical wiringand equipment of Cano or certain of its subsidiaries relating to oil and gasoperations started a wildfire that began on March 12, 2006 in CarsonCounty, Texas.  The plaintiffs (i) allegenegligence and (ii) seek undisclosed damages for the wrongful death of tworelatives, Gerardo Villarreal and Medardo Garcia, who they claim died as aresult of the fire.  An additional heirof one of Medardo Garcia has intervened in this case alleging similar claims.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Martinez case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 31stDistrict Court until the 200th District Court resolves all pretrialmatters and remands this case to the 31st District Court for trial.

 

Theplaintiffs and intervenor nonsuited this case on December 19, 2007 andrefiled in the 348th Judicial District Court of Tarrant County,Texas as part of the Valenzuela case described below.

 

**Villarreal:**

 

OnAugust 9, 2006, the following lawsuit was filed in the 233rd JudicialDistrict Court of Gray County, Texas, Yolanda Villarreal, Individually and onbehalf of the Estate of Gerardo Villarreal v. Cano Petroleum, Inc., W.O.Energy of Nevada, Inc., W. O. Operating Company, Ltd., and WO Energy, Inc.(“Villarreal”).  The plaintiffsclaim that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County, Texas. The plaintiffs (i) allegenegligence and (ii) seek undisclosed damages, including exemplary damages,for the wrongful death of Gerardo Villarreal who they claim died as a result ofthe fire.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable under vicariousliability theories.  Relatives of RobertoChavira have intervened in the case alleging similar claims regarding the deathof Roberto Chavira.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Martinez case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 233rdDistrict Court until the 200th District Court resolves all pretrialmatters and remands this case to the 233rd District Court for trial.

 

3

----

 

**SPS:**

 

OnMarch 14, 2007, the following lawsuit was filed in 100th Judicial DistrictCourt in Carson County, Texas; Cause No. 9994, Southwestern Public ServiceCompany d/b/a Xcel Energy v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd, and WO Energy, Inc. (“SPS”). Theplaintiff claims that the electrical wiring and equipment of Cano or certain ofits subsidiaries relating to oil and gas operations started a wildfire thatbegan on March 12, 2006 in Carson County. The plaintiff (i) alleges negligence and breach of contract and (ii) seeks$1,876,000 in damages for loss and damage to transmission and distributionequipment, utility poles, lines and other equipment.  In addition, the plaintiff seeksreimbursement for its attorney’s fees.

 

OnMay 15, 2007, William L. Arrington, William M. Arrington and Mark and Le’AnnMitchell intervened in the lawsuit.  Theintervenors (i) allege negligence, res ipsa loquitor, nuisance, andtrespass and (ii) seek damages, including, but not limited to, damages totheir land, buildings and livestock and certain remedial expenses totaling approximately$201,280.  In addition, the intervenorsseek (i) reimbursement for their attorney’s fees and (ii) exemplarydamages.  The intervenors also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or as a partnership or de facto partnership.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the SPS case to the Honorable Paul Davis, retired judge of the 200thDistrict Court of Travis County, Texas. No further action will be taken in the 100th District Courtuntil the 200th District Court resolves all pretrial matters andremands this case to the 100th District Court for trial.

 

OnJanuary 10, 2008, Philip L. Fletcher intervened in the consolidated casein the 200th District Court of Travis County, Texas as part of the SPScase.  The intervenor (i) alleges negligence, trespass and nuisanceand (ii) seeks damages, including, but not limited to, damages to hislivestock.  In addition, the intervenorseeks (i) reimbursement for his attorney’s fees and (ii) exemplarydamages.  The intervenor also claims thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or as a partnership or de facto partnership.

 

OnJanuary 15, 2008, the Jones and McMordie Ranch Partnership intervened inthe consolidated case in the 200th District Court of Travis County, Texas aspart of the SPS case.  The intervenor (i) alleges negligence,trespass and nuisance and (ii) seeks damages, including, but not limitedto, damages to its land.  In addition,the intervenor seeks exemplary damages. The intervenor also claims that Cano and its subsidiaries are jointlyand severally liable as a single business enterprise and/or as a partnership orde facto partnership.

 

**Burgess:**

 

OnMay 2, 2007, the following lawsuit was filed in the 84thJudicial District Court of Hutchinson County, Texas, Cause No. 37,619,Gary and Genia Burgess, et al. v. Cano Petroleum, Inc., W.O. Energy ofNevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. (“Burgess”).  Eleven plaintiffs claim that electricalwiring and equipment relating to oil and gas operations of the Company orcertain of its subsidiaries started a wildfire that began on March 12,2006 in Carson 

 

4

----

 

County,Texas.  The plaintiffs (i) allegenegligence, res ipsa loquitor,nuisance, and trespass and (ii) seek damages, including, but not limitedto, damages to their land, buildings and livestock and certain remedialexpenses totaling approximately $1,152,480. In addition, the plaintiffs seek (i) reimbursement for theirattorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and itssubsidiaries are jointly and severally liable as a single business enterpriseand/or as a partnership or de facto partnership.

 

OnSeptember 25, 2007, the Texas Judicial Panel on Multidistrict Litigationgranted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer andtransferred the Burgess case to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  No further action will be taken in the 84thDistrict Court until the 200th District Court resolves all pretrialmatters and remands this case to the 84th District Court for trial.

 

**MDLCase:**

 

On September 25, 2007,the Texas Judicial Panel on Multidistrict Litigation granted CanoPetroleum, Inc., W.O. Energy of Nevada, Inc., W. O. OperatingCompany, Ltd, and WO Energy, Inc.’s Motion to Transfer Related Casesto Pretrial Court pursuant to Texas Rule of Judicial Administration13.  The Panel transferred to a singlepretrial court for consideration of pretrial matters of all pending cases (Adcock,Chisum, Hutchison, Villarreal, Martinez, SouthwesternPublic Service Company d/b/a Xcel Energy, Burgess, identified above)that assert claims against the Company and its subsidiaries related towildfires beginning on March 12, 2006.  The Panel transferred allpending cases to the Honorable Paul Davis, retired judge of the200th District Court of Travis County, Texas.  On October 19,2007, the Court entered a Case Management Order settling deadlines forcompletion of discovery in January and February of 2008 and a hearingdate for summary judgment motions on April 14, 2008.

 

On December 19, 2007,the plaintiffs and intervenor in the Martinez case nonsuited their claims inthe MDL Case.

 

**Valenzuela:**

 

On December 18, 2007,the following lawsuit was filed in the 348th Judicial District Courtof Tarrant County, Texas, Cause No. 348-227907-07, Norma Valenzuela, etal. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. (“Valenzuela”).  Six plaintiffs, including the two plaintiffsand intervenor from the nonsuited Martinez case, claim that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County. The plaintiffs (i) allege negligence and (ii) seek undiscloseddamages for the wrongful death of four relatives, Manuel Dominguez, RobertoChavira, Gerardo Villarreal and Medardo Garcia, who they claim died as a resultof the fire.  In addition, plaintiffsseek (i) reimbursement for their attorney’s fees and (ii) exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or as a partnership or de facto partnership.  Cano and its subsidiaries filed a Motion toDismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Along transferringthe case to the MDL Case in the 200th Judicial District Court ofTravis County, Texas.

 

5

----

 

**AbrahamEquine:**

 

On February 11, 2008,the following lawsuit was filed in the 48th Judicial District Courtof Tarrant County, Texas, Cause No. 048-228763-08, Abraham Equine, Inc.v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. (“Abraham Equine”).  The plaintiff claims that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County. The plaintiff (i) alleges negligence, trespass and nuisance and (ii) seeksdamages, including, but not limited to, damages to its land, livestock and lostprofits.  In addition, the plaintiffseeks (i) reimbursement for its attorney’s fees and (ii) exemplarydamages.  The plaintiff also claims thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or a general partnership or de facto partnership.  Cano and its subsidiaries filed a Motion toDismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Alongtransferring the case to the MDL Case in the 200th Judicial DistrictCourt of Travis County, Texas.

 

**Pfeffer:**

 

On March 10, 2008, thefollowing lawsuit was filed in the 352nd Judicial District Court ofTarrant County, Texas, Cause No. 352-229256-08, Gary Pfeffer v. CanoPetroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. (“Pfeffer”).  Cano and its subsidiaries have not yet beenserved with the lawsuit.  The plaintiff claims that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence,trespass and nuisance, (ii) seeks undisclosed damages for the wrongfuldeath of his father, Bill W. Pfeffer, who he claims died as a result of thefire and (iii) seeks undisclosed damages, including, but not limited to,damages to his parents’ home and property. In addition, the plaintiff seeks exemplary damages.  The plaintiff also claims that Cano and itssubsidiaries are jointly and severally liable as a general partnership or defacto partnership.  Cano and itssubsidiaries will file a Motion to Transfer Venue and a Notice of Tag Alongtransferring the case to the MDL Case in the 200th Judicial DistrictCourt of Travis County, Texas.

 

**Ayers:**

 

On March 11, 2008, thefollowing lawsuit was filed in the 141st Judicial District Court ofTarrant County, Texas, Cause No. 141-229281-08, Pamela Ayers, et al. v.Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. Cano and its subsidiaries have not yet been served with thelawsuit.  The plaintiffs claim that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and(ii) seek undisclosed damages for the wrongful death of their mother,Kathy Ryan, who they claim died as a result of the fire.  In addition, the plaintiffs seek exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or general partnership or de facto partnership.  Cano and its subsidiaries 

 

6

----

 

will file a Motion toTransfer Venue and a Notice of Tag Along transferring the case to the MDL Casein the 200th Judicial District Court of Travis County, Texas.

 

**Travelers:**

 

On March 12, 2008, thefollowing lawsuit was filed in the 17th Judicial District Court ofTarrant County, Texas, Cause No. 017-229316-08, The Travelers LloydsInsurance Company and Travelers Lloyds of Texas Insurance Company v. CanoPetroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. Cano and its subsidiaries have not yet been served with thelawsuit.  The plaintiffs claim that the electrical wiring and equipment ofCano or certain of its subsidiaries relating to oil and gas operations starteda wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence, res ipsa loquitor, and trespass and (ii) claimthey are subrogated to the rights of their insureds for damages to theirbuildings and building contents totaling $447,764.60.  The plaintiffs also claim that Cano and itssubsidiaries are jointly and severally liable as a single business enterpriseand/or general partnership or de facto partnership.  Cano and its subsidiaries will file a Motionto Transfer Venue and a Notice of Tag Along transferring the case to the MDLCase in the 200th Judicial District Court of Travis County, Texas.

 

**TollingAgreement:**

 

On January 29, 2008,Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.Operating, Ltd. and WO Energy, Inc. entered into a confidentialtolling agreement with two claimants, which preserved their ability to bringclaims against Cano and its subsidiaries arising out of, or related to,wildfires that allegedly began on March 12, 2006 in Carson County.

 

7

----

 

**SCHEDULE 4.14(a)**

 

**AGREEMENTS WHICH COULD CREATE A MATERIAL ADVERSECHANGE**

 

CreditAgreement among Cano Petroleum, Inc. as Borrower, The Lenders Party heretofrom time to time, as Lenders, and Union Bank of California, N.A., asAdministrative Agent and as issuing Lender, dated November 29, 2005,including its Amendments (1-9) and all associated agreements.

 

SecuritiesPurchase Agreement dated August 25, 2006 by and among Cano Petroleum, Inc.and the Buyers listed therein.

 

Certificateof Designations, Preferences and Rights of Series D Convertible PreferredStock of Cano Petroleum, Inc. filed August 31, 2006 with the DelawareSecretary of State.

 

----

 

**SCHEDULE 4.20**

** **

**CANO PETROLEUM, INC.**

**SCHEDULE OF HEDGING AGREEMENTS**

 

**COSTLESS COLLARS**

 
| ** **           | ** ** | **Floor**          | ** ** | **Ceiling**        | ** ** | **Barrels**            | ** ** | **Floor**          | ** ** | **Ceiling**        | ** ** | **MCF**                | ** ** | ** **       | ** ** |
|----------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|------------------|------------|
| **Time Period** | ** ** | **Oil Price** | ** ** | **Oil Price** | ** ** | **Quantity/ Mo.** | ** ** | **Gas Price** | ** ** | **Gas Price** | ** ** | **Quantity/ Mo.** | ** ** | **Counterparty** | ** ** |
| 4/1/08 - 12/31/08    |       | $                  | 80.00      |               | $          | 117.50                 |       | 11,000             |       | $                  | 7.75       |                   | $          | 11.40            |       | 56,000 |   | UBOC |   |
| 1/1/09 - 12/31/09    |       | $                  | 80.00      |               | $          | 110.90                 |       | 11,000             |       | $                  | 7.75       |                   | $          | 10.60            |       | 50,000 |   | UBOC |   |
| 1/1/10 - 12/31/10    |       | $                  | 80.00      |               | $          | 108.20                 |       | 10,000             |       | $                  | 7.75       |                   | $          | 9.85             |       | 47,000 |   | UBOC |   |
| 1/1/11 - 3/31/11     |       | $                  | 80.00      |               | $          | 107.30                 |       | 10,000             |       | $                  | 7.75       |                   | $          | 11.60            |       | 44,000 |   | UBOC |   |
|                 |       |               |       |               |       |                   |       |               |       |               |       |                   |       |             |       |
| 4/1/08 - 12/31/08    |       | $                  | 85.00      |               | $          | 110.60                 |       | 8,000              |       | $                  | 8.00       |                   | $          | 10.90            |       | 37,000 |   | UBOC |   |
| 1/1/09 - 12/31/09    |       | $                  | 85.00      |               | $          | 104.40                 |       | 7,000              |       | $                  | 8.00       |                   | $          | 10.15            |       | 34,000 |   | UBOC |   |
| 1/1/10 - 12/31/10    |       | $                  | 85.00      |               | $          | 101.50                 |       | 7,000              |       | $                  | 8.00       |                   | $          | 9.40             |       | 31,000 |   | UBOC |   |
| 1/1/11 - 3/31/11     |       | $                  | 85.00      |               | $          | 100.50                 |       | 6,000              |       | $                  | 8.00       |                   | $          | 11.05            |       | 29,000 |   | UBOC |   |

 

**PUTS PURCHASED BY CANO**

 
| **Trade**         | ** ** | **Effective** | ** ** | **Termination** | ** ** | **Notional**           | ** ** | **Strike Price** | ** ** | ** **       | ** **  |
|-------------------|------------|---------------|------------|-----------------|------------|------------------------|------------|-----------------------|------------|------------------|-------------|
| **Date**          | ** ** | **Date**      | ** ** | **Date**        | ** ** | **Quantity/ Mo.** | ** ** | **(PUT)**             | ** ** | **Counterparty** | ** **  |
| ***Crude Oil***   |       |          |       |            |       |                   |       |                  |       |             |        |
| 12/1/2007         |       | 1/1/2008      |       | 12/31/2008      |       | 14,500                 |       | $                     | 55.00      |             | UBOC        |   |
| 5/2/2006          |       | 1/1/2008      |       | 12/31/2008      |       | 2,000                  |       | $                     | 60.00      |             | UBOC        |   |
| 5/2/2006          |       | 1/1/2009      |       | 4/30/2009       |       | 1,800                  |       | $                     | 60.00      |             | UBOC        |   |
| 12/22/2006        |       | 1/1/2009      |       | 12/31/2009      |       | 12,000                 |       | $                     | 55.00      |             | UBOC        |   |
| 6/22/2007         |       | 1/1/2010      |       | 6/30/2010       |       | 11,000                 |       | $                     | 55.00      |             | UBOC        |   |
| 6/22/2007         |       | 7/1/2010      |       | 12/31/2010      |       | 12,000                 |       | $                     | 55.00      |             | F.C.  Stone |   |
|              |       |          |       |            |       |                   |       |                  |       |             |        |
| ***Natural Gas*** |       |          |       |            |       |                   |       |                  |       |             |        |
| 12/1/2007         |       | 1/1/2008      |       | 12/31/2008      |       | 46,500                 |       | $                     | 7.50       |             | UBOC        |   |
| 5/4/2006          |       | 1/1/2008      |       | 12/31/2008      |       | 18,000                 |       | $                     | 7.60       |             | UBOC        |   |
| 5/2/2006          |       | 1/1/2009      |       | 4/30/2009       |       | 17,000                 |       | $                     | 7.60       |             | UBOC        |   |
| 12/22/2006        |       | 1/1/2009      |       | 12/31/2009      |       | 50,000                 |       | $                     | 7.60       |             | UBOC        |   |
| 6/22/2007         |       | 1/1/2010      |       | 6/30/2010       |       | 50,000                 |       | $                     | 7.00       |             | UBOC        |   |
| 12/18/2007        |       | 7/1/2010      |       | 12/31/2010      |       | 63,000                 |       | $                     | 7.50       |             | F.C.  Stone |   |

 

**CEILINGS PURCHASED BY CANO**

***Crude Oil***

 
| **Trade** | ** ** | **Effective** | ** ** | **Termination** | ** ** | **Notional**           | ** ** | **Strike Price** | ** ** | ** **       | ** ** |
|-----------|------------|---------------|------------|-----------------|------------|------------------------|------------|-----------------------|------------|------------------|------------|
| **Date**  | ** ** | **Date**      | ** ** | **Date**        | ** ** | **Quantity/ Mo.** | ** ** | **(Ceiling)**         | ** ** | **Counterparty** | ** ** |
| 9/27/2007 |       | 1/1/2008      |       | 6/30/2008       |       | 14,000                 |       | $                     | 86.00      |             | UBOC       |   |
|           |            |               |            |                 |            |                        |            |                       |            |                  |            |  |

 

----

 

**SCHEDULE 4.21**

 

**MATERIAL AGREEMENTS**

 
| **Description**                                                                                                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                            |
| Certificate of Designations, Preferences and Rights  of Series D Convertible Preferred Stock of Cano Petroleum, Inc.  filed August 31, 2006 with the Delaware Secretary of State.      |
|                                                                                                                                                                                                  |
| Crude  Oil Purchase Contract between Cano Petro of New Mexico Inc and Plains  Marketing L.P. dated January 21, 2008, Contract No. 7405-1001.                                                |
|                                                                                                                                                                                                  |
| Crude  Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock  Transportation dated June 25, 2007.                                                                           |
|                                                                                                                                                                                                  |
| Crude  Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock  Transportation dated February 28, 2008.                                                                       |
|                                                                                                                                                                                                  |
| Gas  Services and/or Purchase Agreement between Myriad Resources Corporation and  Dynegy Midstream Services, L. P. dated July 20, 1999.                                                          |
|                                                                                                                                                                                                  |
| Gas  Purchase Contract between Duke Energy (formerly Phillips 66) and Sohio  Petroleum Company dated February 1, 1974.                                                                           |
|                                                                                                                                                                                                  |
| Amendatory  Agreement between Duke Energy (formerly Phillips 66) and Sohio Petroleum  Company dated August 19, 1986.                                                                             |
|                                                                                                                                                                                                  |
| Gas  Purchase Contract between Myriad Resources Corporation and GPM Gas Corporation  (successor to Phillips 66 Natural Gas Company) dated November 27, 1992.                                     |
|                                                                                                                                                                                                  |
| Amendatory  Agreement for Gas Purchase Contract between Myriad Resources Corporation and  GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated  November June 18, 1993. |
|                                                                                                                                                                                                  |
| Amendatory  Agreement for Gas Purchase Contract between Myriad Resources Corporation and  GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated  January 4, 1994.             |
|                                                                                                                                                                                                  |
| Gas  Purchase Contract between Myriad Resources Corporation and GPM Gas  Corporation dated June 23, 1994.                                                                                        |
|                                                                                                                                                                                                  |
| Gas  Purchase Contract between Myriad Resources and GMPM Gas Corporation dated  March 10, 1999.                                                                                                  |
|                                                                                                                                                                                                  |
| Gas  Purchase Agreement between ONEOK Texas Field Services, L. P and PAMTEX,  Contract No,. 431625 dated October 1, 2004.                                                                        |
|                                                                                                                                                                                                  |
| Gas  Purchase Agreement between Scissortail Energy, Inc. and Ladder Energy  Co. dated September 4, 2004.                                                                                    |
|                                                                                                                                                                                                  |
| Amendment  to Gas Purchase Contract between GPM Gas Corporation and Rio  Petroleum, Inc. dated June 1, 1999.                                                                                |
|                                                                                                                                                                                                  |
| Crude  Oil Purchase Agreement between Sunoco Partners Marketing &  Terminals, LP and Ladder Energy Company dated February 1, 2000.                                                      |
|                                                                                                                                                                                                  |
| Amendment  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &  Terminals, LP and Ladder Energy Company dated December 1, 2004.                                         |
|                                                                                                                                                                                                  |
| Amendment  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &  Terminals, LP and Ladder Energy Company dated June 2, 2005.                                             |

 

1

----

 
| Amendment  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &  Terminals, LP and Ladder Energy Company dated September 2, 2005.                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                              |
| Amendment  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &  Terminals, LP and Ladder Energy Company dated September 26, 2006.                   |
|                                                                                                                                                                              |
| Gas  Purchase and Sales Contract between Arrow Oil & Gas Inc and  STP, Inc. dated August 15, 2002.                                                             |
|                                                                                                                                                                              |
| Gas  Purchase Contract between Union Texas Products Corporation and Gemini Oil  Company dated June 1, 1985.                                                                  |
|                                                                                                                                                                              |
| Gas  Sales & Purchase Agreement between Alliant Energy Desdemona and  Square One Energy dated June 20, 2006.                                                        |
|                                                                                                                                                                              |
| Gas  Sales & Purchase Agreement Amendment between Alliant Energy  Desdemona and Square One Energy dated January 1, 2007.                                            |
|                                                                                                                                                                              |
| Gas  Sales & Purchase Agreement Amendment between Alliant Energy  Desdemona and Square One Energy dated March 20, 2007.                                             |
|                                                                                                                                                                              |
| Gas  Sales & Purchase Agreement Amendment between Alliant Energy  Desdemona and Square One Energy dated November 1, 2007.                                           |
|                                                                                                                                                                              |
| Gas  Purchase Contract between Enbridge G & P (North Texas) L. P. and  Square One Energy, Inc. contract number 5409 dated March 1, 2007.                       |
|                                                                                                                                                                              |
| Crude  Oil Purchase Contract between Plains Marketing, LP (PMLP) and Square One  Energy contract number 7062-1001 dated March 1, 2007.                                       |
|                                                                                                                                                                              |
| Crude  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &  Terminals L.P. and Square One Energy Reference Number 521329 dated  June 1, 2003.      |
|                                                                                                                                                                              |
| Crude  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &  Terminals L.P. and Square One Energy Reference Number 521329 dated  March 1, 2004.     |
|                                                                                                                                                                              |
| Crude  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &  Terminals L.P. and Square One Energy Reference Number 521329 dated  November 1, 2004.  |
|                                                                                                                                                                              |
| Crude  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &  Terminals L.P. and Square One Energy Reference Number 521329 dated  September 1, 2006. |
|                                                                                                                                                                              |
| Crude  Oil Purchase Agreement between Sunoco Partners Marketing & Terminals  L.P. and Square One Energy Reference Number 521329 dated November 1,  2006.            |
|                                                                                                                                                                              |
| Crude  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &  Terminals L.P. and Square One Energy Reference Number 521329 dated  November 1, 2006.  |
|                                                                                                                                                                              |
| Crude Oil Purchase  Agreement Amendment between Sunoco Partners Marketing & Terminals  L.P. and Square One Energy Reference Number 521329 dated April 7, 2004.      |
|                                                                                                                                                                              |
| Gas  Purchase Contract between Duke Energy Field Services and W. O. Operating  dated November 1, 2003.                                                                       |
|                                                                                                                                                                              |
| Gas  Purchase Contract Amendment between Duke Energy Field Services and W. O.  Operating dated September 1, 2005.                                                            |
|                                                                                                                                                                              |
| Gas  Purchase Contract between Duke Energy Field Services and W. O. Operating  dated August 1, 2005.                                                                         |
|                                                                                                                                                                              |
| Crude  Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and W.  O. Operating Company Contract number 01-0838 dated May 1, 2001                         |

 

2

----

 
| Crude  Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and W.  O. Operating Company Contract number 01-0838 dated August 1, 2007 and  Exhibit A.                                                                                                                        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                     |
| Gas  Purchase Agreement between Eagle Rock Field Services, L.P. and W. O.  Operating Company Ltd and Pantwist, LLC dated April 1, 2007.                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                     |
| Gas  Purchase Contract between Hugoton Energy Corporation and GPM Gas Corporation  dated August 3, 1995.                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                     |
| Gas  Purchase Contract between W. O. Operating Company and GPM Corporation dated  March 15, 1994.                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                     |
| Gas  Purchase Agreement between ONEOK Texas Field Services, L. P. and W. O.  Operating Company, LTD dated January 1, 2005.                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                     |
| Gas  Purchase Contract between Phillips Petroleum Company and Skelly Oil Company  dated September 1, 1975.                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                     |
| Crude  Oil Purchase Agreement Amendment 14 between Valero Marketing and Supply  Company and W. O. Operating Company dated December 1, 2007.                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                     |
| Crude  Oil Purchase Agreement Amendment between Blackrock Transportation and Cano  Petro Of New Mexico, Inc. dated February 1, 2008.                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                     |
| Gas Services and/or  Purchase Agreement between Versado Gas Processors, L.L.C. acting through  Dynegy Midstream Services, Limited Partnership, its operator and UHC New  Mexico Corporation, Owner dated June 1, 2000.                                                                              |
|                                                                                                                                                                                                                                                                                                     |
| Amendment to Gas  Services and/or Purchase Agreement between Cano Petroleum, Inc, Owner and  Versado Gas Processors, L.L.C. acting through Targa Midstream Services  Limited Partnership, its operator                                                                                                   |
|                                                                                                                                                                                                                                                                                                     |
| Pipeline Lease  Agreement dated effective June 19, 2007, between Meyer Land and Cattle  Co., Inc., Meyer Farms, Inc. and W.O. Operating Company, Ltd.                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                     |
| Unit Agreement –  Cockrell Ranch Unit – Hutchinson County, Texas, dated January 8, 2007  executed by W.O. Operating Company, Ltd.                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                     |
| Unit Operating  Agreement – Cano Unit dated May 1, 1989.                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                     |
| Unit Agreement for the  Development and Operation for the Cato Unit – Chaves County, New Mexico dated  May 1, 1989.                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                     |
| Credit  Agreement among Cano Petroleum, Inc. as Borrower, The Lenders Party  hereto from time to time, as Lenders, and Union Bank of California, N.A., as  Administrative Agent and as issuing Lender, dated November 29, 2005,  including its Amendments (1-9) and all associated agreements. |

 

3

----

 

**SCHEDULE 5.12**

 

**Required Hedging Contracts**

 

**COSTLESS COLLARS**

 
| ** **           | ** ** | **Floor**          | ** ** | **Ceiling**        | ** ** | **Barrels**            | ** ** | **Floor**          | ** ** | **Ceiling**        | ** ** | **MCF**                | ** ** | ** **       | ** ** |
|----------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|------------------|------------|
| **Time Period** | ** ** | **Oil Price** | ** ** | **Oil Price** | ** ** | **Quantity/ Mo.** | ** ** | **Gas Price** | ** ** | **Gas Price** | ** ** | **Quantity/ Mo.** | ** ** | **Counterparty** | ** ** |
| 4/1/08 - 12/31/08    |       | $                  | 80.00      |               | $          | 117.50                 |       | 11,000             |       | $                  | 7.75       |                   | $          | 11.40            |       | 56,000 |   | UBOC |   |
| 1/1/09 - 12/31/09    |       | $                  | 80.00      |               | $          | 110.90                 |       | 11,000             |       | $                  | 7.75       |                   | $          | 10.60            |       | 50,000 |   | UBOC |   |
| 1/1/10 - 12/31/10    |       | $                  | 80.00      |               | $          | 108.20                 |       | 10,000             |       | $                  | 7.75       |                   | $          | 9.85             |       | 47,000 |   | UBOC |   |
| 1/1/11 - 3/31/11     |       | $                  | 80.00      |               | $          | 107.30                 |       | 10,000             |       | $                  | 7.75       |                   | $          | 11.60            |       | 44,000 |   | UBOC |   |
|                 |       |               |       |               |       |                   |       |               |       |               |       |                   |       |             |       |
| 4/1/08 - 12/31/08    |       | $                  | 85.00      |               | $          | 110.60                 |       | 8,000              |       | $                  | 8.00       |                   | $          | 10.90            |       | 37,000 |   | UBOC |   |
| 1/1/09 - 12/31/09    |       | $                  | 85.00      |               | $          | 104.40                 |       | 7,000              |       | $                  | 8.00       |                   | $          | 10.15            |       | 34,000 |   | UBOC |   |
| 1/1/10 - 12/31/10    |       | $                  | 85.00      |               | $          | 101.50                 |       | 7,000              |       | $                  | 8.00       |                   | $          | 9.40             |       | 31,000 |   | UBOC |   |
| 1/1/11 - 3/31/11     |       | $                  | 85.00      |               | $          | 100.50                 |       | 6,000              |       | $                  | 8.00       |                   | $          | 11.05            |       | 29,000 |   | UBOC |   |

 

----

 

**EXHIBIT A**

 

**FORM OF ASSIGNMENT ANDACCEPTANCE**

 

ThisAssignment and Acceptance (the “Assignment and Acceptance”) is dated asof the Effective Date set forth below and is entered into by and between[the][each](1) Assignor identified in item 1 below ([the][each, an] “Assignor”)and [the][each](2) Assignee identified in item 2 below ([the][each, an] “Assignee”).  [It is understood and agreed that the rightsand obligations of [the Assignors][the Assignees](3) hereunder are severaland not joint.](4)  Capitalized terms used but not defined herein shallhave the meanings given to them in the Credit Agreement identified below (asamended, the “Credit Agreement”), receipt of a copy of which is herebyacknowledged by [the][each] Assignee. The Standard Terms and Conditions set forth in Annex 1 attached heretoare hereby agreed to and incorporated herein by reference and made a part ofthis Assignment and Acceptance as if set forth herein in full.

 

Foran agreed consideration, [the][each] Assignor hereby irrevocably sells andassigns to [the Assignee][the respective Assignees], and [the][each] Assigneehereby irrevocably purchases and assumes from [the Assignor][the respectiveAssignors], subject to and in accordance with the Standard Terms and Conditionsand the Credit Agreement, as of the Effective Date inserted by theAdministrative Agent as contemplated below (i) all of [the Assignor’s][therespective Assignors’] rights and obligations in [its capacity as aLender][their respective capacities as Lenders] under the Credit Agreement andany other documents or instruments delivered pursuant thereto to the extentrelated to the amount and percentage interest identified below of all of suchoutstanding rights and obligations of [the Assignor][the respective Assignors]under the respective facilities identified below (including without limitationany letters of credit, guarantees, and swingline loans included in suchfacilities) and (ii) to the extent permitted to be assigned underapplicable law, all claims, suits, causes of action and any other right of [theAssignor (in its capacity as a Lender)][the respective Assignors (in theirrespective capacities as Lenders)] against any Person, whether known or unknown,arising under or in connection with the Credit Agreement, any other documentsor instruments delivered pursuant thereto or the loan transactions governedthereby or in any way based on or related to any of the foregoing, including,but not limited to, contract claims, tort claims, malpractice claims, statutoryclaims and all other claims at law or in equity related to the rights andobligations sold and assigned pursuant to clause (i) above (the rights andobligations sold and assigned by [the][any] Assignor to [the][any] Assigneepursuant to clauses (i) and (ii) above being referred to hereincollectively as [the][an] “Assigned Interest”).  Each such sale and assignment is withoutrecourse to [the][any] Assignor and, except as expressly provided in thisAssignment and Acceptance, without representation or warranty by [the][any]Assignor.

 

----

(1) For bracketed language here and elsewhere in this formrelating to the Assignor(s), if the assignment is from a single Assignor,choose the first bracketed language.  Ifthe assignment is from multiple Assignors, choose the second bracketedlanguage.

 

(2) For bracketed language here and elsewhere in this formrelating to the Assignee(s), if the assignment is to a single Assignee, choosethe first bracketed language.  If theassignment is to multiple Assignees, choose the second bracketed language.

 

(3) Select as appropriate.

 

(4) Include bracketed language if there are either multipleAssignors or multiple Assignees.

 

1

----

 
| 1.     |   | Assignor[s]:                                                                     |   |                                                                                                                                                                                                                  |   |
|--------|--------|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |   |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
| 2.     |   | Assignee[s]:                                                                     |   |                                                                                                                                                                                                                  |   |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |   |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |   |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
|   |   | [for  each Assignee, indicate [Affiliate][Approved Fund] of [*identify  Lender*] |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
| 3.     |   | Borrower:                                                                        |   | CANO  PETROLEUM, INC., a Delaware corporation                                                                                                                                                                         |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
| 4.     |   | Administrative  Agent:                                                           |   | UNIONBANCAL  EQUITIES, INC., as the administrative agent under the Credit Agreement                                                                                                                                   |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
| 5.     |   | Credit  Agreement:                                                               |   | The  Subordinated Credit Agreement dated as of  March     , 2008 among Borrower, the Lenders party  thereto from time to time, and UnionBanCal Equities, Inc. as  Administrative Agent. |
|   |   |                                                                             |   |                                                                                                                                                                                                                  |
| 6.     |   | Assigned  Interest[s]:                                                           |   |                                                                                                                                                                                                                  |

 
| **Assignor[s]** | ** ** | **Assignee[s]** | ** ** | **Facility  Assigned** | ** ** | **Aggregate Amount  of Commitment  /Advance for all  Lenders** | ** ** | **Amount of  Commitment /   Advances  Assigned(5)** | ** ** | **Percentage Assigned  of Commitment /  Advances(6)** | ** ** | **CUSIP  Number** | ** ** |
|-----------------|------------|-----------------|------------|------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------|------------|
|            |       |            |       |                   |       | $                                                                                  |       | $                                                                  |       |                                                                 | %          |              |       |
|            |       |            |       |                   |       | $                                                                                  |       | $                                                                  |       |                                                                 | %          |              |       |
|            |       |            |       |                   |       | $                                                                                  |       | $                                                                  |       |                                                                 | %          |              |       |

 

7.             Trade Date:                                          (7)

 

EffectiveDate:                                  , 20      [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATEOF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

 

----

(5) Amount to be adjusted by the counterparties to take intoaccount any payments or prepayments made between the Trade Date and the EffectiveDate.

 

(6) Set forth, to at least 9 decimals, as a percentage of theCommitment / Advances of all Lenders thereunder.

 

 

(7) To be completed if the Assignor(s) and the Assignee(s) intendthat the minimum assignment amount is to be determined as of the Trade Date.

 

2

----

 

The terms set forth in thisAssignment and Acceptance are hereby agreed to:

 
|   | ASSIGNOR[S](8)      |
|--------|---------------------|
|   | [NAME OF ASSIGNOR]  |
|   |                |
|   | By:                 |   |
|   | Name:               |   |
|   | Title:              |   |
|   |                |   |
|   | [NAME OF ASSIGNOR]  |
|   |                |
|   |                |
|   | By:                 |   |
|   | Name:               |   |
|   | Title:              |   |
|   |                |
|   | ASSIGNEE[S]         |
|   | [NAME  OF ASSIGNEE] |
|   |                |
|   |                |
|   | By:                 |   |
|   | Name:               |   |
|   | Title:              |   |
|   |                |
|   | [NAME  OF ASSIGNEE] |
|   |                |
|   |                |
|   | By:                 |   |
|   | Name:               |   |
|   | Title:              |   |
|        |                     |  |  |  |  |  |  |  |

 

[Consentedto and](9) Accepted:

 
| UNIONBANCAL  EQUITIES, INC., as               |   |
|-----------------------------------------------|--------|
|     Administrative  Agent |   |
|                                          |   |
| By:                                           |   |   |
| Name:                                         |   |   |
| Title:                                        |   |   |
|                                               |        |  |  |  |

 

 

----

(8) Add additionalsignature blocks as needed.

 

(9) Tobe added only if the consent of the Administrative Agent is required by theterms of the Credit Agreement.

 

3

----

 

[Consentedto:](10)

 
| CANO  PETROLEUM, INC., a Delaware corporation |   |
|-----------------------------------------------|--------|
|                                          |   |
| By:                                           |   |   |
| Name:                                         |   |   |
| Title:                                        |   |   |
|                                               |        |  |  |  |

 

----

(10) To be added only if the consent of the Borrower is requiredby the terms of the Credit Agreement.

 

4

----

 

Annex 1

To Exhibit A – Assignment and Acceptance

 

**STANDARD TERMS AND CONDITIONS FOR**

**ASSIGNMENT AND ACCEPTANCE**

 

1.  Representations and Warranties.

 

1.1Assignor[s].  [The][Each] Assignor(a) represents and warrants that (i) it is the legal and beneficialowner of [the][the relevant] Assigned Interest, (ii) [the][such] AssignedInterest is free and clear of any lien, encumbrance or other adverse claim and (iii) ithas full power and authority, and has taken all action necessary, to executeand deliver this Assignment and Acceptance and to consummate the transactionscontemplated hereby; and (b) assumes no responsibility with respect to (i) anystatements, warranties or representations made in or in connection with theCredit Agreement or any other Loan Document, (ii) the execution, legality,validity, enforceability, genuineness, sufficiency or value of the LoanDocuments or any collateral thereunder, (iii) the financial condition ofthe Borrower, any of its Subsidiaries or Affiliates or any other Personobligated in respect of any Loan Document or (iv) the performance orobservance by the Borrower, any of its Subsidiaries or Affiliates or any otherPerson of any of their respective obligations under any Loan Document.

 

1.2.Assignee[s].  [The][Each] Assignee(a) represents and warrants that (i) it has full power and authority,and has taken all action necessary, to execute and deliver this Assignment andAcceptance and to consummate the transactions contemplated hereby and to becomea Lender under the Credit Agreement, (ii) it meets all the requirements tobe an Eligible Assignee under Section 9.06 of the Credit Agreement(subject to such consents, if any, as may be required under Section 9.06of the Credit Agreement), (iii) from and after the Effective Date, itshall be bound by the provisions of the Credit Agreement as a Lender thereunderand, to the extent of [the][the relevant] Assigned Interest, shall have theobligations of a Lender thereunder, (iv) it is sophisticated with respectto decisions to acquire assets of the type represented by the Assigned Interestand either it, or the person exercising discretion in making its decision toacquire the Assigned Interest, is experienced in acquiring assets of such type,(v) it has received a copy of the Credit Agreement, and has received orhas been accorded the opportunity to receive copies of the most recentfinancial statements delivered pursuant to Section 3.01(c) thereof,as applicable, and such other documents and information as it deems appropriateto make its own credit analysis and decision to enter into this Assignment andAcceptance and to purchase [the][such] Assigned Interest, (vi) it has,independently and without reliance upon the Administrative Agent or any otherLender and based on such documents and information as it has deemed appropriate,made its own credit analysis and decision to enter into this Assignment andAcceptance and to purchase [the][such] Assigned Interest, and (vii) if itis a Person that is organized under the laws of a jurisdiction other than thatin which the Borrower is resident for tax purposes, attached to the Assignmentand Acceptance is any documentation required to be delivered by it pursuant tothe terms of the Credit Agreement, duly completed and executed by [the][such]Assignee; and (b) agrees that (i) it will, independently and withoutreliance on the Administrative Agent, [the][any] Assignor or any other Lender,and based on such documents and information as it shall deem appropriate at thetime, continue to make its own credit decisions in taking or not taking action 

 

1

----

 

underthe Loan Documents, and (ii) it will perform in accordance with theirterms all of the obligations which by the terms of the Loan Documents arerequired to be performed by it as a Lender.

 

2.  Payments.  From and after the Effective Date, theAdministrative Agent shall make all payments in respect of [the][each] AssignedInterest (including payments of principal, interest, fees and other amounts) to[the][the relevant] Assignee whether such amounts have accrued prior to, on orafter the Effective Date.  TheAssignor[s] and the Assignee[s] shall make all appropriate adjustments inpayments by the Administrative Agent for periods prior to the Effective Date orwith respect to the making of this assignment directly between themselves.

 

3.  General Provisions.  This Assignment and Acceptance shall bebinding upon, and inure to the benefit of, the parties hereto and theirrespective successors and assigns.  ThisAssignment and Acceptance may be executed in any number of counterparts, whichtogether shall constitute one instrument. Delivery of an executed counterpart of a signature page of thisAssignment and Acceptance by telecopy shall be effective as delivery of amanually executed counterpart of this Assignment and Acceptance.  This Assignment and Acceptance shall begoverned by, and construed in accordance with, the law of the State of Texas.

 

2

----

 

**EXHIBIT B**

** **

**FORM OF COMPLIANCECERTIFICATEFOR THE PERIOD FROM              ,200     TO                ,200**

** **

This certificate dated as of                            ,           is preparedpursuant to the Subordinated Credit Agreement dated as of March     ,2008 (as amended, supplemented or otherwise modified from time to time, the “CreditAgreement”) among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),the lenders party thereto (the “Lenders”), and UNIONBANCAL EQUITIES, INC. asadministrative agent for such Lenders (in such capacity, the “AdministrativeAgent”).  Unless otherwise defined inthis certificate, capitalized terms that are defined in the Credit Agreementshall have the meanings assigned to them by the Credit Agreement.

 

The undersigned herebycertifies that:

 

(a)                                  all of therepresentations and warranties made by the Borrower in the Credit Agreement andthe other Loan Documents are true and correct in all material respects as ifmade on this date, except to the extent that any such representation orwarranty expressly relates solely to an earlier date, in which case it shallhave been true and correct in all material respects as of such earlier date;

 

[(b)                             that no Defaultor Event of Default has occurred and is continuing; and]

 

[(b)                             the followingDefault[s] or Event[s] of Default exist as of the date hereof or have occurredsince the date of the Borrower’s previous certification to the AdministrativeAgent, if any, and the actions set forth below have been or are being taken toremedy such circumstances:

 

                                                                        ;and]

 

(c) that as of the lastday of the previous quarter the following statements, amounts, and calculationswere true and correct:

 

**I.****                                        ****Current Ratio—Section 6.17****.**

 
| (a)           consolidated current assets(11)      | $      |   |   |
|------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                 |   |   |   |
| (b)           consolidated current liabilities(12) | $      |   |   |

 

----

(11)“current assets” shall include the aggregate Unused Commitment Amounts (asdefined in the Senior Credit Agreement), but shall exclude (A) any cashdeposited with or at the request of a counterparty to any Hedge Contract or anyother similar hedge arrangement and (B) any assets representing avaluation account arising from the application of SFAS 133 and 143.

 

(12)“current liabilities” shall exclude, as of the date of calculation, the currentportion of long-term Debt existing under the Senior Credit Agreement, thecurrent portion of long-term Debt existing under the Credit Agreement and anyliabilities representing a valuation account arising from the application ofSFAS 133 and 143.

 

1

----

 
| Current Ratio = (a) to (b) = |       |                                                                              |
|----------------------------------------|------------|-----------------------------------------------------------------------------------|
|                                   |       |                                                                              |
| Minimum Current Ratio not less than:   |       | 1.00 to 1.00                                                                      |
|                                   |       |                                                                              |
| **COMPLIANCE?**                        | ** ** | **YES            NO** | **NO** |   |

 

**II.****                                    ****Leverage Ratio—Section 6.18.**

 
| (a)           consolidated Debt(13)                                                             |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                              |   |   |
| (b)           consolidated  EBITDA(14) =                                                        |   |   |
|                                                                                                                                              |   |   |
| (i) + [(ii) + (iii) + (iv)](15) –  (v) =                                                                                 | $      |   |
|                                                                                                                                              |   |   |
| (i)            Consolidated Net  Income                                                    | $      |   |
|                                                                                                                                              |   |   |
| (ii)           consolidated Interest  Expense                                                   | $      |   |
|                                                                                                                                              |   |   |
| (iii)          taxes                                                                                 | $      |   |
|                                                                                                                                              |   |   |
| (iv)          depreciation,  amortization, depletion & other non-cash items(16)             | $      |   |
|                                                                                                                                              |   |   |
| (v)           all  non-cash items of income included in determining Consolidated Net Income(17) | $      |   |

 
| Leverage Ratio = (a) to (b) = |       |                                                                              |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------|
|                                    |       |                                                                              |
| Maximum Leverage Ratio:                 |       | [5.50 to 1.00] [5.00 to 1.00](18)                                                 |
|                                    |       |                                                                              |
| **COMPLIANCE?**                         | ** ** | **YES            NO** | ** ** |   |

 

----

(13)“consolidated Debt” shall not include Debt outstanding under preferred EquityInterests issued in compliance with Section 6.22 of the Credit Agreement.

 

(14)EBITDA shall be measured for the four fiscal quarter period then ended.

 

(15)  Items (ii) – (iv) shall be includedto the extent deducted in determining Consolidated Net Income.

 

(16)Other non-cash items should include any provisions for the reduction in thecarrying value of assets recorded in accordance with GAAP and includingnon-cash charges resulting from the requirements of SFAS 133 or 143.

 

(17)Non-cash items of income should include any items resulting from therequirements of SFAS 133 or 143.

 

(18)  Use(i) 5.50 to 1.00 for each fiscal quarter ending prior to June 30,2008 and (ii) 5.00 to 1.00 for each fiscal quarter ending on or afterJune 30, 2008.

 

2

----

 

**III.****                                ****Interest Coverage Ratio—Section 6.19.**

 
| (a)           consolidated EBITDA = *See II(b) above* = | $      |                                                 |
|----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|
|                                                                                                           |   |                                                 |
| (b)           consolidated Interest Expense =                | $      |                                                 |
|                                                                                                           |   |                                                 |
| Interest  Coverage Ratio = (a) to (b) =                                                              |   |                                                 |
|                                                                                                           |   |                                                 |
| Minimum  Interest Coverage Ratio =                                                                             |   | 1.50  to 1.00                                        |
|                                                                                                           |   |                                                 |
| **COMPLIANCE?**                                                                                                |   | **YES        NO** |

 

**IV.****                               ****Minimum Asset Coverage Ratio - Section 6.22.**

 
| (a)           PDP NPV *=*                                                                                                  | $          |                                                 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|
|                                                                                                                                                                         |       |                                                 |
| (b)           PDNP NPV *=*                                                                                                 | $          |                                                 |
|                                                                                                                                                                         |       |                                                 |
| (c)           PUD NPV =                                                                                                    | $          |                                                 |
|                                                                                                                                                                         |       |                                                 |
| (d)           = (a) divided by  sum of (a) plus (b) plus (c)                                                | %          |                                                 |
|                                                                                                                                                                         |       |                                                 |
| (e)           = (a) divided by  .60                                                                                   | $          |                                                 |
|                                                                                                                                                                         |       |                                                 |
| (f)            = (a) plus  (b) plus (c)                                                                     | $          |                                                 |
|                                                                                                                                                                         |       |                                                 |
| **(g)           Total Present Value = either (f), or if (d) is less  than 60%, then Total Present Value equals (e)=** | **$**      | ** **                                           |
| ** **                                                                                                                                                                   | ** ** | ** **                                           |
| **(h)           consolidated Debt = *see II(a) above =***                                                             | **$**      | ** **                                           |
| ** **                                                                                                                                                                   | ** ** | ** **                                           |
| Minimum  Reserve Ratio = (g) to (h)                                                                                                                                     | ** ** | ** **                                           |
|                                                                                                                                                                         | ** ** | ** **                                           |
| Minimum  Interest Coverage Ratio:                                                                                                                                            | ** ** | 1.50  to 1.00                                        |
|                                                                                                                                                                         | ** ** | ** **                                           |
| **COMPLIANCE?**                                                                                                                                                              | ** ** | **YES        NO** |

 

IN WITNESS THEREOF, I havehereto signed my name to this Compliance Certificate as of                                  ,20        .

 

 

3

----

 
|   | CANO PETROLEUM, INC., a Delaware |
|--------|----------------------------------|
|   | corporation                      |
|   |                             |
|   |                             |
|   | By:                              |   |
|   |                             |
|   | Name:                            |   |
|   |                             |
|   | Title:                           |   |
|        |                                  |  |  |  |

 

4

----

** **

**EXHIBIT C**

 

**FORM OF GUARANTYAGREEMENT**

** **

This Subordinated GuarantyAgreement dated as of March         ,2008 (this “Guaranty”) is executed by each of the undersigned(individually a “Guarantor” and collectively, the “Guarantors”),in favor of UnionBanCal Equities, Inc., as Administrative Agent for theratable benefit of itself, the Lenders (as defined below) (together with theAdministrative Agent and the Lenders, individually a “Beneficiary”, andcollectively, the “Beneficiaries”).

 

**INTRODUCTION**

** **

                A.            ThisGuaranty is given in connection with that certain Subordinated Credit Agreementdated as of March         , 2008(as it has been or may be amended, supplemented, restated or otherwise modifiedfrom time to time, the “Credit Agreement”), among Cano Petroleum, Inc.,a Delaware corporation (the “Borrower”), the lenders party thereto fromtime to time (individually a “Lender” and collectively, the “Lenders”),and UnionBanCal Equities, Inc. as administrative agent (“AdministrativeAgent”) for such Lenders.

 

B.            Each Guarantor is a Subsidiary of the Borrower and willderive substantial direct and indirect benefit from the transactionscontemplated by the Credit Agreement and the other Loan Documents (as definedin the Credit Agreement).

 

C.            Each Guarantor is executing and delivering this Guaranty (i) toinduce the Lenders to provide the Advances and the other considerations underthe Credit Agreement, and (ii) intending it to be a legal, valid, binding,enforceable and continuing obligation of such Guarantor, whether or not suchGuarantor derives any benefit from the Credit Agreement or from any other LoanDocument.

 

NOW, THEREFORE, inconsideration of the premises, each Guarantor hereby agrees as follows:

 

**ARTICLE I.                   DEFINITIONS.  ALL CAPITALIZED TERMS NOT OTHERWISE DEFINEDIN THIS GUARANTY THAT ARE DEFINED IN THE CREDIT AGREEMENT SHALL HAVE THEMEANINGS ASSIGNED TO SUCH TERMS BY THE CREDIT AGREEMENT.**

** **

**ARTICLE II.                 GUARANTY.**

** **

Section 2.01.          Each Guarantor hereby absolutely,unconditionally and irrevocably guarantees the punctual payment andperformance, when due, whether at stated maturity, by acceleration orotherwise, of all Obligations, whether absolute or contingent and whether forprincipal, interest (including, without limitation, interest that but for theexistence of a bankruptcy, reorganization or similar proceeding would accrue),fees, amounts required to be provided as collateral, indemnities, expenses orotherwise (collectively, the “Guaranteed Obligations”). Without limitingthe generality of the foregoing, each Guarantor’s liability shall extend to allamounts that constitute part of the Guaranteed Obligations and would be owed bythe Borrower to the Administrative Agent or any Lender under the Loan Documentsand by the 

 

1

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Borrower or any of itsSubsidiaries but for the fact that they are unenforceable or not allowable dueto insolvency or the existence of a bankruptcy, reorganization or similarproceeding involving the Borrower or such other Subsidiary.

 

Section 2.02.          It is the intention of the Guarantorsand each Beneficiary that the amount of the Guaranteed Obligations guaranteedby each Guarantor shall be in, but not in excess of, the maximum amountpermitted by fraudulent conveyance, fraudulent transfer or similar LegalRequirements applicable to such Guarantor. Accordingly, notwithstandinganything to the contrary contained in this Guaranty or in any other agreementor instrument executed in connection with the payment of any of the GuaranteedObligations, the amount of the Guaranteed Obligations guaranteed by a Guarantorunder this Guaranty shall be limited to an aggregate amount equal to thelargest amount that would not render such Guarantor’s obligations hereundersubject to avoidance under Section 548 of the United States BankruptcyCode or any comparable provision of any other applicable law.

 

**ARTICLE III.                GUARANTYABSOLUTE.  EACH GUARANTOR GUARANTEESTHAT THE GUARANTEED OBLIGATIONS WILL BE PAID STRICTLY IN ACCORDANCE WITH THETERMS OF THE LOAN DOCUMENTS, REGARDLESS OF ANY LAW, REGULATION OR ORDER NOW ORHEREAFTER IN EFFECT IN ANY JURISDICTION AFFECTING ANY OF SUCH TERMS OR THERIGHTS OF THE ADMINISTRATIVE AGENT OR ANY LENDER WITH RESPECT THERETO BUTSUBJECT TO SECTION 2(B) ABOVE. THE OBLIGATIONS OF EACH GUARANTOR UNDER THIS GUARANTY ARE INDEPENDENT OFTHE GUARANTEED OBLIGATIONS OR ANY OTHER OBLIGATIONS OF ANY OTHER PERSON UNDERTHE LOAN DOCUMENTS, AND A SEPARATE ACTION OR ACTIONS MAY BE BROUGHT ANDPROSECUTED AGAINST ANY GUARANTOR TO ENFORCE THIS GUARANTY, IRRESPECTIVE OFWHETHER ANY ACTION IS BROUGHT AGAINST THE BORROWER, ANY OTHER GUARANTOR OR ANYOTHER PERSON OR WHETHER THE BORROWER, ANY OTHER GUARANTOR OR ANY OTHER PERSONIS JOINED IN ANY SUCH ACTION OR ACTIONS. THE LIABILITY OF EACH GUARANTOR UNDERTHIS GUARANTY SHALL BE IRREVOCABLE, ABSOLUTE AND UNCONDITIONAL IRRESPECTIVE OF,AND EACH GUARANTOR HEREBY IRREVOCABLY WAIVES ANY DEFENSES IT MAY NOW ORHEREAFTER HAVE IN ANY WAY RELATING TO, ANY OR ALL OF THE FOLLOWING:**

** **

Section 3.01.          any lack of validity or enforceabilityof any Loan Document or any agreement or instrument relating thereto or anypart of the Guaranteed Obligations being irrecoverable;

 

Section 3.02.          any change in the time, manner orplace of payment of, or in any other term of, all or any of the GuaranteedObligations or any other obligations of any Person under the Loan Documents, orany other amendment or waiver of or any consent to departure from any LoanDocument, including, without limitation, any increase in the Guaranteed Obligationsresulting from the extension of additional credit to the Borrower or otherwise;

 

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Section 3.03.          any taking, exchange, release ornon-perfection of any collateral, or any taking, release or amendment or waiverof or consent to departure from any other guaranty, for all or any of theGuaranteed Obligations;

 

Section 3.04.          any manner of application ofcollateral, or proceeds thereof, to all or any of the Guaranteed Obligations,or any manner of sale or other disposition of any collateral for all or any ofthe Guaranteed Obligations or any other obligations of any other Person underthe Loan Documents or any other assets of the Borrower or any of itsSubsidiaries;

 

Section 3.05.          any change, restructuring or terminationof the corporate structure or existence of the Borrower or any of itsSubsidiaries;

 

Section 3.06.          any failure of any Beneficiary todisclose to the Borrower or any Guarantor any information relating to thebusiness, condition (financial or otherwise), operations, properties orprospects of any Person now or in the future known to any Beneficiary (and eachGuarantor hereby irrevocably waives any duty on the part of any Beneficiary todisclose such information);

 

Section 3.07.          any signature of any officer of theBorrower or any other Person being mechanically reproduced in facsimile orotherwise; or

 

Section 3.08.          any other circumstance or anyexistence of or reliance on any representation by any Beneficiary that mightotherwise constitute a defense available to, or a discharge of, the Borrower,any Guarantor or any other guarantor, surety or other Person.

 

**ARTICLEIV.               **CONTINUATION ANDREINSTATEMENT, ETC.  EACH GUARANTORAGREES THAT, TO THE EXTENT THAT PAYMENTS OF ANY OF THE GUARANTEED OBLIGATIONSARE MADE, OR ANY LENDER OR THE ADMINISTRATIVE AGENT RECEIVES ANY PROCEEDS OFCOLLATERAL, AND SUCH PAYMENTS OR PROCEEDS OR ANY PART THEREOF ARESUBSEQUENTLY INVALIDATED, DECLARED TO BE FRAUDULENT OR PREFERENTIAL, SET ASIDE,OR OTHERWISE REQUIRED TO BE REPAID, THEN TO THE EXTENT OF SUCH REPAYMENT THEGUARANTEED OBLIGATIONS SHALL BE REINSTATED AND CONTINUED IN FULL FORCE ANDEFFECT AS OF THE DATE SUCH INITIAL PAYMENT OR COLLECTION OF PROCEEDSOCCURRED.  EACH GUARANTOR SHALL DEFEND AND INDEMNIFY EACH BENEFICIARY FROM ANDAGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 4(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCHACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSEARISING AS A RESULT OF THE INDEMNIFIED BENEFICIARY’S OWN NEGLIGENCE BUTEXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUNDIN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TOHAVE RESULTED FROM SUCH INDEMNIFIED BENEFICIARY’S GROSS NEGLIGENCE OR WILLFULMISCONDUCT.

 

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**ARTICLE V.                 WAIVERS AND ACKNOWLEDGMENTS.**

** **

Section 5.01.          Each Guarantor hereby waivespromptness, diligence, presentment, notice of acceptance and any other noticewith respect to any of the Guaranteed Obligations and this Guaranty and anyrequirement that any Beneficiary protect, secure, perfect or insure any Lien orany Property or exhaust any right or take any action against the Borrower orany other Person or any collateral.

 

Section 5.02.          Each Guarantor hereby irrevocablywaives any right to revoke this Guaranty, and acknowledges that this Guarantyis continuing in nature and applies to all Guaranteed Obligations, whetherexisting now or in the future.

 

Section 5.03.          Each Guarantor acknowledges that itwill receive substantial direct and indirect benefits from the financingarrangements involving the Borrower and its Subsidiaries contemplated by theLoan Documents and that the waivers set forth in this Guaranty are knowinglymade in contemplation of such benefits.

 

**ARTICLE VI.                SUBROGATION.NO GUARANTOR WILL EXERCISE ANY RIGHTS THAT IT MAY NOW HAVE OR HEREAFTERACQUIRE AGAINST THE BORROWER OR ANY OTHER PERSON TO THE EXTENT THAT SUCH RIGHTSARISE FROM THE EXISTENCE, PAYMENT, PERFORMANCE OR ENFORCEMENT OF SUCHGUARANTOR’S OBLIGATIONS UNDER THIS GUARANTY OR ANY OTHER LOAN DOCUMENT,INCLUDING, WITHOUT LIMITATION, ANY RIGHT OF SUBROGATION, REIMBURSEMENT,EXONERATION, CONTRIBUTION OR INDEMNIFICATION AND ANY RIGHT TO PARTICIPATE INANY CLAIM OR REMEDY OF ANY BENEFICIARY AGAINST THE BORROWER OR ANY OTHERPERSON, WHETHER OR NOT SUCH CLAIM, REMEDY OR RIGHT ARISES IN EQUITY OR UNDERCONTRACT, STATUTE OR COMMON LAW, INCLUDING, WITHOUT LIMITATION, THE RIGHT TOTAKE OR RECEIVE FROM THE BORROWER OR ANY OTHER PERSON, DIRECTLY OR INDIRECTLY,IN CASH OR OTHER PROPERTY OR BY SET-OFF OR IN ANY OTHER MANNER, PAYMENT ORSECURITY ON ACCOUNT OF SUCH CLAIM, REMEDY OR RIGHT, UNLESS AND UNTIL ALL OF THEGUARANTEED OBLIGATIONS AND ANY AND ALL OTHER AMOUNTS PAYABLE BY THE GUARANTORSUNDER THIS GUARANTY SHALL HAVE BEEN PAID IN FULL IN CASH, ALL COMMITMENTS SHALLHAVE EXPIRED OR TERMINATED, AND THE CREDIT AGREEMENT HAS BEEN TERMINATED INWRITING.  IF ANY AMOUNT SHALL BE PAID TOA GUARANTOR IN VIOLATION OF THE PRECEDING SENTENCE AT ANY TIME PRIOR TO (A) THEPAYMENT IN FULL IN CASH OF THE GUARANTEED OBLIGATIONS AND ANY AND ALL OTHERAMOUNTS PAYABLE BY THE GUARANTORS UNDER THIS GUARANTY, AND (B) THETERMINATION OF THE COMMITMENTS, SUCH AMOUNT SHALL BE HELD IN TRUST FOR THEBENEFIT OF THE BENEFICIARIES AND SHALL FORTHWITH BE PAID TO THE ADMINISTRATIVEAGENT TO BE CREDITED AND APPLIED TO THE GUARANTEED OBLIGATIONS AND ANY AND ALLOTHER AMOUNTS PAYABLE BY THE GUARANTORS UNDER THIS GUARANTY, WHETHER MATURED OR**

 

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**UNMATURED,IN ACCORDANCE WITH THE TERMS OF THE LOAN DOCUMENTS.**

** **

**ARTICLE VII.              REPRESENTATIONSAND WARRANTIES.  EACH GUARANTORHEREBY REPRESENTS AND WARRANTS AS FOLLOWS:**

** **

Section 7.01.          There are no conditions precedent tothe effectiveness of this Guaranty.  SuchGuarantor benefits from executing this Guaranty.

 

Section 7.02.          Such Guarantor has, independently andwithout reliance upon the Administrative Agent or any Lender and based on suchdocuments and information as it has deemed appropriate, made its own creditanalysis and decision to enter into this Guaranty, and such Guarantor hasestablished adequate means of obtaining from the Borrower and each otherrelevant Person on a continuing basis information pertaining to, and is now andon a continuing basis will be completely familiar with, the business, condition(financial and otherwise), operations, properties and prospects of the Borrowerand each other relevant Person.

 

Section 7.03.          The obligations of such Guarantorunder this Guaranty are the valid, binding and legally enforceable obligationsof such Guarantor, and the execution and delivery of this Guaranty by suchGuarantor has been duly and validly authorized in all respects by such Guarantor,and the Person who is executing and delivering this Guaranty on behalf of suchGuarantor has full power, authority and legal right to so do, and to observeand perform all of the terms and conditions of this Guaranty on such Guarantor’spart to be observed or performed.

 

**ARTICLE VIII.             RIGHTOF SET-OFF.  UPON THE OCCURRENCE ANDDURING THE CONTINUANCE OF ANY EVENT OF DEFAULT, ANY BENEFICIARY IS HEREBYAUTHORIZED AT ANY TIME, TO THE FULLEST EXTENT PERMITTED BY LAW, TO SET OFF ANDAPPLY ANY DEPOSITS (GENERAL OR SPECIAL, TIME OR DEMAND, PROVISIONAL OR FINAL)AND OTHER INDEBTEDNESS OWING BY SUCH BENEFICIARY TO THE ACCOUNT OF EACHGUARANTOR AGAINST ANY AND ALL OF THE OBLIGATIONS OF THE GUARANTORS UNDER THISGUARANTY, IRRESPECTIVE OF WHETHER OR NOT SUCH BENEFICIARY SHALL HAVE MADE ANYDEMAND UNDER THIS GUARANTY AND ALTHOUGH SUCH OBLIGATIONS MAY BE CONTINGENTAND UNMATURED.  SUCH BENEFICIARY SHALLPROMPTLY NOTIFY THE AFFECTED GUARANTOR AFTER ANY SUCH SET-OFF AND APPLICATIONIS MADE, PROVIDED THAT THE FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT THEVALIDITY OF SUCH SET-OFF AND APPLICATION. THE RIGHTS OF THE BENEFICIARIES UNDER THIS SECTION 8 ARE INADDITION TO OTHER RIGHTS AND REMEDIES (INCLUDING, WITHOUT LIMITATION, OTHERRIGHTS OF SET-OFF) WHICH ANY BENEFICIARY MAY HAVE.**

** **

**ARTICLE IX.                AMENDMENTS,ETC.  NO AMENDMENT OR WAIVER OF ANYPROVISION OF THIS GUARANTY AND NO CONSENT TO ANY DEPARTURE BY ANY GUARANTORTHEREFROM SHALL IN ANY EVENT BE EFFECTIVE UNLESS THE SAME SHALL BE IN WRITINGAND SIGNED BY THE AFFECTED**

 

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**GUARANTOR,THE ADMINISTRATIVE AGENT AND THE REQUIRED LENDERS, AND THEN SUCH WAIVER ORCONSENT SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND FOR THE SPECIFICPURPOSE FOR WHICH GIVEN; PROVIDED THAT NO AMENDMENT, WAIVER OR CONSENTSHALL, UNLESS IN WRITING AND SIGNED BY ALL OF THE LENDERS, (A) OTHER THANTO THE EXTENT EXPRESSLY PROVIDED IN SUCH AMENDMENT, WAIVER OR CONSENT, LIMITTHE LIABILITY OF ANY GUARANTOR HEREUNDER (IT BEING UNDERSTOOD THAT WAIVERS ANDAMENDMENTS PERMITTED TO BE MADE UNDER THE CREDIT AGREEMENT BY THE REQUIREDLENDERS WITH RESPECT TO ANY OF THE UNDERLYING OBLIGATIONS GUARANTEED HEREUNDERSHALL NOT BE DEEMED TO LIMIT THE LIABILITY OF ANY GUARANTOR WITHIN THE MEANINGOF THIS CLAUSE (A)), (B) POSTPONE ANY DATE FIXED FOR PAYMENT HEREUNDER INRESPECT OF ANY OF THE GUARANTEED OBLIGATIONS THAT IS PRINCIPAL OF, OR INTERESTON, THE NOTES OR ANY FEES, OR (C) CHANGE THE PERCENTAGE OF THE COMMITMENTSOR OF THE AGGREGATE UNPAID PRINCIPAL AMOUNT OF THE NOTES REQUIRED TO TAKE ANYACTION HEREUNDER.**

** **

**ARTICLE X.                 NOTICES,ETC.  ALL NOTICES AND OTHERCOMMUNICATIONS PROVIDED FOR HEREUNDER SHALL BE SENT IN THE MANNER PROVIDED FORIN SECTION 9.02 OF THE CREDIT AGREEMENT AND IF TO A GUARANTOR, AT ITSADDRESS SPECIFIED ON THE SIGNATURE PAGE HERETO AND IF TO THE ADMINISTRATIVEAGENT OR ANY LENDER, AT ITS ADDRESS SPECIFIED IN OR PURSUANT TO THE CREDITAGREEMENT.  ALL SUCH NOTICES ANDCOMMUNICATIONS SHALL BE EFFECTIVE WHEN DELIVERED, EXCEPT THAT NOTICES AND COMMUNICATIONSTO THE ADMINISTRATIVE AGENT SHALL NOT BE EFFECTIVE UNTIL RECEIVED BY THEADMINISTRATIVE AGENT.**

** **

**ARTICLE XI.                NOWAIVER: REMEDIES.  NO FAILURE ON THE PART OFANY BENEFICIARY TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT HEREUNDERSHALL OPERATE AS A WAIVER THEREOF; NOR SHALL ANY SINGLE OR PARTIAL EXERCISE OFANY RIGHT HEREUNDER PRECLUDE ANY OTHER OR FURTHER EXERCISE THEREOF OR THEEXERCISE OF ANY OTHER RIGHT. THE REMEDIES HEREIN PROVIDED ARE CUMULATIVE ANDNOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY LAW.**

** **

**ARTICLE XII.              CONTINUINGGUARANTY: ASSIGNMENTS UNDER THE CREDIT AGREEMENT.  THIS GUARANTY IS A CONTINUING GUARANTY ANDSHALL (A) REMAIN IN FULL FORCE AND EFFECT UNTIL THE PAYMENT IN FULL OF ALLGUARANTEED OBLIGATIONS AND ALL OTHER AMOUNTS PAYABLE UNDER THE LOAN DOCUMENTSAND THE TERMINATION OF ALL THE COMMITMENTS, (B) BE BINDING UPON EACHGUARANTOR AND ITS SUCCESSORS AND ASSIGNS, AND (C) INURE TO THE BENEFIT OFAND BE ENFORCEABLE BY THE ADMINISTRATIVE AGENT AND EACH LENDER, AND, IN THECASE OF TRANSFERS AND ASSIGNMENTS MADE IN ACCORDANCE WITH THE CREDIT AGREEMENT,TRANSFEREES AND ASSIGNS.  WITHOUTLIMITING**

 

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**THEGENERALITY OF THE FOREGOING CLAUSE (C), SUBJECT TO SECTION 9.06 OF THECREDIT AGREEMENT, ANY LENDER MAY ASSIGN OR OTHERWISE TRANSFER ALL OR ANYPORTION OF ITS RIGHTS AND OBLIGATIONS UNDER THE CREDIT AGREEMENT (INCLUDING,WITHOUT LIMITATION, ALL OR ANY PORTION OF ITS COMMITMENT, THE ADVANCES OWING TOIT AND THE NOTE OR NOTES HELD BY IT) TO ANY OTHER PERSON, AND SUCH OTHER PERSONSHALL THEREUPON BECOME VESTED WITH ALL THE BENEFITS IN RESPECT THEREOF GRANTEDTO SUCH LENDER HEREIN OR OTHERWISE, SUBJECT, HOWEVER, IN ALL RESPECTS TO THEPROVISIONS OF THE CREDIT AGREEMENT.  EACHGUARANTOR ACKNOWLEDGES THAT UPON ANY PERSON BECOMING A LENDER, THEADMINISTRATIVE AGENT IN ACCORDANCE WITH THE CREDIT AGREEMENT, SUCH PERSON SHALLBE ENTITLED TO THE BENEFITS HEREOF.**

** **

**ARTICLE XIII.             GOVERNINGLAW.  THIS GUARANTY SHALL BE GOVERNEDBY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OFTEXAS.  EACH GUARANTOR HEREBY IRREVOCABLYSUBMITS TO THE JURISDICTION OF ANY TEXAS STATE OR FEDERAL COURT SITTING INDALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THISGUARANTY AND THE OTHER LOAN DOCUMENTS, AND EACH GUARANTOR HEREBY IRREVOCABLYAGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BEHEARD AND DETERMINED IN SUCH COURT.  EACHGUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELYDO SO, ANY RIGHT IT MAY HAVE TO THE DEFENSE OF AN INCONVENIENT FORUM TOTHE MAINTENANCE OF SUCH ACTION OR PROCEEDING. EACH GUARANTOR HEREBY AGREES THAT SERVICE OF COPIES OF THE SUMMONS ANDCOMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION ORPROCEEDING MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TOSUCH GUARANTOR AT ITS ADDRESS SET FORTH IN THE CREDIT AGREEMENT OR SET FORTH ONTHE SIGNATURE PAGE OF THIS GUARANTY. EACH GUARANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION ORPROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONSBY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS SECTION SHALL AFFECT THERIGHTS OF ANY BENEFICIARY TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTEDBY THE LAW OR AFFECT THE RIGHT OF ANY BENEFICIARY TO BRING ANY ACTION ORPROCEEDING AGAINST ANY GUARANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHERJURISDICTION.**

** **

**ARTICLEXIV.             INDEMNIFICATION. **EACH GUARANTOR SHALL INDEMNIFY EACH OF THE Beneficiaries, AND THEIRRESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND DISCHARGE,RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LIABILITIES,OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND OR NATUREWHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT 

 

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**RELATING TO OR ARISING OUT OFTHIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS,EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL OR PROPOSEDUSE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THE BORROWER OR ANYGUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACH BY THE BORROWEROR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT OR ANY OTHER LOANDOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDINGANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO THE FOREGOING, (D) ANYENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATINGTO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED PROPERTIES OF THE BORROWER, ANYGUARANTOR OR THE OPERATIONS OR BUSINESS, OF THE BORROWER OR ANY GUARANTORINCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDIT AGREEMENT, OR (E) ANYENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATEDTO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND EACH GUARANTOR SHALLREIMBURSE THE Beneficiaries AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEESAND AGENTS, UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKET EXPENSES (INCLUDINGREASONABLE OUTSIDE LEGAL FEES) INCURRED IN CONNECTION WITH ANY SUCHINVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY INCLUDING ANY SUCHLOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF THEPERSON BEING INDEMNIFIED’S OWN NEGLIGENCE,**BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS,DAMAGES OR EXPENSES THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY ACOURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PERSON’SGROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

** **

**ARTICLE XV.              WAIVEROF JURY TRIAL. **EACHGUARANTOR HEREBY ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY AND HAS CONSULTEDWITH COUNSEL OF ITS CHOICE, AND HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY,AND IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGALPROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY, ANY OTHER LOANDOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

** **

**ARTICLE XVI.             ADDITIONALGUARANTORS.  PURSUANT TO SECTION 6.15OF THE CREDIT AGREEMENT, EACH SUBSIDIARY OF THE BORROWER THAT WAS NOT INEXISTENCE ON THE DATE OF THE CREDIT AGREEMENT IS REQUIRED TO ENTER INTO THISGUARANTY AS A GUARANTOR UPON BECOMING A SUBSIDIARY.  AFTER THE DATE HEREOF, UPON EXECUTION ANDDELIVERY AFTER THE DATE HEREOF BY THE ADMINISTRATIVE AGENT AND SUCH SUBSIDIARYOF AN INSTRUMENT IN THE FORM OF ANNEX 1, SUCH SUBSIDIARY SHALL BECOMEA GUARANTOR HEREUNDER WITH THE SAME FORCE AND EFFECT AS IF ORIGINALLY NAMED ASA GUARANTOR HEREIN.  THE EXECUTION ANDDELIVERY OF ANY**

 

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**INSTRUMENTADDING AN ADDITIONAL GUARANTOR AS A PARTY TO THIS GUARANTY SHALL NOT REQUIRETHE CONSENT OF ANY OTHER GUARANTOR HEREUNDER. THE RIGHTS AND OBLIGATIONS OF EACH GUARANTOR HEREUNDER SHALL REMAIN INFULL FORCE AND EFFECT NOTWITHSTANDING THE ADDITION OF ANY NEW GUARANTOR AS APARTY TO THIS GUARANTY.**

** **

**ARTICLE XVII.             SUBORDINATIONAND INTERCREDITOR AGREEMENT. REFERENCE IS MADE TO THE SUBORDINATION AND INTERCREDITOR AGREEMENT DATEDOF EVEN DATE HEREWITH (AS AMENDED, RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIEDFROM TIME TO TIME, THE “SUBORDINATION AND*****INTERCREDITOR AGREEMENT***”), AMONG UNION BANKOF CALIFORNIA, N.A., AS SENIOR AGENT, AND ****UNIONBANCAL EQUITIES, INC.,****AS SUBORDINATED AGENT, AND CERTAINOTHER PERSONS, PARTY OR THAT MAY BECOME PARTY THERETO FROM TIME TOTIME.  NOTWITHSTANDING ANYTHING HEREIN TOTHE CONTRARY, THIS GUARANTY, THE OBLIGATIONS OF THE GUARANTORS HEREUNDER ANDTHE RIGHTS AND REMEDIES OF THE BENEFICIARIES HEREUNDER ARE SUBJECT TO THEPROVISIONS OF THE SUBORDINATION AND INTERCREDITOR AGREEMENT.  IN THE EVENT OF ANY CONFLICT BETWEEN THETERMS OF THE SUBORDINATION AND INTERCREDITOR AGREEMENT AND THIS GUARANTY, THETERMS OF THE SUBORDINATION AND INTERCREDITOR AGREEMENT SHALL GOVERN ANDCONTROL.

** **

**ARTICLEXVIII.         **NOTICE OF FINALAGREEMENTS.  PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESSAND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENTEXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITINGAND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.

** **

**THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENTSUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTENAGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BYAND MERGED INTO THIS GURANTY.  THISGUARANTY AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THEPARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTSOF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTSAMONG THE PARTIES.**

** **

**[Remainder of this page intentionally leftblank.]**

 

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Each Guarantor has causedthis Guaranty to be duly executed as of the date first above written.

 
| ** ** | **GUARANTOR:**                 |
|------------|--------------------------------|
|       |                           |
|       | [SUBSIDIARY  OF BORROWER]      |
|       |                           |
|       |                           |
|       | By:                            |   |
|       | Name:                          |   |
|       | Title:                         |   |
|       |                           |
|       |                           |
|       | AddressofGuarantor:            |
|       |                           |
|       |                           |
|       |                           |
|       |                                |
|       | [SUBSIDIARY  OF BORROWER]      |
|       |                           |
|       |                           |
|       | By:                            |   |
|       | Name:                          |   |
|       | Title:                         |   |
|       |                                |
|       | AddressofGuarantor:            |
|       |                           |
|       |                           |
|       |                           |
|       |                           |
|       | ** **                     |
|       | **ADMINISTRATIVE AGENT:**      |
|       |                           |
|       |                           |
|       | UNIONBANCAL EQUITIES, INC., as |
|       | Administrative  Agent          |
|       |                                |
|       | By:                            |   |
|       | Name:                          |   |
|       | Title:                         |   |
|            |                                |  |  |  |  |

 

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Annex1 to the

SubordinatedGuaranty Agreement

 

SUPPLEMENTNO.          dated as of                            (the*“Supplement*”),to the Subordinated Guaranty Agreement dated as of March       ,2008 (as amended, supplemented or otherwise modified from time to time, the *“Guaranty Agreement”*),among each of the subsidiaries party thereto (each such subsidiaryindividually, a *“Guarantor”* and collectively, the *“Guarantors”*) of CANO PETROLEUM,INC., a Delaware corporation (the *“Borrower”*) in favor ofUNIONBANCAL EQUITIES, INC., as Administrative Agent (the *“Administrative Agent”*) for thebenefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made to theSubordinated Credit Agreement dated as of March       ,2008 (as amended, supplemented or otherwise modified from time to time, the *“Credit Agreement”*),among the Borrower, the lenders from time to time party thereto (the *“Lenders”*),and the Administrative Agent.

 

B.            Capitalized terms used herein andnot otherwise defined herein shall have the meanings assigned to such terms inthe Guaranty Agreement and the Credit Agreement.

 

C.            The Guarantors have entered into theGuaranty Agreement in order to induce the Lenders to make Advances.  Pursuant to Section 6.15 of the CreditAgreement, the Subsidiaries of the Borrower are required to enter into theGuaranty Agreement as Guarantors.  Section 16of the Guaranty Agreement provides that additional Subsidiaries of the Borrowermay become Guarantors under the Guaranty Agreement by execution and delivery ofan instrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the *“New Guarantor”*) is executing thisSupplement in accordance with the requirements of the Credit Agreement tobecome a Guarantor under the Guaranty Agreement.

 

Accordingly, theAdministrative Agent and the New Guarantor agree as follows:

 

SECTION 1.           In accordance with Section 16 ofthe Guaranty Agreement, the New Guarantor by its signature below becomes aGuarantor under the Guaranty Agreement with the same force and effect as iforiginally named therein as a Guarantor and the New Guarantor hereby (a) agreesto all the terms and provisions of the Guaranty Agreement applicable to it as aGuarantor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Guarantor thereunder are trueand correct in all material respects on and as of the date hereof.  Each reference to a “Guarantor” in theGuaranty Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement is hereby incorporatedherein by reference.

 

SECTION 2.           The New Guarantor represents andwarrants to the Administrative Agent and the other Beneficiaries that thisSupplement has been duly authorized, executed and delivered by it andconstitutes its legal, valid and binding obligation, enforceable against it inaccordance with its terms (subject to applicable bankruptcy, reorganization,insolvency, moratorium or similar laws affecting creditors’ rights generallyand subject, as to enforceability, to equitable principles of generalapplication (regardless of whether enforcement is sought in a proceeding inequity or at law)).

 

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SECTION 3.           This Supplement may be executed incounterparts, each of which shall constitute an original, but all of which whentaken together shall constitute a single contract.  This Supplement shall become effective whenthe Administrative Agent shall have received counterparts of this Supplementthat, when taken together, bear the signatures of the New Guarantor and the AdministrativeAgent. Delivery of an executed signature page to this Supplement by faxtransmission shall be as effective as delivery of a manually executedcounterpart of this Supplement.

 

SECTION 4.           Except as expressly supplementedhereby, the Guaranty Agreement shall remain in full force and effect.

 

SECTION 5.           THIS SUPPLEMENT SHALL BE GOVERNED BY,AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.  The New Guarantor hereby irrevocably submitsto the jurisdiction of any Texas state or federal court sitting in Dallas, Texasin any action or proceeding arising out of or relating to this Supplement orthe Guaranty Agreement and the other Loan Documents, and the New Guarantorhereby irrevocably agrees that all claims in respect of such action orproceeding may be heard and determined in such court.  The New Guarantor hereby irrevocably waives,to the fullest extent it may effectively do so, any right it may have to thedefense of an inconvenient forum to the maintenance of such action orproceeding.  The New Guarantor herebyagrees that service of copies of the summons and complaint and any otherprocess which may be served in any such action or proceeding may be made bymailing or delivering a copy of such process to such Guarantor at its addressset forth on the signature page hereof. The New Guarantor agrees that a final judgment in any such action orproceeding shall be conclusive and may be enforced in other jurisdictions bysuit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect therights of any Beneficiary to serve legal process in any other manner permittedby the law or affect the right of any Beneficiary to bring any action orproceeding against the New Guarantor or its Property in the courts of any otherjurisdiction.

 

SECTION 6.           In case any one or more of theprovisions contained in this Supplement should be held invalid, illegal orunenforceable in any respect, the validity, legality and enforceability of theremaining provisions contained herein and in the Guaranty Agreement shall notin any way be affected or impaired thereby (it being understood that theinvalidity of a particular provision hereof in a particular jurisdiction shallnot in and of itself affect the validity of such provision in any otherjurisdiction).  The parties hereto shallendeavor in good-faith negotiations to replace the invalid, illegal orunenforceable provisions with valid provisions the economic effect of whichcomes as close as possible to that of the invalid, illegal or unenforceableprovisions.

 

SECTION 7.           All communications and noticeshereunder shall be in writing and given as provided in Section 10 of theGuaranty Agreement.  All communicationsand notices hereunder to the New Guarantor shall be given to it at the addressset forth under its signature below.

 

SECTION 8.           The New Guarantor agrees to reimbursethe Administrative Agent for its reasonable out-of-pocket expenses inconnection with this Supplement, including the fees, disbursements and othercharges of counsel for the Administrative Agent.

 

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SECTION 9.           **PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESSAND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENTEXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITINGAND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.**

 

**THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENTSUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTENAGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BYAND MERGED INTO THIS GURANTY.  THISSUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THEFINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ANDMAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, ORSUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THEREARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

 

IN WITNESS WHEREOF, the NewGuarantor and the Administrative Agent have duly executed this Supplement tothe Guaranty Agreement as of the day and year first above written.

 

 
|   | [Name of New Guarantor] |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | By:                     |   |
|   |                    |
|   | Name:                   |   |
|   |                    |
|   | Title:                  |   |
|   |                    |
|   |                    |
|   | AddressofGuarantor:     |
|   |                    |
|   |                    |
|   |                    |
|        |                         |  |  |  |

 

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|   | **ADMINISTRATIVE AGENT:**       |
|--------|---------------------------------|
|   |                            |
|   | UNIONBANCAL EQUITIES,  INC., as |
|   | Administrative Agent            |
|   |                            |
|   |                            |
|   | By:                             |   |
|   |                            |
|   | Name:                           |   |
|   |                            |
|   | Title:                          |   |
|        |                                 |  |  |  |

 

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** **

** **

**EXHIBIT D**

 

**FORM OF MORTGAGE**

 

**SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING STATEMENT**

 

THISINSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY AND FUTURE ADVANCE PROVISIONS.

 

THISINSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN MINERALS OR THE LIKE (INCLUDINGOIL AND GAS) BEFORE EXTRACTION AND THE SECURITY INTEREST CREATED BY THISINSTRUMENT ATTACHES TO SUCH MINERALS AS EXTRACTED AND TO THE ACCOUNTS RESULTINGFROM THE SALE THEREOF AT THE WELLHEAD. THIS INSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN FIXTURES.  THIS FINANCING STATEMENT IS TO BE FILED FORRECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS.  PRODUCTS OF THE COLLATERAL ARE ALSO COVERED.

 

**NOTICE TO MORTGAGOR:**

 

**A POWER OF SALE HAS BEEN GRANTED IN THISMORTGAGE.  A POWER OF SALE MAY ALLOWTHE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURTIN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.**

 

FROM

 

**CANO PETROLEUM, INC.**

(Mortgagor, Debtor and Grantor)

 

TO

 

UNIONBANCAL EQUITIES, INC., as Administrative Agent

(Mortgagee, Secured Party and Grantee)

 

            ,2008

 

Forpurposes of filing this Mortgage as a financing statement, the mailing addressof Mortgagor is 801 Cherry Street, Suite 3200, Fort Worth, Texas76102.  Mortgagor is a corporationorganized under the laws of the State of Delaware and the Mortgagor’sorganizational number is 

 

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                        the mailing address of Mortgagee is 445 South Figueroa Street, 13th Floor, LosAngeles, California 90071.

 

***********************************

 

Thisinstrument, prepared by Sommer Louie, Bracewell & Giuliani LLP, 711Louisiana, South Tower Pennzoil Place, Suite 2300, Houston, Texas 77002,(713) 221-1363, contains after-acquired property provisions and covers futureadvances and proceeds to the fullest extent allowed by applicable law.

 

**ATTENTIONRECORDING OFFICER****:** This instrument is amortgage of both real and personal property insofar as the same covers orrelates to the Oil and Gas Properties and is, among other things, a SecurityAgreement and Financing Statement under the Uniform Commercial Code in effectin Oklahoma.  This instrument creates alien on rights in or relating to lands of Mortgagor which are described in Exhibit Ahereto or in documents described in such Exhibit A.

 

**RECORDEDDOCUMENT SHOULD BE RETURNED TO:**

 

BRACEWELL & GIULIANI LLP

711 Louisiana, South Tower Pennzoil Place, Suite 2300

Houston, Texas 77002

Attn: Cynthia Hasty

 

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**SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING STATEMENT**

 

WHEREAS,this instrument (the “Mortgage”) is made as of                      ,2008 (the “Effective Date”) and executed and delivered by CANOPETROLEUM, INC., a Delaware corporation (“Mortgagor”), to and in favorof UnionBanCal Equities, Inc. (the “Mortgagee”) in its capacity asthe Administrative Agent under the Credit Agreement (as hereinafter defined)and on behalf of the Credit Parties (as hereinafter defined).  The addresses of Mortgagor and the Mortgageeappear in Section 7.12 of this Mortgage.

 

WHEREAS,this Mortgage is executed in connection with, and pursuant to the terms of thatcertain Subordinated Credit Agreement dated as of March       ,2008 (as the same may be renewed, extended, amended, supplemented and/orrestated from time-to-time, the “Credit Agreement”), among Mortgagor,the lenders party thereto from time to time (the “Lenders”) and theMortgagee (the Mortgagee and the Lenders collectively referred to herein as the“Credit Parties”).

 

WHEREAS,it is a condition precent to the extension of credit to Mortgagor under theCredit Agreement that the Mortgagor and the Mortgagee on behalf of the CreditParties execute and deliver this Mortgage.

 

NOW,THEREFORE, in consideration of the foregoing and for other good and valuableconsideration, the receipt and sufficiency of which are hereby acknowledged,the Mortgagor (a) wishes to make this Mortgage in favor of Mortgagee tosecure the Obligations (as defined herein), and (b) hereby agrees asfollows:

 

**ARTICLE I**

**Definitions**

 

1.1                                 “*Collateral*” means the Realty Collateral, PersonaltyCollateral and Fixture Collateral.

 

1.2                                 “*Contracts*” means all contracts, agreements, operatingagreements, farm-out or farm-in agreements, sharing agreements, mineralpurchase agreements, contracts for the purchase, exchange, transportation,processing or sale of Hydrocarbons, rights-of-way, easements, surface leases,equipment leases, permits, franchises, licenses, pooling or unitizationagreements, and unit or pooling designations and orders now or hereafteraffecting any of the Oil and Gas Properties, Operating Equipment, FixtureOperating Equipment, or Hydrocarbons now or hereafter covered hereby, or whichare useful or appropriate in drilling for, producing, treating, handling,storing, transporting or marketing oil, gas or other minerals produced from anyof the Oil and Gas Properties, and all as such contracts and agreements as theymay be amended, restated, modified, substituted or supplemented fromtime-to-time.

 

1.3                                 “*Event of Default*” shall have the meaning set forth in Article Vhereof.

 

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1.4                                 “*Fixture Collateral*” means all of Mortgagor’s interest nowowned or hereafter acquired in and to all Fixture Operating Equipment and allproceeds, products, renewals, increases, profits, substitutions, replacements,additions, amendments and accessions thereof, thereto or therefor.

 

1.5                                 “*Fixture Operating Equipment*” means any of the itemsdescribed in the first sentence of the definition of “Operating Equipment”below which as a result of being incorporated into realty or structures orimprovements located therein or thereon, with the intent that they remain therepermanently, constitute fixtures under the laws of the state in which suchequipment is located.

 

1.6                                 “*Governmental Authority”*shall have the meaning assigned tosuch term in the Credit Agreement.

 

1.7                                 “*Hydrocarbons*” means oil, gas, coal seam gas, casinghead gas,drip gasoline, natural gasoline, condensate, distillate, and all other liquidand gaseous hydrocarbons produced or to be produced in conjunction therewithfrom a well bore and all products, by-products, and other substances derivedtherefrom or the processing thereof, and all other minerals and substancesproduced in conjunction with such substances, including sulfur, geothermalsteam, water, carbon dioxide, helium, and any and all minerals, ores, orsubstances of value and the products and proceeds therefrom.

 

1.8                                 “*Legal Requirement”*shall have the meaning assigned to suchterm in the Credit Agreement.

 

1.9                                 “*Notes*” means the “Notes” as that term is defined in theCredit Agreement.

 

1.10                           “*Obligations*” means

 

(a)                                  The “Obligations”,as that term is defined in the Credit Agreement, including all indebtednessevidenced by the Notes;

 

(b)                                 All otherindebtedness, obligations, and liabilities of Mortgagor or any of itsSubsidiaries arising under the Credit Agreement, the Security Documents, thisMortgage, or any of the other Loan Documents;

 

(c)                                  All otherindebtedness, obligations and liabilities of any kind of Mortgagor owing to anyof the Credit Parties now existing or hereafter arising under or pursuant toany Loan Document, whether fixed or contingent, joint or several, direct orindirect, primary or secondary, and regardless of how created or evidenced;

 

(d)                                 All sumsadvanced or costs or expenses incurred by Mortgagee or any of the other CreditParties, which are made or incurred pursuant to, or allowed by, the terms ofthis Mortgage plus interest thereon from the date of the advance or incurrenceuntil reimbursement of Mortgagee or such Credit Party charged at theReimbursement Rate;

 

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(e)                                  All futureadvances or other value, of whatever class or for whatever purpose, at any timehereafter made or given by Mortgagee or any of the other Credit Parties toMortgagor under or pursuant to the Credit Agreement or any other Loan Document,whether or not the advances or value are given pursuant to a commitment,whether or not the advances or value are presently contemplated by the partieshereto, and whether or not Mortgagor is indebted to Mortgagee or any CreditParty at the time of such events; and

 

(f)                                    All renewals,extensions, modifications, amendments, rearrangements and substitutions of allor any part of the above whether or not Mortgagor executes any agreement orinstrument.

 

1.11                           “*Oil and Gas Property*” or “*Oil and GasProperties*” means (a) the oil and gas and/or oil, gas andmineral leases and leasehold interests, fee mineral interests, term mineralinterests, participation interests, back-in or carried working interests,rights of first refusal, options, subleases, farmouts, royalties, overridingroyalties, net profits interests, production payments and similar interests orestates described in Exhibit A attached hereto and made a part hereof forall purposes including the net revenue interests warranted in Exhibit Aand any reversionary or carried interests relating to any of the foregoing, (b) allproduction units, and drilling and spacing units (and the Properties coveredthereby) which may affect all or any portion of such interests including thoseunits which may be described or referred to on Exhibit A and any unitscreated by agreement or designation or under orders, regulations, rules orother official acts of any Federal, state or other governmental body or agencyhaving jurisdiction, (c) the surface leases described in Exhibit A, (d) anyand all non-consent interests owned or held by, or otherwise benefiting,Mortgagor and arising out of, or pursuant to, any of the Contracts, (e) anyother interest in, to or relating to (i) all or any part of the landdescribed in Exhibit A, the land relating to the leases set forth in Exhibit Aor in the documents described in Exhibit A, or (ii) any of theestates, property rights or other interests referred to above, (f) anyinstrument executed in amendment, correction, modification, confirmation,renewal or extension of the same, (g) any and all rights, titles andinterests of Mortgagor (which are similar in nature to any of the rights,titles and interests described in (a) through (f) above) which are locatedon or under or which concern any Property or Properties located in countiesreferenced in Exhibit A hereto or counties in which a counterpart of thisMortgage is filed of record in the real property records of such county, and (h) alltenements, hereditaments and appurtenances now existing or hereafter obtainedin connection with any of the aforesaid, including any rights arising underunitization agreements, orders or other arrangements, communitizationagreements, orders or other arrangements or pooling orders, agreements or otherarrangements, including without limitation pooling orders of the OklahomaCorporation Commission.

 

1.12                           “*Operating Equipment*” means all surface or subsurfacemachinery, equipment, facilities, supplies or other Property of whatsoever kindor nature now or hereafter located on any of the Property affected by the Oiland Gas Properties which are useful for the production, treatment, storage ortransportation of Hydrocarbons, including all oil wells, gas wells, waterwells, injection wells, casing, tubing, rods, pumping units and engines,christmas trees, derricks, separators, gun barrels, flow lines, pipelines,tanks, gas systems (for gathering, treating and compression), water systems(for treating, disposal and injection), supplies, derricks, wells,

 

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powerplants, poles, cables, wires, meters, processing plants, compressors,dehydration units, lines, transformers, starters and controllers, machineshops, tools, storage yards and equipment stored therein, buildings and camps,telegraph, telephone and other communication systems, roads, loading racks,shipping facilities and all additions, substitutes and replacements for, andaccessories and attachments to, any of the foregoing.  Operating Equipment shall not include anyitems incorporated into realty or structures or improvements located therein orthereon in such a manner that they no longer remain personalty under the lawsof the state in which such equipment is located.

 

1.13                           “*Permitted Liens*” means the Liens permitted under the CreditAgreement.

 

1.14                           “*Permitted Prior Liens*”shall have the meaning assigned to such term in the Credit Agreement.

 

1.15                           “*Personalty Collateral*” means all of Mortgagor’s interest nowowned or hereafter acquired in and to (a) all Operating Equipment, (b) allHydrocarbons severed and extracted from or attributable to the Oil and GasProperties, including oil in tanks and all other “as-extracted” collateral fromor attributable to the Oil and Gas Properties, (c) all accounts (includingaccounts resulting from the sale of Hydrocarbons at the wellhead), contractrights and general intangibles, including all accounts, contract rights andgeneral intangibles now or hereafter arising regardless of whether any of theforegoing is in connection with the sale or other disposition of anyHydrocarbons or otherwise, including all liens securing the same, (d) allaccounts, contract rights and general intangibles now or hereafter arisingregardless of whether any of the foregoing is in connection with or resultingfrom any of the Contracts, including all liens security the same, (e) allproceeds and products of the Realty Collateral and any other contracts oragreements, (f) all information concerning the Oil and Gas Properties andall wells located thereon, including abstracts of title, title opinions,geological and geophysical information and logs, lease files, well files, andother books and records (including computerized records and data), (g) anydeposit or time accounts with Mortgagee or any Lender, (h) any options orrights of first refusal to acquire any Realty Collateral, and (i) allproceeds, products, renewals, increases, profits, substitutions, replacements,additions, amendments and accessions of, to or for any of the foregoing.

 

1.16                           “*Property*” means any property of any kind, whether real,personal, or mixed and whether tangible or intangible.

 

1.17                           “*Realty Collateral*” means all of Mortgagor’s interest nowowned or hereafter acquired in and to the Oil and Gas Properties, including anyaccess rights, water and water rights, and all unsevered and unextractedHydrocarbons (even though Mortgagor’s interest therein may be incorrectlydescribed in, or a description of a part or all of such interest may be omittedfrom, Exhibit A).

 

1.18                           *“ReimbursementRate”*means a per annum rate equal to the lesser of (a) the Maximum Rate(as defined in the Credit Agreement) and (b) the Adjusted Reference Rate(as defined in the Credit Agreement) in effect from time to time plus theApplicable Margin for Reference Rate Advances (as such terms are defined in theCredit Agreement) in effect during an Event of Default.

 

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1.19                           All othercapitalized terms defined in the Credit Agreement which are used in thisMortgage and which are not otherwise defined herein shall have the meaningsassigned to such terms in the Credit Agreement. All meanings to defined terms, unless otherwise indicated, are to beequally applicable to both the singular and plural forms of the termsdefined.  Article, Section, Schedule, andExhibit references are to Articles and Sections of and Schedules andExhibits to this Mortgage, unless otherwise specified.  All references to instruments, documents,contracts, and agreements are references to such instruments, documents,contracts, and agreements as the same may be amended, supplemented, andotherwise modified from time to time, unless otherwise specified.  The words “hereof”, “herein” and “hereunder”and words of similar import when used in this Mortgage shall refer to thisMortgage as a whole and not to any particular provision of this Mortgage.  As used herein, the term “including” means “including, without limitation,”.

 

**ARTICLE II**

**Creation of Security**

 

2.1                                 **Conveyanceand Grant of Lien**.  Inconsideration of the advances or extensions by the Credit Parties to Mortgagorof the funds or credit constituting the Obligations, and in furtherconsideration of the mutual covenants contained herein, Mortgagor, by thisMortgage does hereby GRANT, MORTGAGE, WARRANT, CONVEY, SELL, TRANSFER, ANDASSIGN with a general warranty of title, for the uses, purposes and conditionshereinafter set forth all of its right, title and interest in and to the RealtyCollateral, the Personalty Collateral and the Fixture Collateral untoMortgagee, its successors and assigns, with power of sale, to secure thepayment and performance of the Obligations for the benefit of Mortgagee and theratable benefit of the Credit Parties.

 

**MORTGAGORFURTHER GRANTS TO MORTGAGEE, ITS SUCCESSORS AND ASSIGNS, THE RIGHT AND POWER TOFORECLOSE THIS MORTGAGE UNDER THE OKLAHOMA POWER OF SALE MORTGAGE FORECLOSUREACT, 46. O.S. § 40 ET SEQ.**

 

TO HAVE AND TO HOLD theRealty Collateral, the Personalty Collateral and Fixture Collateral unto theMortgagee and its successors and assigns forever for the benefit of the CreditParties, together with all and singular the rights, hereditaments andappurtenances thereto in anywise appertaining or belonging, to secure paymentof the Obligations and the performance of the covenants of Mortgagor containedin this Mortgage.  Mortgagor does herebybind itself, its successors and permitted assigns, to warrant and foreverdefend all and singular the Realty Collateral, the Personalty Collateral andthe Fixture Collateral unto the Mortgagee and its successors and assigns,against every Person whomsoever lawfully claiming or to claim the same, or anypart thereof.

 

Subject, however, to thecondition that none of the Mortgagee or the Credit Parties shall be liable inany respect for the performance of any covenant or obligation of the Mortgagorin respect of the Collateral.  Anyreference in Exhibit A to the name of a well shall not be construed tolimit the Collateral to the well bore of such well or in the pro rataunits.  It is Mortgagor’s

 

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intentionthat this instrument cover Mortgagor’s entire interest in the lands, leases,units and other interests set forth in Exhibit A.

 

2.2                                 **SecurityInterest**.  For thesame consideration and to further secure the Obligations, Mortgagor herebygrants to Mortgagee for its benefit and the ratable benefit of the other CreditParties a security interest in and to the Collateral.

 

2.3                                 **Assignmentof Liens and Security Interests**.  For the same consideration and to furthersecure the Obligations, Mortgagor hereby assigns and conveys to Mortgagee forits benefit and the benefit of the other Credit Parties any security interestsheld by Mortgagor arising under, and any liens granted to the Mortgagorpursuant to, Title 12A of the Oklahoma Statutes (as amended from time to time).

 

**ARTICLE III**

**Proceeds from Production**

 

3.1                                 **Assignmentof Production**.

 

(a)                                  In order tofurther secure the Obligations, Mortgagor has assigned, transferred, conveyedand delivered and does hereby assign, transfer, convey and deliver untoMortgagee, subject to Permitted Prior Liens, effective as of the Effective Dateat 7:00 a.m. Dallas, Texas time, all Hydrocarbons produced from, and whichare attributable to, Mortgagor’s interest, now owned or hereafter acquired, inand to the Oil and Gas Properties, or are allocated thereto pursuant to poolingor unitization orders, agreements or designations, and all proceeds therefrom.

 

(b)                                 Subject to theprovisions of subsection (f) below, all parties producing, purchasing,taking, possessing, processing or receiving any production from the Oil and GasProperties, or having in their possession any such production, or the proceedstherefrom, for which they or others are accountable to Mortgagee by virtue ofthe provisions of this Section 3.1, are authorized and directed byMortgagor to treat and regard Mortgagee as the assignee and transferee ofMortgagor and entitled in its place and stead to receive such Hydrocarbons andthe proceeds therefrom.

 

(c)                                  Mortgagordirects and instructs each of such parties to pay to Mortgagee, for its benefitand the ratable benefit of the other Credit Parties, all of the proceeds ofsuch Hydrocarbons until such time as such party has been furnished evidencethat all of the Obligations have been paid and that the Lien evidenced herebyhas been released; provided, however, that until Mortgagee shall have exercisedthe rights as herein to instruct such parties to deliver such Hydrocarbons andall proceeds therefrom directly to Mortgagee, such parties shall be entitled todeliver such Hydrocarbons and all proceeds therefrom to Mortgagor for Mortgagor’suse and enjoyment, and Mortgagor shall be entitled to execute division orders,transfer orders and other instruments as may be required to direct all proceedsto Mortgagor without the necessity of joinder by Mortgagee in such divisionorders, transfer orders or other instruments. Mortgagor agrees to perform allsuch acts, and to execute all such further assignments, transfers and divisionorders, and other instruments as may be reasonably required

 

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ordesired by Mortgagee or any party in order to have said revenues and proceedsso paid to Mortgagee.  None of suchparties shall have any responsibility for the application of any such proceedsreceived by Mortgagee.  Subject to theprovisions of subsection (f) below, Mortgagor authorizes Mortgagee toreceive and collect all proceeds of such Hydrocarbons.

 

(d)                                 Subject to theprovisions of subsection (f) below, Mortgagor will execute and deliver toMortgagee any instruments Mortgagee may from time to time reasonably requestfor the purpose of effectuating this assignment and the payment to Mortgagee ofthe proceeds assigned.

 

(e)                                  Neither theforegoing assignment nor the exercise by Mortgagee of any of its rights hereinshall be deemed to make Mortgagee a “mortgagee-in-possession” or otherwiseresponsible or liable in any manner with respect to the Oil and Gas Propertiesor the use, occupancy, enjoyment or operation of all or any portion thereof,unless and until Mortgagee, in person or by agent, assumes actual possessionthereof, nor shall appointment of a receiver for the Oil and Gas Properties byany court at the request of Mortgagee or by agreement with Mortgagor or theentering into possession of the Oil and Gas Properties or any part thereof bysuch receiver be deemed to make Mortgagee a “mortgagee-in-possession” orotherwise responsible or liable in any manner with respect to the Oil and GasProperties or the use, occupancy, enjoyment or operation of all or any portionthereof.

 

(f)                                    Notwithstandinganything to the contrary contained herein, so long as no Default or an Event ofDefault shall have occurred and is continuing, Mortgagor shall have the rightto collect all revenues and proceeds attributable to the Hydrocarbons thataccrue to the Oil and Gas Properties or the products obtained or processedtherefrom, as well as any Liens and security interests securing any sales ofsaid Hydrocarbons and to retain, use and enjoy same.

 

(g)                                 Mortgagee mayendorse and cash any and all checks and drafts payable to the order ofMortgagor or Mortgagee for the account of Mortgagor, received from or inconnection with the proceeds of the Hydrocarbons affected hereby, and the samemay be applied as provided herein. Mortgagee may execute any transfer or division orders in the name ofMortgagor or otherwise, with warranties and indemnities binding on Mortgagor;provided that Mortgagee shall not be held liable to Mortgagor for, nor berequired to verify the accuracy of, Mortgagor’s interests as representedtherein.

 

(h)                                 Mortgagee shallhave the right at Mortgagee’s election and in the name of Mortgagor, orotherwise, to prosecute and defend any and all actions or legal proceedingsdeemed advisable by Mortgagee in order to collect such proceeds and to protectthe interests of Mortgagee or Mortgagor, with all costs, expenses and attorneysfees incurred in connection therewith being paid by Mortgagor.  In addition, should any purchaser takingproduction from the Oil and Gas Properties fail to pay promptly to Mortgagee inaccordance with this Article, Mortgagee shall have the right to demand a changeof connection and to designate another purchaser with whom a new connection maybe made without any liability on the part of Mortgagee in making such election,so long as ordinary care is used in the making thereof, and upon failure ofMortgagor to consent to such change of connection, the entire amount of all the

 

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Obligationsmay, at the option of Mortgagee, be immediately declared to be due and payableand subject to foreclosure hereunder.

 

(i)                                     Without in anyway limiting the effectiveness of the foregoing provisions, if Mortgagorreceives any proceeds which under this Section 3.1 are payable toMortgagee, Mortgagor shall hold the same in trust and remit such proceeds, orcause them to be remitted, immediately, to Mortgagee.

 

3.2                                 **Applicationof Proceeds**.  Allpayments received by Mortgagee pursuant to this Article III attributableto the interest of Mortgagor in and to the Hydrocarbons shall be applied in theorder set forth in Section 7.06 of the Credit Agreement.

 

3.3                                 **Mortgagor’sPayment Duties**.  Except asprovided in Section 7.16 hereof, nothing contained herein will limitMortgagor’s absolute duty to make payment of the Obligations regardless ofwhether the proceeds assigned by this Article III are sufficient to paythe same, and the receipt by Mortgagee of proceeds from Hydrocarbons under thisMortgage will be in addition to all other security now or hereafter existing tosecure payment of the Obligations.

 

3.4                                 **Liabilityof Mortgagee**.  Mortgageeis hereby absolved from all liability for failure to enforce collection of anyof such proceeds, and from all other responsibility in connection therewithexcept the responsibility to account to Mortgagor for proceeds actuallyreceived by Mortgagee.

 

3.5                                 **Actionsto Effect Assignment**. Subject to the provisions of Section 3.1(f), Mortgagor covenants tocause all operators, pipeline companies, production purchasers and otherremitters of said proceeds to pay promptly to Mortgagee the proceeds from suchHydrocarbons in accordance with the terms of this Mortgage, and to execute,acknowledge and deliver to said remitters such division orders, transferorders, certificates and other documents as may be necessary, requested orproper to effect the intent of this assignment; and Mortgagee shall not berequired at any time, as a condition to its right to obtain the proceeds ofsuch Hydrocarbons, to warrant its title thereto or to make any guarantywhatsoever.  In addition, Mortgagorcovenants to provide to Mortgagee the name and address of every such remitterof proceeds from such Hydrocarbons, together with a copy of the applicabledivision orders, transfer orders, sales contracts and governinginstruments.  All expenses incurred bythe Mortgagee in the collection of said proceeds shall be repaid promptly byMortgagor; and prior to such repayment, such expenses shall be a part of theObligations secured hereby.  If under anyexisting Contracts for the sale of Hydrocarbons, other than division orders ortransfer orders, any proceeds of Hydrocarbons are required to be paid by theremitter direct to Mortgagor so that under such existing agreements paymentcannot be made of such proceeds to Mortgagee in the absence of foreclosure,Mortgagor’s interest in all proceeds of Hydrocarbons under such existing Contractsshall, when received by Mortgagor, constitute trust funds in Mortgagor’s handsand shall be immediately paid over to Mortgagee.

 

3.6                                 **Powerof Attorney**.  Withoutlimitation upon any of the foregoing, Mortgagor hereby designates and appointsMortgagee as true and lawful agent and attorney-in-fact (with

 

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fullpower of substitution, either generally or for such periods or purposes asMortgagee may from time to time prescribe), with full power and authority, forand on behalf of and in the name of Mortgagor, to execute, acknowledge anddeliver all such division orders, transfer orders, certificates and otherdocuments of every nature, with such provisions as may from time to time, inthe opinion of Mortgagee, be necessary or proper to effect the intent andpurpose of the assignment contained in this Article III; and Mortgagorshall be bound thereby as fully and effectively as if Mortgagor had personallyexecuted, acknowledged and delivered any of the foregoing orders, certificatesor documents.  The powers and authoritiesherein conferred on Mortgagee may be exercised by Mortgagee through any personwho, at the time of exercise, is the president, a senior vice president or avice president of Mortgagee.  **The power of attorney conferred by this Section 3.6is granted for valuable consideration and coupled with an interest and isirrevocable until all of the Obligations have been fully and finally paid anddischarged in full, all Commitments have been terminated or expired and theCredit Agreement has been terminated in writing.**** **All persons dealingwith Mortgagee, or any substitute, shall be fully protected in treating thepowers and authorities conferred by this Section 3.6 as continuing in fullforce and effect until advised by Mortgagee that the Obligations are fully andfinally paid and the Liens granted hereunder have been released.

 

**3.7****                              ****INDEMNIFICATION****.  MORTGAGOR AGREES TO INDEMNIFY MORTGAGEE ANDTHE OTHER CREDIT PARTIES, AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS,EMPLOYEES, AND AGENTS (COLLECTIVELY, THE “INDEMNIFIED PARTIES”) FROM,AND DISCHARGE, RELEASE AND HOLD EACH OF THEM HARMLESS AGAINST ALL LOSSES,DAMAGES, CLAIMS, ACTIONS, LIABILITIES, JUDGMENTS, COSTS, ATTORNEYS FEES OROTHER CHARGES OF WHATSOEVER KIND OR NATURE (HEREAFTER REFERRED TO AS “CLAIMS”)MADE AGAINST, IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM IN ANY ASA CONSEQUENCE OF THE ASSERTION EITHER BEFORE OR AFTER THE PAYMENT IN FULL OFTHE OBLIGATIONS THAT ANY OF THE INDEMNIFIED PARTIES RECEIVED HYDROCARBONS ORPROCEEDS PURSUANT TO THIS MORTGAGE OR PURSUANT TO ANY RIGHT TO COLLECT PROCEEDSDIRECTLY FROM ACCOUNT DEBTORS WHICH ARE CLAIMED BY THIRD PERSONS.  THE INDEMNIFIED PARTIES WILL HAVE THE RIGHTTO EMPLOY ATTORNEYS AND TO DEFEND AGAINST ANY SUCH CLAIMS AND UNLESS FURNISHEDWITH REASONABLE INDEMNITY, THE INDEMNIFIED PARTIES WILL HAVE THE RIGHT TO PAYOR COMPROMISE AND ADJUST ALL SUCH CLAIMS. MORTGAGOR WILL INDEMNIFY AND PAY TO THE INDEMNIFIED PARTIES ALL SUCHAMOUNTS AS MAY BE PAID IN RESPECT THEREOF, OR AS MAY BE SUCCESSFULLYADJUDICATED AGAINST ANY OF THE INDEMNIFIED PARTIES.  THE INDEMNITY UNDER THIS SECTION SHALLAPPLY TO CLAIMS ARISING OR INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’SOWN NEGLIGENCE BUT SHALL NOT APPLY TO CLAIMS ARISING OR INCURRED BY REASON OFTHE PERSON BEING INDEMNIFIED’S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT**.  **THE LIABILITIES OFMORTGAGOR AS SET FORTH IN THIS SECTION 3.7 SHALL SURVIVE THE TERMINATIONOF THIS MORTGAGE.**

 

**ARTICLE IV**

**Mortgagor’s Warranties and Covenants**

 

4.1                                 **Paymentof Obligations**.  Mortgagorcovenants that Mortgagor shall timely pay and perform the Obligations securedby this Mortgage.

 

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4.2                                 **Representationsand Warranties**.  Mortgagorrepresents and warrants as follows:

 

(a)                                  *Incorporationof Representations and Warranties from the Credit Agreement*.  The representations and warranties applicableto the Mortgagor and to its Properties contained in Article IV of theCredit Agreement are hereby confirmed and restated, each such representationand warranty, together with all related definitions and ancillary provisions,being hereby incorporated into this Mortgage by reference as thoughspecifically set forth in this Section.

 

(b)                                 *Title toCollateral*.  Mortgagorhas good and marketable title to the Collateral as is customary in the oil andgas industry in all material respects and free from all Liens, securityinterests or other encumbrances except as permitted by the provisions of Section 4.4(i) below.  The descriptions set forth in Exhibit Aof the quantum and nature of the interests of Mortgagor in and to the Oil andGas Properties include the entire interests of Mortgagor in the Oil and GasProperties and are complete and accurate in all material respects.  There are no “back-in” or “reversionary”interests held by third parties which could reduce the interests of Mortgagorin the Oil and Gas Properties except as set forth on Exhibit A.  No operating or other agreement to whichMortgagor is a party or by which Mortgagor is bound affecting any part of theCollateral requires Mortgagor to bear any of the costs relating to theCollateral greater than the leasehold interest of Mortgagor in such portion ofthe Collateral, except in the event Mortgagor is obligated under an operatingagreement to assume a portion of a defaulting party’s share of costs.

 

(c)                                  *Statusof Leases, Term Mineral Interests and Contracts*.  All of the leases and term mineral interestsin the Oil and Gas Properties are valid, subsisting and in full force andeffect, and Mortgagor has no knowledge that a default exists under any of theterms or provisions, express or implied, of any of such leases or interests orunder any agreement to which the same are subject.  All of the Contracts and obligations ofMortgagor that relate to the Oil and Gas Properties are in full force andeffect and constitute legal, valid and binding obligations of Mortgagor.  Neither Mortgagor nor, to the knowledge ofMortgagor, any other party to any leases or term mineral interests in the Oiland Gas Properties or any Contract (A) is in breach of or default, or withthe lapse of time or the giving of notice, or both, would be in breach ordefault, with respect to any obligations thereunder, whether express orimplied, or (B) has given or threatened to give notice of any defaultunder or inquiry into any possible default under, or action to alter,terminate, rescind or procure a judicial reformation of, any lease in the Oiland Gas Properties or any Contract.

 

(d)                                 *ProductionBurdens, Taxes, Expenses and Revenues*.  All rentals, royalties, overriding royalties,shut-in royalties and other payments due under or with respect to the Oil andGas Properties have been properly and timely paid, except for payments held insuspense in the ordinary course of business or remitted to state agenciesresponsible for handling unclaimed property. All taxes have been properly and timely paid except to the extent suchtaxes are being contested in good faith and for which reserves in accordancewith GAAP have been made as reflected in the Financial Statements.  All expenses payable under the terms of the

 

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Contractshave been properly and timely paid except for such expenses being contested ingood faith by appropriate proceedings, and for which reserves shall have beenmade therefore and except for such expenses as are being currently paid priorto delinquency in the ordinary course of business.  Except for Mortgagor’s interests in certainOil and Gas Properties, which Mortgagor represents do not constitute a materialportion (with 2% being deemed material) of the value of the Collateral and allother Properties of Mortgagor securing the Obligations, all of the proceedsfrom the sale of Hydrocarbons produced from the Realty Collateral are beingproperly and timely paid to Mortgagor by the purchasers or other remitters ofproduction proceeds without suspense. Mortgagor’s ownership of the Hydrocarbons and the undivided interests thereinas specified on attached Exhibit A will, after giving full effect to allLiens permitted hereby and after giving full effect to the agreements orinstruments set forth on Exhibit A and any other instruments or agreementsaffecting Mortgagor’s ownership of the Hydrocarbons, afford Mortgagor not lessthan those net interests (expressed as a fraction, percentage or decimal) inthe production from or which is allocated to such Hydrocarbons specified as netrevenue interest on attached Exhibit A and will cause Mortgagor to bearnot more than that portion (expressed as a fraction, percentage or decimal),specified as working interest on attached Exhibit A, of the costs ofdrilling, developing and operating the wells identified on Exhibit A.

 

(e)                                  *Pricing*.  The prices being received for the productionof Hydrocarbons do not violate any Contract or any law or regulation.  Where applicable, all of the wells located onthe Oil and Gas Properties and production of Hydrocarbons therefrom have beenproperly classified under appropriate governmental regulations.

 

(f)                                    *GasRegulatory Matters*.  Mortgagorhas filed with the appropriate state and federal agencies all necessary rateand collection filings and all necessary applications for well determinationsunder the Natural Gas Act of 1938, as amended, the Natural Gas Policy Act of1978, as amended, and the rules and regulations of the Federal EnergyRegulatory Commission (the “FERC”) thereunder, and each such applicationhas been approved by or is pending before the appropriate state or federalagency.

 

(g)                                 *ProductionBalances*.  Except asset forth below or permitted by the Credit Agreement, none of the purchasersunder any production sales contracts are entitled to “make-up” or otherwisereceive deliveries of Hydrocarbons at any time after the date hereof withoutpaying at such time the full contract price therefor.  Except as set forth below, no person isentitled to receive any portion of the interest of Mortgagor in any Hydrocarbonsor to receive cash or other payments to “balance” any disproportionateallocation of Hydrocarbons under any operating agreement, gas balancing andstorage agreement, gas processing or dehydration agreement, or other similaragreements.  Mortgagor believes that certainthird parties may be entitled to receive “make-up” deliveries of Hydrocarbonsor cash or other payments to “balance” a disproportionate allocation ofHydrocarbons produced from certain Oil and Gas Properties; provided, however,Mortgagor represents and warrants that such deliveries or payments are notmaterial (with 2% being deemed material) in aggregate amount when compared tothe value of the Collateral and all other Properties of Mortgagor securing theObligations.

 

(h)                                 *DrillingObligations*.  There areno obligations under any Oil and Gas Property or Contract which require thedrilling of additional wells or operations to earn or to

 

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continueto hold any of the Oil and Gas Properties in force and effect, except for oiland gas leases that are still within their primary term (each of which willrequire drilling operations to perpetuate it beyond its primary term) and thestandard provision in certain oil and gas leases that requires eitherproduction or operations to perpetuate each respective lease after theexpiration of its primary term.

 

(i)                                     *ComplianceWith Laws*.  All wellson or attributable to the Oil and Gas Properties have been drilled, completedand operated, and all production therefrom has been accounted for and paid tothe persons entitled thereto, in compliance in all material respects with allapplicable federal, state and local laws and applicable rules andregulations of the federal, state and local regulatory authorities havingjurisdiction thereof.

 

(j)                                     *RegulatoryFilings and Compliance*.  Allnecessary regulatory filings have been properly made, and all regulatory(including Environmental) processes have been complied with, in connection withthe drilling, completion and operation of the wells on or attributable to theOil and Gas Properties, and the issuance of all rights of way and other surfaceuses necessary for the exploration, development and transportation to and fromsuch wells, and all other operations related thereto.

 

(k)                                  *Allowables*.  All production and sales of Hydrocarbonsproduced or sold from the Oil and Gas Properties have been made in accordancewith any applicable allowables (plus permitted tolerances) imposed by anyGovernmental Authorities.

 

(l)                                     *RefundObligations*.  Mortgagorhas not collected any proceeds from the sale of Hydrocarbons produced from theOil and Gas Properties which are subject to any refund obligation.

 

(m)                               The address ofMortgagor’s place of business, residence, chief executive office and officewhere Mortgagor keeps its records concerning accounts, contract rights andgeneral intangibles is as set forth in Section 7.12, and there has been nochange in the location of Mortgagor’s place of business, residence, chiefexecutive office and office where it keeps such records and no change ofMortgagor’s name during the four months immediately preceding the EffectiveDate.  Mortgagor hereby represents andwarrants that its organizational number is                        ,the state of its formation is Delaware and the correct spelling of Mortgagor’sname is as set forth in its signature block below.

 

4.3                                 **FurtherAssurances**.

 

(a)                                  Mortgagorcovenants that Mortgagor shall execute and deliver such other and furtherinstruments, and shall do such other and further acts as in the opinion of Mortgageemay be necessary or desirable to carry out more effectively the purposes ofthis Mortgage, including without limiting the generality of the foregoing, (i) promptcorrection of any defect in the execution or acknowledgment of this Mortgage,any written instrument comprising part or all of the Obligations, or any otherdocument used in connection herewith; (ii) prompt correction of any defectwhich may hereafter be discovered in the title to the Collateral; (iii) promptexecution and delivery of all division or transfer orders or other instrumentswhich in Mortgagee’s opinion

 

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arerequired to transfer to Mortgagee, for its benefit and the ratable benefit ofthe other Credit Parties, the assigned proceeds from the sale of Hydrocarbonsfrom the Oil and Gas Properties; and (iv) prompt payment when due andowing of all taxes, assessments and governmental charges imposed on thisMortgage, upon the interest of Mortgagee or upon the income and profits from anyof the above.

 

(b)                                 Mortgagorcovenants that Mortgagor shall maintain and preserve the Lien and securityinterest herein created as an Acceptable Security Interest until all of theObligations have been fully and finally paid and discharged in full, all Commitmentshave been terminated or expired and the Credit Agreement has been terminated inwriting.

 

(c)                                  Mortgagor shallimmediately notify Mortgagee of any discontinuance of or change in the addressof Mortgagor’s place of business, residence, chief executive office or officewhere it keeps records concerning accounts, contract rights and generalintangibles.

 

4.4                                 **Operationof Oil and Gas Properties**.  Until all of the Obligations have been fullyand finally paid and discharged in full, all Commitments have been terminatedor expired, and the Credit Agreement has been terminated in writing, Mortgagorshall (at Mortgagor’s own expense):

 

(a)                                  not enter intoany operating agreement, contract or agreement which materially adverselyaffects the Collateral;

 

(b)                                 do all thingsnecessary and within the reasonable control of Mortgagor to keep, or cause tobe kept, in full force and effect the Oil and Gas Properties and Mortgagor’sinterests therein;

 

(c)                                  neitherabandon, forfeit, surrender, release, sell, assign, sublease, farmout orconvey, nor agree to sell, assign, sublease, farmout or convey, nor mortgage orgrant security interests in, nor otherwise dispose of or encumber any of theCollateral or any interest therein, except as permitted by the Credit Agreement;

 

(d)                                 operate the Oiland Gas Properties or, to the extent that the right of operation is vested inothers, will exercise its best efforts to cause the operator to operate the Oiland Gas Properties, in each case in such a manner as to cause the Collateral tobe maintained, developed and protected against drainage and continuouslyoperated for the production and marketing of Hydrocarbons in a good andworkmanlike manner as a prudent operator would in accordance with (i) generallyaccepted practices, (ii) applicable oil and gas leases and Contracts, and (iii) allapplicable Federal, state and local laws, rules and regulations;

 

(e)                                  promptly pay orcause to be paid when due and owing (i) all rentals and royalties payablein respect of the Collateral; (ii) all expenses incurred in or arisingfrom the operation or development of the Collateral; (iii) all taxes,assessments and governmental charges imposed upon the Collateral, upon theincome and profits from any of the Collateral, or upon Mortgagee because of itsinterest therein; and (iv) all local, state and federal taxes, paymentsand contributions for which Mortgagor may be liable except to the extentdisputed as permitted under

 

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theCredit Agreement; and indemnify Mortgagee from all liability in connection withany of the foregoing;

 

(f)                                    promptly takeall action necessary to enforce or secure the observance or performance of anyterm, covenant, agreement or condition to be observed or performed by thirdparties under any Contract, or any part thereof, or to exercise any of itsrights, remedies, powers and privileges under any Contract, all in accordancewith the respective terms thereof;

 

(g)                                 other than asotherwise permitted under the terms of the Credit Agreement, cause theOperating Equipment and the Fixture Operating Equipment to be kept in good andeffective operating condition, ordinary wear and tear excepted, and cause to bemade all repairs, renewals, replacements, additions and improvements thereof orthereto, necessary or appropriate in connection with the production ofHydrocarbons from the Oil and Gas Properties;

 

(h)                                 permit and doall things necessary or proper to enable the Mortgagee (through any of theirrespective agents and employees) to enter upon the Oil and Gas Properties forthe purpose of investigating and inspecting the condition and operations of theCollateral in accordance with the terms of the Credit Agreement;

 

(i)                                     cause theCollateral to be kept free and clear of Liens, charges, security interests andencumbrances of every character other than (i) the Liens and securityinterests created and assigned by this Mortgage and (ii) the PermittedLiens;

 

(j)                                     carry andmaintain the insurance required by the Credit Agreement;

 

(k)                                  furnish to Mortgagee,upon request, copies of any Contracts; and

 

(l)                                     promptlyperform all covenants express or implied in any Contract.

 

4.5                                 **Recording**.  Mortgagor shall promptly (at Mortgagor’s ownexpense) record, register, deposit and file this Mortgage and every otherinstrument in addition or supplement hereto, including applicable financingstatements, in such offices and places within the state where the Collateral islocated and in the state where the Mortgagor is registered as a limitedliability company and at such times and as often as may be necessary topreserve, protect and renew the Lien and security interest herein created as anAcceptable Security Interest on real or personal property as the case may be,and otherwise shall do and perform all matters or things necessary or expedientto be done or observed by reason of any Legal Requirement for the purpose ofeffectively creating, perfecting, maintaining and preserving the Lien andsecurity interest created hereby in and on the Collateral.

 

4.6                                 **Records,Statements and Reports**. Mortgagor shall keepproper books of record and account in which complete and correct entries shallbe made of Mortgagor’s transactions in accordance with the method of accountingrequired in the Credit Agreement and shall furnish or cause to be furnished toMortgagee the reports required to be delivered pursuant to the terms of theCredit Agreement.

 

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4.7                                 **Insurance**.  To the extent that insurance is carried by athird-party operator on behalf of Mortgagor, upon request by Mortgagee,Mortgagor shall obtain and provide Mortgagee with copies of certificates ofinsurance showing Mortgagor as a named insured. Mortgagor hereby assigns to Mortgagee for its benefit and the benefit ofthe other Credit Parties any and all monies that may become payable under anysuch policies of insurance by reason of damage, loss or destruction of any ofthe Collateral and Mortgagee may receive such monies and apply all or any partof the sums so collected, at its election, toward payment of the Obligations,whether or not such Obligations are then due and payable, in such manner asMortgagee may elect. Any insurance proceeds received by Mortgagor shall be heldin trust for the benefit of Mortgagee, shall be segregated from other funds ofMortgagor and shall be forthwith paid over to Mortgagee.

 

**ARTICLE V**

**Default**

 

5.1                                 **Eventsof Default**.  An Event ofDefault under the terms of the Credit Agreement shall constitute an “Event ofDefault” under this Mortgage.

 

5.2                                 **AccelerationUpon Default**.  Upon theoccurrence and during the continuance of any Event of Default, Mortgagee may(or shall at the request of the Majority Lenders), declare the entire unpaidprincipal of, and the interest accrued on, and all other amounts owed inconnection with, the Obligations to be forthwith due and payable, whereupon thesame shall become immediately due and payable without any protest, presentment,demand, notice of intent to accelerate, notice of acceleration or furthernotice of any kind, all of which are hereby expressly waived by Mortgagor.  Whether or not Mortgagee or the MajorityLenders elect to accelerate as herein provided, Mortgagee may simultaneously,or thereafter, without any further notice to Mortgagor, exercise any otherright or remedy provided in this Mortgage or otherwise existing under theCredit Agreement or any other Loan Documents or any other agreement, document,or instrument evidencing obligations owing from the Mortgagor to any of theCredit Parties.

 

**ARTICLE VI**

**Mortgagee’s Rights**

 

6.1                                 **Rightsto Realty Collateral Upon Default**.

 

(a)                                  *Operationof Property by Mortgagee*.  Uponthe occurrence and during the continuance of an Event of Default, and inaddition to all other rights of Mortgagee, Mortgagee shall have the followingrights and powers (but no obligation):

 

(i) To enter upon and take possession of any of the Realty Collateral and excludeMortgagor therefrom;

 

(ii) To hold, use, administer, manage and operate the Realty Collateral to theextent that Mortgagor could do so, and without any liability to Mortgagor inconnection with such operations; and

 

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(iii) Tothe extent that Mortgagor could do so, to collect, receive and receipt for allHydrocarbons produced and sold from the Realty Collateral, to make repairs, topurchase machinery and equipment, to conduct workover operations, to drilladditional wells, and to exercise every power, right and privilege of Mortgagorwith respect to the Realty Collateral.

 

Mortgageemay designate any person, firm, corporation or other entity to act on itsbehalf in exercising the foregoing rights and powers.  When and if the expenses of such operationand development (including costs of unsuccessful workover operations oradditional wells) have been paid and all of the Obligations have been fully andfinally paid and discharged in full, all of the Commitments have terminated orexpired, and the Credit Agreement has been terminated in writing, the RealtyCollateral shall be returned to Mortgagor (providing there has been noforeclosure sale).

 

(b)                                 *JudicialProceedings*.  Upon theoccurrence and during the continuance of an Event of Default, the Mortgagee, inlieu of or in addition to exercising the power of sale hereafter given, mayproceed by a suit or suits, in equity or at law (i) for the specificperformance of any covenant or agreement herein contained or in aid of theexecution of any power herein granted, (ii) for the appointment of areceiver whether there is then pending any foreclosure hereunder or the sale ofthe Realty Collateral, or (iii) for the enforcement of any otherappropriate legal or equitable remedy. Furthermore, if an action is filed to foreclose this Mortgage, or ifMortgagee seeks to foreclose this Mortgage by power of sale under the OklahomaPower of Sale Mortgage Foreclosure Act, Mortgagee shall be entitled to theimmediate appointment of a receiver pursuant to 12 O.S. §1551(2)(c) withoutthe necessity of further proof.

 

(c)                                  *Intentionallyomitted*.

 

(d)                                 *CertainAspects of Sale*.  Mortgageewill have the right to become the purchaser at any foreclosure sale and tocredit the then outstanding balance of the Obligations against the amountpayable by Mortgagee as purchaser at such sale. Statements of fact or other recitals contained in any conveyance to anypurchaser or purchasers at any sale made hereunder will conclusively establishthe occurrence of an Event of Default, any acceleration of the maturity of theObligations, the advertisement and conduct of such sale in the manner providedherein and the truth and accuracy of all other matters stated therein.  Mortgagor does hereby ratify and confirm alllegal acts that the Mortgagee may do in carrying out the Mortgagee’s duties andobligations under this Mortgage, and Mortgagor hereby irrevocably appointsMortgagee to be the attorney-in-fact of Mortgagor and in the name and on behalfof Mortgagor to execute and deliver any deeds, transfers, conveyances,assignments, assurances and notices which Mortgagor ought to execute anddeliver and do and perform any and all such acts and things which Mortgagorought to do and perform under the covenants herein contained and generally touse the name of Mortgagor in the exercise of all or any of the powers herebyconferred on Mortgagee.  Upon any sale,whether under the power of sale hereby given or by virtue of judicialproceedings, it shall not be necessary for Mortgagee or any public officer actingunder execution or by order of court, to have physically present orconstructively in his possession any of the

 

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Collateral,and Mortgagor hereby agrees to deliver to the purchaser or purchasers at suchsale on the date of sale the Collateral purchased by such purchasers at suchsale and if it should be impossible or impracticable to make actual delivery ofsuch Collateral, then the title and right of possession to such Collateralshall pass to the purchaser or purchasers at such sale as completely as if thesame had been actually present and delivered.

 

(e)                                  *Effectof Sale*.  Any sale or sales of theRealty Collateral will operate to divest all right, title, interest, claim anddemand whatsoever, either at law or in equity, of Mortgagor in and to thepremises and the Realty Collateral sold, and will be a perpetual bar, both atlaw and in equity, against Mortgagor, Mortgagor’s successors or assigns, andagainst any and all persons claiming or who shall thereafter claim all or anyof the Realty Collateral sold by, through or under Mortgagor, or Mortgagor’ssuccessors or assigns.  Nevertheless, ifrequested by the Mortgagee so to do, Mortgagor shall join in the execution anddelivery of all proper conveyances, assignments and transfers of the Propertyso sold.  The purchaser or purchasers atthe foreclosure sale will receive as incident to his, her, its or their ownownership, immediate possession of the Realty Collateral purchased andMortgagor agrees that if Mortgagor retains possession of the Realty Collateralor any part thereof subsequent to such sale, Mortgagor will be considered atenant at sufferance of the purchaser or purchasers and will be subject toeviction and removal by any lawful means, with or without judicialintervention, and all damages by reason thereof are hereby expressly waived byMortgagor.

 

(f)                                    *Provisionswith Respect to the Power of Sale*.  Notwithstanding any other provisions in thisMortgage, if Mortgagee sells the Collateral under the power of sale granted bythis Mortgage, the following provisions shall apply:

 

(i)                                     The noticesdescribed in Title 46 Okla. Stat. Sec. 40 and following, as amended (the “Act”),shall be given as and when required therein;

 

(ii)                                  All noticeswhich are required to be given Mortgagor under the Act may be given toMortgagor at the address which is set forth in the first paragraph of thisMortgage, or if such address has been changed pursuant to this Mortgage, tothat changed address;

 

(iii)                               Mortgagee maypurchase part or all of the Collateral at any such sale;

 

(iv)                              Mortgagorstipulates the total amounts owing under this Mortgage will have benefitedMortgagor substantially and are not unconscionable in amount, and therefore thetotal amount of the Obligations, less the fair market value of the Collateralsold under such Act, and any prior indebtedness, shall be available as adeficiency judgment against Mortgagor;

 

(v)                                 The purchaserunder such sale may seek and obtain a writ of assistance by application to the DistrictCourt in the county in Oklahoma in which any part of the Realty Collateral islocated, or the United States District Court having venue for actions arisingin such county;

 

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(vi)                              Mortgagee may,at its option, proceed with foreclosure under judicial proceedings instead ofexercising the rights of this Power of Sale;

 

(vii)                           All otherprocedures and requirements of such Act shall be followed;

 

(viii)                        After thecompletion of the sale as contemplated by such Act, the purchaser shall haveall of Mortgagor’s right, title and interest in and to the Collateral, free andclear of all rights of Mortgagor, and free and clear of all rights of anyperson with a priority which is subordinate to the lien of this Mortgage,except any right which may be reserved under such Act;

 

(ix)                                Any recitationin any notice, publication thereof, recordation thereof, or deed, of theexistence of an event of default, giving, publication, service and recordationof notice, occurrence of the sale at the time and place set forth in suchnotice or any postponement authorized and effective under such Act,circumstances of sale and bidding, and compliance with the terms of such Act,shall be presumed to be statements of fact and no person shall be required toinvestigate the truthfulness or accuracy of any such recitation; and

 

(x)                                   The proceeds ofany such sale shall be applied first to the costs, attorney fees, and expensesof sale, next to the Obligations; except that if such application of proceedsconflicts with the requirements of such Act, the proceeds shall be applied asprovided under such Act only to the extent of any such conflict.

 

(g)                                 *Applicationof Proceeds*.  Theproceeds of any sale of the Realty Collateral or any part thereof, whetherunder the power of sale herein granted and conferred or by virtue of judicialproceedings, shall either be, at the option of Mortgagee, applied at the timeof receipt, or held by Mortgagee in the Collateral Account as additionalCollateral, and in either case, applied in the order set forth in Section 7.06of the Credit Agreement.

 

(h)                                 *Appraisementand Marshalling*.  Mortgagoragrees, to the full extent that Mortgagor may lawfully so agree, that Mortgagorwill not at any time insist upon or plead or in any manner whatever claim thebenefit of any appraisement, valuation, stay, extension or redemption law, nowor hereafter in force, in order to prevent or hinder the enforcement orforeclosure of this Mortgage, the absolute sale of the Collateral, includingthe Realty Collateral, or the possession thereof by any purchaser at any salemade pursuant to this Mortgage or pursuant to the decree of any court ofcompetent jurisdiction.  Mortgagee herebywaives or does not waive appraisement, such election to be made at or beforeentry of judgment in any action to foreclose this Mortgage, and Mortgagor, forMortgagor and all who may claim through or under Mortgagor, hereby waives, tothe extent that Mortgagor may lawfully do so under any applicable law, any andall rights to have the Collateral, including the Realty Collateral, marshaledupon any foreclosure of the Lien hereof or sold in inverse order ofalienation.  Mortgagor agrees that, inthe event of a judicial foreclosure or a sale under the power of sale provisionsof this Mortgage, the Collateral, including the Realty Collateral, may be soldin part, in parcels or as an entirety as directed by Mortgagee.

 

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6.2                                 **Rightsto Personalty Collateral Upon Default**.  Upon the occurrence of an Event of Default,or at any time thereafter, Mortgagee may proceed against the PersonaltyCollateral in accordance with the rights and remedies granted herein withrespect to the Realty Collateral, or will have all rights and remedies grantedby the Uniform Commercial Code as in effect in Oklahoma and this Mortgage.  Mortgagee shall have the right to takepossession of the Personalty Collateral, and for this purpose Mortgagee mayenter upon any premises on which any or all of the Personalty Collateral issituated and, to the extent that Mortgagor could do so, take possession of andoperate the Personalty Collateral or remove it therefrom.  Mortgagee may require Mortgagor to assemblethe Personalty Collateral and make it available to Mortgagee at a place to bedesignated by Mortgagee which is reasonably convenient to both parties.  Unless the Personalty Collateral isperishable or threatens to decline speedily in value or is of a type customarilysold on a recognized market, Mortgagee will send Mortgagor reasonable notice ofthe time and place of any public sale or of the time after which any privatesale or other disposition of the Personalty Collateral is to be made.  This requirement of sending reasonable noticewill be met if such notice is mailed, postage prepaid, to Mortgagor at theaddress designated in Section 7.12 hereof (or such other address as hasbeen designated as provided herein) at least ten days before the time of thesale or disposition.  In addition to theexpenses of retaking, holding, preparing for sale, selling and the like,Mortgagee will be entitled to recover attorney’s fees and legal expenses asprovided for in this Mortgage and in the writings evidencing the Obligationsbefore applying the balance of the proceeds from the sale or other dispositiontoward satisfaction of the Obligations. Mortgagor will remain liable for any deficiency remaining after the saleor other disposition.

 

6.3                                 **Rightsto Fixture Collateral Upon Default**.  Upon the occurrence of an Event of Default,or at any time thereafter, Mortgagee may elect to treat the Fixture Collateralas either Realty Collateral or as Personalty Collateral (but not both) andproceed to exercise such rights as apply to the type of Collateral selected.

 

6.4                                 **AccountDebtors**.  Mortgageemay, in its discretion, after the occurrence and during the continuance of anEvent of Default, notify any account debtor to make payments directly toMortgagee and contact account debtors directly to verify information furnishedby Mortgagor.  Mortgagee shall not haveany obligation to preserve any rights against prior parties.

 

6.5                                 **Costsand Expenses**.  All sumsadvanced or costs or expenses incurred by Mortgagee (either by it directly oron its behalf by any receiver appointed hereunder) in protecting and enforcingits rights hereunder shall constitute a demand obligation owing by Mortgagor toMortgagee as part of the Obligations. Mortgagor hereby agrees to repay such sums on demand plus interestthereon from the date of the advance or incurrence until reimbursement ofMortgagee at the Reimbursement Rate.

 

6.6                                 **Set-Off**.  Upon the occurrence and during thecontinuance of any Event of Default, Mortgagee shall have the right to set-offany funds of Mortgagor in the possession of Mortgagee against any amounts thendue by Mortgagor to Mortgagee pursuant to this Mortgage.

 

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**ARTICLE VII**

**Miscellaneous**

 

7.1                                 **Advancesby Mortgagee**.  Each andevery covenant of Mortgagor herein contained shall be performed and kept byMortgagor solely at Mortgagor’s expense. If Mortgagor fails to perform or keep any of the covenants of whatsoeverkind or nature contained in this Mortgage, Mortgagee (either by it directly oron its behalf by any receiver appointed hereunder) may, but will not beobligated to, make advances to perform the same on Mortgagor’s behalf, andMortgagor hereby agrees to repay such sums and any attorneys’ fees incurred inconnection therewith on demand plus interest thereon from the date of theadvance until reimbursement of Mortgagee at the Reimbursement Rate.  In addition, Mortgagor hereby agrees to repayon demand any costs, expenses and attorney’s fees incurred by Mortgagee whichare to be obligations of Mortgagor pursuant to, or allowed by, the terms ofthis Mortgage, including such costs, expenses and attorney’s fees incurredpursuant to Section 3.1(h), Section 6.5 or Section 7.2 hereof,plus interest thereon from the date of the advance by Mortgagee untilreimbursement of Mortgagee at the Reimbursement Rate.  Such amounts will be in addition to any sumof money which may, pursuant to the terms and conditions of the writteninstruments comprising part of the Obligations, be due and owing.  No such advance will be deemed to relieveMortgagor from any default hereunder.

 

7.2                                 **Defenseof Claims**.  Mortgagorshall promptly notify Mortgagee in writing of the commencement of any legalproceedings affecting Mortgagor’s title to the Collateral or Mortgagee’s Lienor security interest in the Collateral, or any part thereof, and shall takesuch action, employing attorneys agreeable to Mortgagee, as may be necessary topreserve Mortgagor’s and Mortgagee’s rights affected thereby.  If Mortgagor fails or refuses to adequatelyor vigorously, in the sole judgment of Mortgagee, defend Mortgagor’s orMortgagee’s rights to the Collateral, the Mortgagee may take such action onbehalf of and in the name of Mortgagor and at Mortgagor’s expense.  Moreover, Mortgagee may take such independentaction in connection therewith as it may in its discretion deem proper,including the right to employ independent counsel and to intervene in any suitaffecting the Collateral.  All costs,expenses and attorneys’ fees incurred by Mortgagee pursuant to this Section 7.2or in connection with the defense by Mortgagee of any claims, demands orlitigation relating to Mortgagor, the Collateral or the transactionscontemplated in this Mortgage shall be paid by Mortgagor on demand plusinterest thereon from the date of such demand by Mortgagee until reimbursementof Mortgagee at the Reimbursement Rate.

 

7.3                                 **Termination**.  If all of the Obligations have been fully andfinally paid and discharged in full, all Commitments have been terminated orexpired, and the Credit Agreement has been terminated in writing, then all ofthe Collateral (to the extent not sold, assigned or otherwise transferred aspermitted herein or under applicable law) will revert to Mortgagor and theentire estate, right, title and interest of the Mortgagee will thereupon cease;and Mortgagee in such case shall, upon the request of Mortgagor and the paymentby Mortgagor of all attorneys’ fees and other expenses, deliver to Mortgagorproper instruments acknowledging satisfaction of this Mortgage.

 

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7.4                                 **Renewals,Amendments and Other Security**.  Without notice or consent of Mortgagor,renewals and extensions of the written instruments constituting part or all ofthe Obligations may be given at any time and amendments may be made toagreements relating to any part of such written instruments or theCollateral.  Mortgagee may take or holdother security for the Obligations without notice to or consent of Mortgagor.  The acceptance of this Mortgage by Mortgageeshall not waive or impair any other security Mortgagee may have or hereafteracquire to secure the payment of the Obligations nor shall the taking of anysuch additional security waive or impair the Lien and security interests hereingranted.  The Mortgagee may resort firstto such other security or any part thereof, or first to the security hereingiven or any part thereof, or from time to time to either or both, even to thepartial or complete abandonment of either security, and such action will not bea waiver of any rights conferred by this Mortgage.  This Mortgage may not be amended, waived ormodified except in a written instrument executed by both Mortgagor andMortgagee.

 

7.5                                 **SecurityAgreement, Financing Statement and Fixture Filing**.  This Mortgage will be deemed to be and may beenforced from time to time as an assignment, chattel mortgage, contract, deedof trust, financing statement, real estate mortgage, or security agreement, andfrom time to time as any one or more thereof if appropriate under applicablestate law.  As a financing statement,this Mortgage is intended to cover all Personalty Collateral includingMortgagor’s interest in all Hydrocarbons as and after they are extracted andall accounts arising from the sale thereof at the wellhead.  **THIS MORTGAGE SHALL BEEFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TOFIXTURE COLLATERAL INCLUDED WITHIN THE COLLATERAL**.   This Mortgage shall be filed in the realestate records or other appropriate records of the county or counties in thestate in which any part of the Realty Collateral and Fixture Collateral islocated as well as the Uniform Commercial Code records of the Secretary ofState or other appropriate office of the state in which any Collateral orMortgagor is located.  At Mortgagee’s requestMortgagor shall deliver financing statements covering the PersonaltyCollateral, including all Hydrocarbons sold at the wellhead, and FixtureCollateral, which financing statements may be filed in the Uniform CommercialCode records of the Secretary of State or other appropriate office of the statein which any of the Collateral or Mortgagor is located or in the county whereany of the Collateral is located. Furthermore, Mortgagor hereby irrevocably authorizes Mortgagee and anyaffiliate, employee or agent thereof, at any time and from time to time, tofile in any Uniform Commercial Code jurisdiction any financing statement ordocument and amendments thereto, without the signature of Mortgagor wherepermitted by law, in order to perfect or maintain the perfection of anysecurity interest granted under this Mortgage. A photographic or other reproduction of this Mortgage shall besufficient as a financing statement.

 

7.6                                 **Unenforceableor Inapplicable Provisions**.  If any term, covenant, condition or provisionhereof is invalid, illegal or unenforceable in any respect, the otherprovisions hereof will remain in full force and effect and will be liberallyconstrued in favor of the Mortgagee in order to carry out the provisionshereof.

 

7.7                                 **RightsCumulative**.  Each andevery right, power and remedy herein given to the Mortgagee will be cumulativeand not exclusive, and each and every right, power and remedy whetherspecifically herein given or otherwise existing may be exercised from time totime and

 

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asoften and in such order as may be deemed expedient by the Mortgagee, as thecase may be, and the exercise, or the beginning of the exercise, of any suchright, power or remedy will not be deemed a waiver of the right to exercise, atthe same time or thereafter, any other right, power or remedy.  No delay or omission by Mortgagee in theexercise of any right, power or remedy will impair any such right, power orremedy or operate as a waiver thereof or of any other right, power or remedythen or thereafter existing.

 

7.8                                 **Waiverby Mortgagee**.  Any and allcovenants in this Mortgage may from time to time by instrument in writing byMortgagee, be waived to such extent and in such manner as the Mortgagee maydesire, but no such waiver will ever affect or impair the Mortgagee’s rightshereunder, except to the extent specifically stated in such written instrument.

 

7.9                                 **Terms**.  The term “Mortgagor” as used in this Mortgagewill be construed as singular or plural to correspond with the number ofpersons executing this Mortgage as Mortgagor. If more than one person executes this Mortgage as Mortgagor, his, her,its, or their duties and liabilities under this Mortgage will be joint andseveral.  The terms “Mortgagee” and “Mortgagor”as used in this Mortgage include the heirs, executors or administrators,successors, representatives, receiver, trustees and assigns of thoseparties.  Unless the context otherwiserequires, terms used in this Mortgage which are defined in the UniformCommercial Code of Oklahoma are used with the meanings therein defined.

 

7.10                           **Counterparts**.  This Mortgage may be executed in any numberof counterparts, each of which will for all purposes be deemed to be anoriginal, and all of which are identical except that, to facilitaterecordation, in any particular counties counterpart portions of Exhibit Ahereto which describe Properties situated in counties other than the countiesin which such counterpart is to be recorded may have been omitted.

 

7.11                           **GoverningLaw**.  This Mortgage shall begoverned by and construed in accordance with the laws of the State of Oklahoma.

 

7.12                           **Notice**.  All notices required or permitted to be givenby Mortgagor or Mortgagee shall be made in the manner set forth in the Credit Agreementand shall be addressed as follows:

 
| Mortgagor: | c/o Cano Petroleum, Inc.              |
|------------|--------------------------------------------|
|       | 309  West 7th Street, Suite 1600      |
|       | Fort  Worth, Texas 76102                   |
|       | Attention:  Morris B. Smith, CFO           |
|       | Facsimile:  (817) 334-0222                 |
|       |                                       |
| Mortgagee: | UnionBanCal  Equities, Inc.           |
|       | 445  South Figueroa Street, 13th Floor     |
|       | Los  Angeles, California 90071             |
|       | Attention:   Maggie  Elower |
|       | Facsimile:   213-236-7619   |

 

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7.13                           **Condemnation**.  All awards and payments heretofore andhereafter made for the taking of or injury to the Collateral or any portionthereof whether such taking or injury be done under the power of eminent domainor otherwise, are hereby assigned, and shall be paid to Mortgagee.  Mortgagee is hereby authorized to collect andreceive the proceeds of such awards and payments and to give proper receiptsand acquittances therefor.  Mortgagorhereby agrees to make, execute and deliver, upon request, any and allassignments and other instruments sufficient for the purpose of confirming thisassignment of the awards and payments to Mortgagee free and clear of anyencumbrances of any kind or nature whatsoever. Any such award or payment may, at the option of Mortgagee, be retainedand applied by Mortgagee after payment of attorneys’ fees, costs and expensesincurred in connection with the collection of such award or payment towardpayment of all or a portion of the Obligations, whether or not the Obligationsare then due and payable, or be paid over wholly or in part to Mortgagor forthe purpose of altering, restoring or rebuilding any part of the Collateralwhich may have been altered, damaged or destroyed as a result of any suchtaking, or other injury to the Collateral.

 

7.14                           **Successorsand Assigns**.

 

(a)                                  This Mortgageis binding upon Mortgagor, Mortgagor’s successors and assigns, and shall inureto the benefit of each Credit Party and each of its successors and assigns, andthe provisions hereof shall likewise be covenants running with the land.

 

(b)                                 This Mortgageshall be transferable and negotiable, with the same force and effect and to thesame extent as the Obligations may be transferable, it being understood that,upon the transfer or assignment by the Credit Parties (or any of them) of anyof the Obligations, the legal transfer or assignment by the Credit Parties (orany of them) of any of the Obligations, the legal holder of such Obligationsshall have all of the rights granted to the Mortgagee for the benefit of theCredit Parties under this Mortgage.  TheMortgagor specifically agrees that upon any transfer of all or any portion ofthe Obligations, this Mortgage shall secure with retroactive rank the existingObligations of the Mortgagor to the transferee and any and all Obligations tosuch transferee thereafter arising.

 

(c)                                  The Mortgagorhereby recognizes and agrees that the Credit Parties (or any of them) may, fromtime to time, one or more times, transfer all or any portion of the Obligationsto one or more third parties.  Suchtransfers may include, but are not limited to, sales of participation interestsin such Obligations in favor of one or more third parties.  Upon any transfer of all or any portion ofthe Obligations, the Mortgagee may transfer and deliver any and/or all of theCollateral to the transferee of such Obligations and such Collateral shallsecure any and all of the Obligations in favor of such a transferee thenexisting and thereafter arising, and after any such transfer has taken place,the Mortgagee shall be fully discharged from any and all future liability andresponsibility to the Mortgagor with respect to such Collateral, and transfereethereafter shall be vested with all the powers, rights and duties with respectsuch Collateral.

 

7.15                           **Article andSection Headings**.  Thearticle and section headings in this Mortgage are inserted for convenience ofreference and shall not be considered a part of this Mortgage or used in itsinterpretation.

 

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7.16                           **UsuryNot Intended**.  It is theintent of Mortgagor and Mortgagee in the execution and performance of thisMortgage, the Credit Agreement and the other Loan Documents to contract instrict compliance with applicable usury laws governing the Obligationsincluding such applicable usury laws of the State of Texas and the United Statesof America as are from time-to-time in effect. In furtherance thereof, Mortgagee and Mortgagor stipulate and agree thatnone of the terms and provisions contained in this Mortgage, the CreditAgreement or the other Loan Documents shall ever be construed to create acontract to pay, as consideration for the use, forbearance or detention ofmoney, interest at a rate in excess of the maximum non-usurious rate permittedby applicable law and that for purposes hereof “interest” shall include theaggregate of all charges which constitute interest under such laws that arecontracted for, charged or received under this Mortgage, the Credit Agreementand the other Loan Documents; and in the event that, notwithstanding theforegoing, under any circumstances the aggregate amounts taken, reserved,charged, received or paid on the Obligations, include amounts which byapplicable law are deemed interest which would exceed the maximum non-usuriousrate permitted by applicable law, then such excess shall be deemed to be amistake and Mortgagee shall credit the same on the principal of the Obligations(or if the Obligations shall have been paid in full, refund said excess toMortgagor).  In the event that thematurity of the Obligations is accelerated by reason of any election ofMortgagee resulting from any Event of Default, or in the event of any requiredor permitted prepayment, then such consideration that constitutes interest maynever include more than the maximum non-usurious rate permitted by applicablelaw and excess interest, if any, provided for in this Mortgage, the CreditAgreement or other Loan Documents shall be canceled automatically as of thedate of such acceleration and prepayment and, if theretofore paid, shall becredited on the Obligations or, if the Obligations shall have been paid infull, refunded to Mortgagor.  Indetermining whether or not the interest paid or payable under any specificcontingencies exceeds the maximum non-usurious rate permitted by applicablelaw, Mortgagor and Mortgagee shall to the maximum extent permitted underapplicable law amortize, prorate, allocate and spread in equal part during theperiod of the full stated term of the Obligations, all amounts considered to beinterest under applicable law of any kind contracted for, charged, received orreserved in connection with the Obligation.

 

7.17                           **CreditAgreement**.  To thefullest extent possible, the terms and provisions of the Credit Agreement shallbe read together with the terms and provisions of this Mortgage so that theterms and provisions of this Mortgage do not conflict with the terms andprovisions of the Credit Agreement; provided, however, notwithstanding theforegoing, in the event that any of the terms or provisions of this Mortgageconflict with any terms or provisions of the Credit Agreement, the terms orprovisions of the Credit Agreement shall govern and control for all purposes;provided that the inclusion in this Mortgage of terms and provisions,supplemental rights or remedies in favor of the Secured Party not addressed inthe Credit Agreement shall not be deemed to be a conflict with the CreditAgreement and all such additional terms, provisions, supplemental rights orremedies contained herein shall be given full force and effect.

 

7.18                           **DueAuthorization. **Mortgagorhereby represents, warrants and covenants to Mortgagee that the obligations ofMortgagor under this Mortgage are the valid, binding and legally enforceableobligations of Mortgagor, that the execution, ensealing and delivery of thisMortgage by Mortgagor has been duly and validly authorized in all respects byMortgagor, and

 

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thatthe persons who are executing and delivering this Mortgage on behalf ofMortgagor have full power, authority and legal right to so do, and to observeand perform all of the terms and conditions of this Mortgage on Mortgagor’spart to be observed or performed**.**

 

7.19                           **NoOffsets, Etc. **Mortgagorhereby represents, warrants and covenants to Mortgagee that there are nooffsets, counterclaims or defenses at law or in equity against this Mortgage orthe indebtedness secured hereby**.**

 

7.20                           **BankruptcyLimitation. **Notwithstandinganything contained herein to the contrary, it is the intention of theMortgagor, the Mortgagee and the other Credit Parties that the amount of theObligation secured by the Mortgagor’s interests in any of its Property shall bein, but not in excess of, the maximum amount permitted by fraudulentconveyance, fraudulent transfer and other similar law, rule or regulationof any Governmental Authority applicable to the Mortgagor.  Accordingly, notwithstanding anything to thecontrary contained in this Mortgage in any other agreement or instrumentexecuted in connection with the payment of any of the Obligations, the amountof the Obligations secured by the Mortgagor’s interests in any of its Propertypursuant to this Mortgage shall be limited to an aggregate amount equal to thelargest amount that would not render the Mortgagor’s obligations hereunder orthe Liens and security interest granted to the Mortgagee hereunder subject toavoidance under Section 548 of the United States Bankruptcy Code or anycomparable provision of any other applicable law**.**

 

**7.21****                       ****Subordinationand Intercreditor Agreement.  Referenceis made to the Subordination and Intercreditor Agreement, dated as of                        ,2008 (as amended, restated, supplemented or otherwise modified from time totime, the “Subordination and ***Intercreditor Agreement***”),among Union Bank of California, N.A., as Senior Agent, and******UnionBanCal Equities, Inc.,******asSubordinated Agent, and certain other persons, party or that may become partythereto from time to time. Notwithstanding anything herein to the contrary, this Mortgage, theLiens granted to the Mortgagee pursuant to this Mortgage and the exercise ofany right or remedy by the Mortgagee or any of the Lenders hereunder aresubject to the provisions of the Subordination and IntercreditorAgreement.  In the event of any conflictbetween the terms of the Subordination and Intercreditor Agreement and thisMortgage, the terms of the Subordination and Intercreditor Agreement shallgovern and control.**

 

**THIS WRITTEN AGREEMENT ANDTHE OTHER LOAN DOCUMENTS, AS DEFINED IN THIS MORTGAGE, REPRESENT THE FINALAGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OFPRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THEREARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

 

**[Remainder of this page intentionally left blank.]**

 

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**NOTICE TO MORTGAGOR:**

 

**A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE.  A POWER OF SALE MAY ALLOW THE MORTGAGEETO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT IN AFORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.**

 

EXECUTEDAND DELIVERED effective as of the date first written above.

 
|   | **MORTGAGOR****:**                            |
|--------|-----------------------------------------------|
|   |                                          |
|   | CANO  PETROLEUM, INC., a Delaware corporation |
|   |                                          |
|   |                                          |
|   | By:                                           |   |
|   |                                          | S. Jeffrey Johnson |
|   |                                          | President |
|   |                                          |
|   |                                          |
|   | **MORTGAGEE****:**                            |
|   | ** **                                    |
|   | **UNIONBANCAL EQUITIES, INC.**                |
|   | ** **                                    |
|   | as Administrative Agent                       |
|   |                                          |
|   |                                          |
|   | By:                                           |   |
|   |                                          | Henry Park |
|   |                                          | Senior Vice President |
|   |                                          |
|   |                                          |
|   | By:                                           |   |
|   |                                          | Tom Thompson |
|   |                                          | Senior Vice President |

 

26

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| THE  STATE OF TEXAS | § |   |
|---------------------|--------|--------|
|                | § |   |
| COUNTY  OF DALLAS   | § |   |

 

Thisinstrument was acknowledged before me on this           day of March,2008, by S. Jeffrey Johnson as President of Cano Petroleum, Inc., onbehalf of said limited liability company.

 
|                 |                      |   |
|----------------------|---------------------------|--------|
|                 | Notary  Public in and for |
|                 | the  State of Texas       |
|                 |                      |
|                 |
| STATE  OF CALIFORNIA | )                         |
|                 | )                         |
| COUNTY  OF           | )                         |
|                      |                           |        |  |

 

OnMarch     , 2008, before me, Henry Park, personallyknown to me (or proved to me on the basis of satisfactory evidence) to be theperson whose name is subscribed to the within instrument and acknowledged to methat he executed the same in his authorized capacity, and that by his signatureon the instrument the person, or the entity upon behalf of which the personacted, executed the instrument.

 

WITNESSmy hand and official seal.

 

 
| Signature |   |   (Seal) |
|-----------|--------|--------------------|

 

 
| STATE  OF CALIFORNIA | ) |
|----------------------|---|
|                 | ) |
| COUNTY  OF           | ) |

 

OnMarch     , 2008, before me, Tom Thompson, personallyknown to me (or proved to me on the basis of satisfactory evidence) to be theperson whose name is subscribed to the within instrument and acknowledged to methat he executed the same in his authorized capacity, and that by his signatureon the instrument the person, or the entity upon behalf of which the personacted, executed the instrument.

 

WITNESSmy hand and official seal.

 

 
| Signature |   |   (Seal) |
|-----------|--------|--------------------|

 

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EXHIBIT A

TO

**SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING STATEMENT**

 

Thedesignation “Working Interest” or “WI” or “GWI” when used in this Exhibit meansan interest owned in an oil, gas, and mineral lease that determines thecost-bearing percentage of the owner of such interest.  The designation “Net Revenue Interest” or “NRI”or “NRIO” or “NRIG” means that portion of the production attributable to theowner of a working interest after deduction for all royalty burdens, overridingroyalty burdens or other burdens on production, except severance, production,and other similar taxes.  The designation“Overriding Royalty Interest” “ORRI” means an interest in production which isfree of any obligation for the expense of exploration, development, andproduction, bearing only its pro rata share of severance, production, and othersimilar taxes and, in instances where the document creating the overridingroyalty interest so provides, costs associated with compression, dehydration,other treating or processing, or transportation of production of oil, gas, orother minerals relating to the marketing of such production.  The designation “Royalty Interest” or “RI”means an interest in production which results from an ownership in the mineralfee estate or royalty estate in the relevant land and which is free of anyobligation for the expense of exploration, development, and production, bearingonly its pro rata share of severance, production, and other similar taxes and, in instances where the documentcreating the royalty interest so provides, costs associated with compression,dehydration, other treating or processing or transportation of production ofoil, gas, or other minerals relating to the marketing of such production.  Each amount set forth as “Working Interest”or “WI” or “GWI” or “Net Revenue Interest” or “NRI” or “NRIO” or “NRIG” is theMortgagor’s interest after giving full effect to, among other things, all Lienspermitted by the Credit Agreement and after giving full effect to theagreements or instruments set forth in this Exhibit A and any otherinstruments or agreements affecting Mortgagor’s ownership of the Hydrocarbons.

 

Anyreference in this Exhibit A to wells or units is for warranty of interest,administrative convenience, and identification and shall not limit or restrictthe right, title, interest, or Properties covered by this Mortgage.  All right, title, and interest of Mortgagorin the Properties described herein and in Exhibit A are and shall besubject to this Mortgage, regardless of the presence of any units or wells notdescribed herein.

 

Thereference to book or volume and page herein and in Exhibit A refer tothe recording location of each respective Realty Collateral described hereinand in Exhibit A in the county where the land covered by the RealtyCollateral is located.

 

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**EXHIBIT E**

 

**FORM OF NOTE**

 

**THE OBLIGATIONS OF THEBORROWER UNDER THIS NOTE ARE SUBORDINATED TO THE PAYMENT OF CERTAIN SENIOR DEBTAS SET FORTH IN THE SUBORDINATION AND INTERCREDITOR AGREEMENT REFERRED TOBELOW.**

 

**NOTE**

 

$                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            , 2008

 

For value received, theundersigned Cano Petroleum, Inc., a Delaware corporation (“Borrower”),hereby promises to pay to the order of                                              (“Bank”), the principal amount of                                                                                      Dollars($                            )or, if less, the aggregate outstanding principal amount of the Advances (asdefined in the Credit Agreement referred to below) made by the Bank to theBorrower, together with interest on the unpaid principal amount of the Advancesfrom the date of such Advances until such principal amount is paid in full, atsuch interest rates, and at such times, as are specified in the CreditAgreement.

 

This Note is one of theNotes referred to in, and is entitled to the benefits of, and is subject to theterms of, the Subordinated Credit Agreement dated as of March     ,2008 (as the same may be amended, restated, or modified from time to time, the “CreditAgreement”), among the Borrower, the lenders party thereto (the “Lenders”),and UnionBanCal Equities, Inc., as administrative agent for the Lenders(the “Administrative Agent”). Capitalized terms used in this Note that are defined in the CreditAgreement and not otherwise defined in this Note have the meanings assigned tosuch terms in the Credit Agreement.  TheCredit Agreement, among other things, (a) provides for the making of theAdvances by the Bank to the Borrower in an aggregate amount not to exceed atany time outstanding the Dollar amount first above mentioned, the indebtednessof the Borrower resulting from each such Advance being evidenced by this Noteand (b) contains provisions for acceleration of the maturity of this Noteupon the happening of certain events stated in the Credit Agreement and foroptional and mandatory prepayments of principal prior to the maturity of thisNote upon the terms and conditions specified in the Credit Agreement.

 

Both principal and interestare payable in lawful money of the United States of America to theAdministrative Agent at the place and in the manner specified in the CreditAgreement.  The Bank shall recordpayments of principal made under this Note, but no failure of the Bank to makesuch recordings shall affect the Borrower’s repayment obligations under thisNote.

 

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Without being limited theretoor thereby, this Note is secured by the Security Instruments and guaranteedunder the Guaranties.

 

Except as specificallyprovided in the Credit Agreement, the Borrower hereby waives presentment,demand, protest, notice of intent to accelerate, notice of acceleration, andany other notice of any kind.  No failureto exercise, and no delay in exercising, any rights hereunder on the part ofthe holder of this Note shall operate as a waiver of such rights.

 

This Note is also subject tothe terms and provisions of the Subordination and Intercreditor Agreement datedas of March         , 2008 (as thesame may be modified from time to time, the “Subordination and IntercreditorAgreement”), among the Borrower, the Administrative Agent, the Guarantors,the Lenders, the Senior Agent and the Senior Lenders.  The Subordination and IntercreditorAgreement, among other things, contains subordination provisions thatsubordinate the rights of the Bank to obtain payment of and exercise remedieswith respect to this Note.

 

This Note shall be governedby, and construed and enforced in accordance with, the laws of the state ofTexas (except that Chapter 346 of the Texas Finance Code Chapter, whichregulates certain revolving credit loan accounts shall not apply to this Note).

 

THIS NOTE AND THE OTHER LOANDOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT AGREEMENTS OFTHE PARTIES.

 

THERE ARE NO UNWRITTEN ORALAGREEMENTS BETWEEN THE PARTIES.

 

 
|   | **CANO PETROLEUM, INC.**, a Delaware  corporation |
|--------|---------------------------------------------------|
|   |                                              |
|   |                                              |
|   | By:                                               |   |   |
|   |                                              |
|   | Name:                                             |   |   |
|   |                                              |
|   | Title:                                            |   |   |
|        |                                                   |  |  |  |  |  |

 

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** **

**EXHIBIT F**

** **

**FORM OF NOTICE OFBORROWING**

** **

[Date]

 

UnionBanCalEquities, Inc., as Administrative Agent

445South Figueroa Street, 15th Floor

LosAngeles, California 90071

 

Attention:  [LOAN PROCESSOR]

 

Ladies and Gentlemen:

 

The undersigned, CanoPetroleum, Inc., a Delaware corporation (the “Borrower”), refers tothe Subordinated Credit Agreement dated as of March       ,2008 (as the same has been and may be amended, restated or modified fromtime-to-time, the “Credit Agreement,” the defined terms of which areused in this Notice of Borrowing unless otherwise defined in this Notice ofBorrowing) among the Borrower, the lenders party thereto (the “Lenders”),and UnionBanCal Equities, Inc., as administrative agent for the Lenders(the “Administrative Agent”), and hereby gives you irrevocable noticepursuant to Section 2.03(a) of the Credit Agreement that theundersigned hereby requests a Borrowing, and in connection with that requestsets forth below the information relating to such Borrowing (the “ProposedBorrowing”) as required by Section 2.03(a) of the CreditAgreement:

 

(a)                                  The Business Day of the ProposedBorrowing is                          ,          .

 

(b)                                 The Proposed Borrowing will be composedof [Reference Rate Advances] [Eurodollar Rate Advances].

 

(c)                                  The aggregate amount of the ProposedBorrowing is$                        .

 

(d)                                 [The Interest Period for each EurodollarRate Advance made as part of the Proposed Borrowing is[           month[s]].]

 

The Borrower herebycertifies that the following statements are true on the date hereof, and willbe true on the date of the Proposed Borrowing:

 

(1)                                  the representations and warrantiescontained in Article IV of the Credit Agreement and the representationsand warranties contained in the Security Instruments, the Guaranties, and eachof the other Loan Documents are true and correct in all material respects onand as of the date of the Proposed Borrowing, before and after giving effect tothe Proposed Borrowing and to the application of the proceeds from the ProposedBorrowing, as though made on and as of such date, except to the extent that anysuch representation or warranty expressly 

 

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relates solely to an earlier date, in which case itshall have been true and correct in all material respects as of such earlierdate; and

 

(2)                                  no Default has occurred and is continuingor would result from the Proposed Borrowing or from the application of theproceeds therefrom.

 
|   | Very  truly yours,               |
|--------|----------------------------------|
|   |                             |
|   |                             |
|   | CANO PETROLEUM, INC., a Delaware |
|   | corporation                      |
|   |                             |
|   |                             |
|   | By:                              |   |
|   |                             |   |
|   | Name:                            |   |
|   |                             |
|   | Title:                           |   |
|        |                                  |  |  |  |

 

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** **

**EXHIBIT G**

** **

**FORM OF NOTICE OFCONVERSION OR CONTINUATION**

** **

[Date]

 

UnionBanCalEquities, Inc., as Administrative Agent445 South Figueroa Street, 15th FloorLos Angeles, California 90071

Attention:[LOAN PROCESSOR]

 

Ladies and Gentlemen:

 

The undersigned, CanoPetroleum, Inc., a Delaware corporation (the “Borrower”), refers tothe Subordinated Credit Agreement dated as of March       ,2008 (as the same may be amended, restated or modified from time-to-time, the “CreditAgreement,” the defined terms of which are used in this Notice ofConversion or Continuation unless otherwise defined in this Notice ofConversion or Continuation) among the Borrower, the lenders party thereto (the “Lenders”),and UnionBanCal Equities, Inc., as administrative agent for the Lenders(the “Administrative Agent”), and hereby gives you irrevocable noticepursuant to Section 2.03(b) of the Credit Agreement that theundersigned hereby requests a Conversion or continuation of an outstandingBorrowing, and in connection with that request sets forth below the informationrelating to such Conversion or continuation (the “Proposed Borrowing”)as required by Section 2.03(b) of the Credit Agreement:

 

(a)                                  The Business Day of the ProposedBorrowing is                              ,20    .

 

(b)                                 The Proposed Borrowing consists of [aConversion to [Reference Rate Advances] [Eurodollar Rate Advances]] [acontinuation of Eurodollar Rate Advances].

 

(c)                                  The aggregate amount of the Borrowing tobe [Converted] [continued] is$             andconsists of [Reference Rate Advances] [Eurodollar Rate Advances].

 

(d)                                 [The Interest Period for each EurodollarRate Advance made as part of the Proposed Borrowing is[         month[s]].]

 

The Borrower herebycertifies that the following statements are true on the date hereof, and willbe true on the date of the Proposed Borrowing:

 

(a)                                  the representations and warrantiescontained in Article IV of the Credit Agreement and the representationsand warranties contained in the Security Instruments, the Guaranties, and eachof the other Loan Documents are true and correct in all material respects onand as of the date of the Proposed Borrowing, before and after giving effect tothe Proposed Borrowing and to the application of the proceeds from the ProposedBorrowing, as though made on and as of such date, except to the extent that anysuch representation or warranty expressly 

 

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relates solely to an earlier date, in which case itshall have been true and correct in all material respects as of such earlierdate; and

 

(b)                                 no Default has occurred and is continuingor would result from the Proposed Borrowing or from the application of theproceeds therefrom.

 
|   | Very  truly yours,                           |
|--------|----------------------------------------------|
|   |                                         |
|   |                                         |
|   | CANO PETROLEUM, INC., a Delaware corporation |
|   |                                         |
|   |                                         |
|   | By:                                          |   |
|   |                                         |   |
|   | Name:                                        |   |
|   |                                         |
|   | Title:                                       |   |
|        |                                              |  |  |  |

 

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**EXHIBIT H**

 

**FORM OFPLEDGE AGREEMENT**

 

THISSUBORDINATED PLEDGE AGREEMENT dated as of March       ,2008 (this “Pledge Agreement”) is by and among CANO PETROLEUM, INC., aDelaware corporation (“Borrower”), each subsidiary of the Borrowersignatory hereto (together with the Borrower, the “Pledgors” andindividually, each a “Pledgor”) and UnionBanCal Equities, Inc. asAdministrative Agent (in such capacity the “Administrative Agent”) underthe Credit Agreement (as hereinafter defined), for its benefit and the benefitof the Lenders (as hereinafter defined).

 

**RECITALS**

 

A.            The Borrower, the lenders partythereto from time to time (the “Lenders”; together with theAdministrative Agent, the “‘Secured Parties”), and the AdministrativeAgent have entered into that certain Subordinated Credit Agreement dated ofeven date herewith (as it may be amended, restated, supplemented or otherwisemodified from time to time, the “Credit Agreement”).

 

B.            It is a condition precedent to theextension of credit to the Borrower under the Credit Agreement that the Pledgorsand the Administrative Agent, on behalf of the Lenders, execute and deliverthis Pledge Agreement.

 

C.            Each Pledgor (other than theBorrower) is a subsidiary of the Borrower, and therefore shall derive directand indirect benefits from the transactions contemplated by the CreditAgreement.

 

**AGREEMENT**

 

NOW, THEREFORE, in consideration of the foregoing and other good andvaluable consideration, the receipt and sufficiency of which is herebyacknowledged and confessed, each Pledgor hereby agrees with the AdministrativeAgent for the benefit of the Secured Parties as follows:

 

**ARTICLE I.             DEFINITIONS.  ALL CAPITALIZED TERMS NOT OTHERWISE DEFINEDIN THIS PLEDGE AGREEMENT THAT ARE DEFINED IN THE CREDIT AGREEMENT SHALL HAVETHE MEANINGS ASSIGNED TO SUCH TERMS BY THE CREDIT AGREEMENT.  ANY TERMS USED IN THIS PLEDGE AGREEMENT THATARE DEFINED IN THE UNIFORM COMMERCIAL CODE IN EFFECT IN THE STATE OF TEXASFROM TIME TO TIME (THE “UCC”) AND NOT OTHERWISE DEFINED HEREIN OR IN THE CREDITAGREEMENT, SHALL HAVE THE MEANINGS ASSIGNED TO THOSE TERMS BY THE UCC. **ALLMEANINGS TO DEFINED TERMS, UNLESS OTHERWISE INDICATED, ARE TO BE EQUALLYAPPLICABLE TO BOTH THE SINGULAR AND PLURAL FORMS OF THE TERMS 

 

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**DEFINED.  ARTICLE,SECTION, SCHEDULE, AND EXHIBIT REFERENCES ARE TO ARTICLES AND SECTIONS OF ANDSCHEDULES AND EXHIBITS TO THIS PLEDGE AGREEMENT, UNLESS OTHERWISESPECIFIED.  ALL REFERENCES TOINSTRUMENTS, DOCUMENTS, CONTRACTS, AND AGREEMENTS ARE REFERENCES TO SUCHINSTRUMENTS, DOCUMENTS, CONTRACTS, AND AGREEMENTS AS THE SAME MAY BEAMENDED, SUPPLEMENTED, AND OTHERWISE MODIFIED FROM TIME TO TIME, UNLESSOTHERWISE SPECIFIED.  THE WORDS “HEREOF”,“HEREIN” AND “HEREUNDER” AND WORDS OF SIMILAR IMPORT WHEN USED IN THIS PLEDGEAGREEMENT SHALL REFER TO THIS PLEDGE AGREEMENT AS A WHOLE AND NOT TO ANYPARTICULAR PROVISION OF THIS PLEDGE AGREEMENT. AS USED HEREIN, THE TERM “INCLUDING” MEANS “INCLUDING, WITHOUTLIMITATION,”. PARAGRAPH HEADINGS HAVE BEEN INSERTED IN THIS PLEDGE AGREEMENT ASA MATTER OF CONVENIENCE FOR REFERENCE ONLY AND IT IS AGREED THAT SUCH PARAGRAPHHEADINGS ARE NOT A PART OF THIS PLEDGE AGREEMENT AND SHALL NOT BE USED INTHE INTERPRETATION OF ANY PROVISION OF THIS PLEDGE AGREEMENT**.

** **

**ARTICLE II.            PLEDGE.**

** **

Section 2.01.    Grant of Pledge.

 

(a)      EachPledgor hereby pledges to the Administrative Agent, and grants to theAdministrative Agent, for the benefit of the Secured Parties, a continuingsecurity interest in, the Pledged Collateral, as defined in Section 2.02below.  This Pledge Agreement shallsecure (i) all Obligations (as defined in the Credit Agreement) now orhereafter existing (ii) all other amounts now or hereafter owed by theBorrower, any Pledgor, or any of their respective Subsidiaries under thisPledge Agreement or the other Loan Documents to the Administrative Agent or anyother Lender, and (iii) any increases, extensions, modifications,substitutions, amendments, restatements and renewals of any of the foregoingobligations, whether for principal, interest, fees, expenses, indemnificationor otherwise.**** All such obligations shall be referred to inthis Pledge Agreement as the “Secured Obligations”.

 

(b)      Notwithstandinganything contained herein to the contrary, it is the intention of each Pledgor,the Administrative Agent and the Lenders that the amount of the SecuredObligation secured by each Pledgor’s interests in any of its property or assets(whether real or personal, or mixed, tangible or intangible) (“Property”)shall be in, but not in excess of, the maximum amount permitted by fraudulentconveyance, fraudulent transfer and other similar law, rule or regulationof any Governmental Authority applicable to such Pledgor.  Accordingly, notwithstanding anything to thecontrary contained in this Pledge Agreement or in any other agreement orinstrument executed in connection with the payment of any of the SecuredObligations, the amount of the Secured Obligations secured by each Pledgor’sinterests in any of its Property pursuant to 

 

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this Pledge Agreement shall be limited to an aggregate amount equal tothe largest amount that would not render such Pledgor’s obligations hereunderor the liens and security interest granted to the Administrative Agenthereunder subject to avoidance under Section 548 of the United StatesBankruptcy Code or any comparable provision of any other applicable law.

 

Section 2.02.    Pledged Collateral.  “Pledged Collateral” shall mean all ofeach Pledgor’s right, title, and interest in the following, whether now ownedor hereafter acquired:

 

(a)      (i) allof the membership interests listed in the attached Schedule 2.02(a) issuedto such Pledgor and all such additional membership interests of any issuer ofsuch interests hereafter acquired by such Pledgor (the “Membership Interests”),(ii) the certificates representing the Membership Interests, if any, and (iii) allrights to money or Property which such Pledgor now has or hereafter acquires inrespect of the Membership Interests, including, without limitation, (A) any proceeds from a sale by oron behalf of such Pledgor of any of the Membership Interests, and (B) anydistributions, dividends, cash, instruments and other property fromtime-to-time received or otherwise distributed in respect of the MembershipInterests, whether regular, special or made in connection with the partial ortotal liquidation of the issuer and whether attributable to profits, the returnof any contribution or investment or otherwise attributable to the MembershipInterests or the ownership thereof (collectively, the “Membership Interests Distributions”);

 

(b)      (i) allof the general and limited partnership interests listed in the attachedSchedule 2.02(b) issued to such Pledgor and all such additional limited orgeneral partnership interests of any issuer of such interests hereafteracquired by such Pledgor (the “Partnership Interests”), and (ii) allrights to money or Property which such Pledgor now has or hereafter acquires inrespect of the Partnership Interests, including, without limitation, (A) any proceeds from a sale by oron behalf of such Pledgor of any of the Partnership Interests, and (B) anydistributions, dividends, cash, instruments and other property fromtime-to-time received or otherwise distributed in respect of the PartnershipInterests, whether regular, special or made in connection with the partial ortotal liquidation of the issuer and whether attributable to profits, the returnof any contribution or investment or otherwise attributable to the PartnershipInterests or the ownership thereof (collectively, the “Partnership Interests Distributions”);

 

(c)      (i) allof the shares of stock listed in the attached Schedule 2.02(c) issued tosuch Pledgor and all such additional shares of stock of any issuer of suchshares of stock hereafter issued to such Pledgor (the “Pledged Shares”),(ii) the certificates representing the Pledged Shares, and (iii) allrights to money or Property which such Pledgor now has or hereafter acquires inrespect of the Pledged Shares, including, without limitation, (A) anyproceeds from a sale by or on behalf of such Pledgor of any of the PledgedShares, and (B) any distributions, dividends, cash, instruments and otherproperty from time-to-time received or otherwise distributed in respect of thePledged 

 

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Shares, whether regular, special or made in connection with the partialor total liquidation of the issuer and whether attributable to profits, thereturn of any contribution or investment or otherwise attributable to thePledged Shares or the ownership thereof (collectively, the “Pledged SharesDistributions”; together with the Membership Interests Distributions andthe Partnership Interest Distributions, the “Distributions”); and

 

(d)      allproceeds from the Pledged Collateral described in paragraphs (a), (b) and (c) ofthis Section 2.02.

 

Section 2.03.    Delivery of Pledged Collateral.  All certificates or instruments, if any,representing the Pledged Collateral shall be delivered to the AdministrativeAgent and shall be in suitable form for transfer by delivery, or shall beaccompanied by duly executed instruments of transfer or assignment in blank,all in form and substance reasonably satisfactory to the Administrative Agent.  After the occurrence and during thecontinuance of an Event of Default, the Administrative Agent shall have theright, upon prior written notice to the applicable Pledgor, to transfer to orto register in the name of the Administrative Agent or any of its nominees anyof the Pledged Collateral, subject to the rights specified in Section 2.04.  In addition, after the occurrence and duringthe continuance of an Event of Default, the Administrative Agent shall have theright at any time to exchange the certificates or instruments representing thePledged Collateral for certificates or instruments of smaller or largerdenominations.

 

Section 2.04.    Rights Retained by Pledgor.  Notwithstanding the pledge in Section 2.01,

 

(a)      so longas no Event of Default shall have occurred and remain uncured or unwaived andexcept as otherwise provided in the Credit Agreement, (i) each Pledgorshall be entitled to receive and retain any dividends and other Distributionspaid on or in respect of the Pledged Collateral and the proceeds of any sale ofthe Pledged Collateral; and (ii) each Pledgor shall be entitled toexercise any voting and other consensual rights pertaining to its PledgedCollateral for any purpose not inconsistent with the terms of this PledgeAgreement or the Credit Agreement; provided, however, that noPledgor shall exercise nor shall it refrain from exercising any such right ifsuch action or inaction, as applicable, would have a materially adverse effecton the value of the Pledged Collateral; and

 

(b)      if anEvent of Default shall have occurred and remain uncured or unwaived,

 

(i)          untilsuch time thereafter as the Administrative Agent gives written notice of itselection to exercise such voting and other consensual rights pursuant to Section 5.02hereof, each Pledgor shall be entitled to exercise any voting and otherconsensual rights pertaining to its Pledged Collateral for any purpose notinconsistent with the terms of this Pledge Agreement or the Credit Agreement; provided,however, that no Pledgor shall exercise nor shall it refrain from 

 

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exercising anysuch right if such action or inaction, as applicable, would have a materiallyadverse effect on the value of the Pledged Collateral; and

 

(ii)         atand after such time as the Administrative Agent gives written notice of itselection to exercise such voting and other consensual rights pursuant to Section 5.02hereof, each Pledgor shall execute and deliver (or cause to be executed anddelivered) to the Administrative Agent all proxies and other instruments as theAdministrative Agent may reasonably request to enable the Administrative Agentto (A) exercise the voting and other rights which such Pledgor is entitledto exercise pursuant to paragraph (a) or paragraph (b)(i) ofthis Section 2.04, and (B) receive any Distributions and proceeds ofsale of the Pledged Collateral which such Pledgor is authorized to receive andretain pursuant to paragraph (a)(i) of this Section 2.04.

 

**ARTICLE III.        PLEDGOR’SREPRESENTATIONS AND WARRANTIES.  EACHPLEDGOR REPRESENTS AND WARRANTS TO THE ADMINISTRATIVE AGENT AND THE LENDERS ASFOLLOWS:**

** **

(a)      ThePledged Collateral applicable to such Pledgor listed on the attachedSchedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorizedand validly issued to such Pledgor and are fully paid and nonassessable.

 

(b)      SuchPledgor is the legal and beneficial owner of the Pledged Collateral free andclear of any Lien or option, except for (i) the security interest createdby this Pledge Agreement and (ii) other Liens permitted under the CreditAgreement ( the “Permitted Liens”).

 

(c)      Noauthorization, authentication, approval, or other action by, and no notice toor filing with, any Governmental Authority or regulatory body is requiredeither (a) for the pledge by such Pledgor of the Pledged Collateralpursuant to this Pledge Agreement or for the execution, delivery, orperformance of this Pledge Agreement by such Pledgor or (b) for theexercise by the Administrative Agent or any Secured Party of the voting orother rights provided for in this Pledge Agreement or the remedies in respectof the Pledged Collateral pursuant to this Pledge Agreement (except as may berequired in connection with such disposition by laws affecting the offering andsale of securities generally).

 

(d)      SuchPledgor has the full right, power and authority to deliver, pledge, assign andtransfer the Pledged Collateral to the Administrative Agent.

 

(e)      TheMembership Interests listed on the attached Schedule 2.02(a) constitutethe percentage of the issued and outstanding membership interests of therespective issuer thereof set forth on Schedule 2.02(a) and all of theEquity Interest in such issuer in which the Pledgor has any ownership interest.

 

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(f)       ThePartnership Interests listed on the attached Schedule 2.02(b) constitutethe percentage of the issued and outstanding general and limited partnershipinterests of the respective issuer thereof set forth on Schedule 2.02(b) andall of the Equity Interest in such issuer in which the Pledgor has anyownership interest.

 

(g)      ThePledged Shares list on the attached Schedule 2.02(c) constitute thepercentage of the issued and outstanding shares of capital stock of therespective issuer thereof set forth on Schedule 2.02(c) and all of theEquity Interest in such issuer in which the Pledgor has any ownership interest.

 

(h)      Schedule3 sets forth its sole jurisdiction of formation, type of organization, federaltax identification number, the organizational number, and all names used by itduring the last five years prior to the date of this Pledge Agreement.

 

**ARTICLE IV.        PLEDGOR’SCOVENANTS.  DURING THE TERM OF THISPLEDGE AGREEMENT AND UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN FULLY ANDFINALLY PAID AND DISCHARGED IN FULL, THE COMMITMENTS UNDER THE CREDIT AGREEMENTHAVE BEEN TERMINATED OR EXPIRED, AND THE CREDIT AGREEMENT HAS BEEN TERMINATEDIN WRITING, EACH PLEDGOR COVENANTS AND AGREES WITH THE ADMINISTRATIVE AGENTTHAT:**

** **

Section 4.01.    Protect Collateral; Further Assurances.  Each Pledgor will warrant and defend therights and title herein granted unto the Administrative Agent in and to thePledged Collateral (and all right, title, and interest represented by thePledged Collateral) against the claims and demands of all Personswhomsoever.  Each Pledgor agrees that, atthe expense of such Pledgor, such Pledgor will promptly execute and deliver allfurther instruments and documents, and take all further action, that may bereasonably necessary and that the Administrative Agent or any Secured Party mayreasonably request, in order to perfect and protect any security interestgranted or purported to be granted hereby or to enable the Administrative Agentor any Secured Party to exercise and enforce its rights and remedies hereunderwith respect to any Pledged Collateral. Each Pledgor hereby authorizes the Administrative Agent to file anyfinancing statements, amendments or continuations without the signature of suchPledgor to the extent permitted by applicable law in order to perfect ormaintain the perfection of any security interest granted under this PledgeAgreement.

 

Section 4.02.    Transfer, Other Liens, and AdditionalShares.  Each Pledgor agrees that itwill not (a) except as otherwise permitted by the Credit Agreement, sellor otherwise dispose of, or grant any option with respect to, any of thePledged Collateral or (b) create or permit to exist any Lien upon or withrespect to any of the Pledged Collateral, except for Permitted Liens.  Each Pledgor agrees that it will (i) causeeach issuer of the Pledged Collateral that is a Subsidiary of such Pledgor notto issue any other Equity Interests in addition to or in substitution for thePledged Collateral issued by such issuer, except to such Pledgor or any otherPledgor and (ii) pledge hereunder, immediately upon its acquisition(directly or indirectly) thereof, any 

 

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additional EquityInterests of an issuer acquired by such Pledgor.  No Pledgor shall approve any amendment ormodification of any of the Pledged Collateral without the Administrative Agent’sprior written consent.

 

Section 4.03.    Jurisdiction of Formation; Name Change.  Each Pledgor shall give the AdministrativeAgent at least 30 days’ prior written notice before it (i) in the case ofa Pledgor that is not a “registered organization” (as defined in Section 9-102of the UCC) changes the location of its principal place of business and chiefexecutive office, or (ii) uses a trade name other than its current nameused on the date hereof.  Other than aspermitted by Section 6.11 of the respective Credit Agreement, no Pledgorshall amend, supplement, modify or restate its articles or certificate ofincorporation, bylaws, limited liability company agreements, or otherequivalent organizational documents, nor amend its name or change itsjurisdiction of incorporation, organization or formation.

 

**ARTICLE V.            REMEDIESUPON DEFAULT.  IF ANY EVENT OFDEFAULT SHALL HAVE OCCURRED AND BE CONTINUING:**

** **

Section 5.01.    UCC Remedies.  To the extent permitted by law, theAdministrative Agent may exercise in respect of the Pledged Collateral, inaddition to other rights and remedies provided for in this Pledge Agreement orotherwise available to it, all the rights and remedies of a AdministrativeAgent under the UCC (whether or not the UCC applies to the affected PledgedCollateral).

 

Section 5.02.    Dividends and Other Rights.

 

(a)      Allrights of the Pledgors to exercise the voting and other consensual rights whichit would otherwise be entitled to exercise pursuant to Section 2.04(a) maybe exercised by the Administrative Agent if the Administrative Agent so electsand gives written notice of such election to the affected Pledgor and allrights of the Pledgors to receive any Distributions on or in respect of thePledged Collateral and the proceeds of sale of the Pledged Collateral which itwould otherwise be authorized to receive and retain pursuant to Section 2.04(b) shallcease.

 

(b)      AllDistributions on or in respect of the Pledged Collateral and the proceeds ofsale of the Pledged Collateral which are received by any Pledgor shall bereceived in trust for the benefit of the Administrative Agent, shall besegregated from other funds of such Pledgor, and shall be promptly paid over tothe Administrative Agent as Pledged Collateral in the same form as so received(with any necessary indorsement).

 

Section 5.03.    Sale of Pledged Collateral. TheAdministrative Agent may sell all or part of the Pledged Collateral at public orprivate sale, at any of the Administrative Agent’s offices or elsewhere, forcash, on credit, or for future delivery, and upon such other terms as theAdministrative Agent may deem commercially reasonable in accordance withapplicable laws.  Each Pledgor agreesthat to the extent permitted by law such sales may be made without notice.

 

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If notice is required bylaw, each Pledgor hereby deems 10 days’ advance notice of the time and place ofany public sale or the time after which any private sale is to be madereasonable notification, recognizing that if the Pledged Collateral threatensto decline speedily in value or is of a type customarily sold on a recognizedmarket shorter notice may be reasonable. The Administrative Agent shall not be obligated to make any sale of thePledged Collateral regardless of notice of sale having been given.  The Administrative Agent may adjourn anypublic or private sale from time-to-time by announcement at the time and placefixed therefor, and such sale may, without further notice, be made at the timeand place to which it was so adjourned. Each Pledgor shall fully cooperate with Administrative Agent in sellingor realizing upon all or any part of the Pledged Collateral.  In addition, each Pledgor shall fully complywith the securities laws of the United States, the State of Texas, and otherstates and take such actions as may be necessary to permit Administrative Agentto sell or otherwise dispose of any securities representing the PledgedCollateral in compliance with such laws.

 

Section 5.04.    Exempt Sale.  If, in the opinion of the AdministrativeAgent, there is any question that a public or semipublic sale or distributionof any Pledged Collateral will violate any state or federal securities law, theAdministrative Agent in its reasonable discretion (a) may offer and sellsecurities privately to purchasers who will agree to take them for investmentpurposes and not with a view to distribution and who will agree to impositionof restrictive legends on the certificates representing the security, or (b) maysell such securities in an intrastate offering under Section 3(a)(11) ofthe Securities Act of 1933, as amended, and no sale so made in good faith bythe Administrative Agent shall be deemed to be not “commercially reasonable”solely because so made.  Each Pledgorshall cooperate fully with the Administrative Agent in selling or realizingupon all or any part of the Pledged Collateral.

 

Section 5.05.    Application of Collateral. Theproceeds of any sale, or other realization (other than that received from asale or other realization permitted by the Credit Agreement) upon all or anypart of the Pledged Collateral pledged by the Pledgors shall be applied by theAdministrative Agent as set forth in Section 7.06 of the Credit Agreement.

 

Section 5.06.    Cumulative Remedies.  Each right, power and remedy hereinspecifically granted to the Administrative Agent or otherwise available to itshall be cumulative, and shall be in addition to every other right, power andremedy herein specifically given or now or hereafter existing at law, inequity, or otherwise, and each such right, power and remedy, whetherspecifically granted herein or otherwise existing, may be exercised at any timeand from time-to-time as often and in such order as may be deemed expedient bythe Administrative Agent in its sole discretion.  No failure on the part of the AdministrativeAgent to exercise, and no delay in exercising, and no course of dealing withrespect to, any such right, power or remedy, shall operate as a waiver thereof,nor shall any single or partial exercise of any such rights, power or remedypreclude any other or further exercise thereof or the exercise of any otherright.

 

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** **

**ARTICLEVI.          ADMINISTRATIVE AGENT ASATTORNEY-IN-FACT FOR PLEDGOR.**

** **

Section 6.01.          Administrative Agent AppointedAttorney-in-Fact.  Each Pledgor hereby irrevocably appoints theAdministrative Agent as such Pledgor’s attorney-in-fact, with full authority afterthe occurrence and during the continuance of an Event of Default to act forsuch Pledgor and in the name of such Pledgor, and, in the Administrative Agent’sdiscretion, to take any action and to execute any instrument which theAdministrative Agent may deem reasonably necessary or advisable to accomplishthe purposes of this Pledge Agreement, including, without limitation, toreceive, indorse, and collect all instruments made payable to such Pledgorrepresenting any dividend, or the proceeds of the sale of the PledgedCollateral, or other distribution in respect of the Pledged Collateral and togive full discharge for the same.  **Each Pledgor hereby acknowledges, consents and agreesthat the power of attorney granted pursuant to this Section is irrevocableand coupled with an interest.**

 

Section 6.02.          Administrative Agent May Perform.The Administrative Agent may from time-to-time, at its option but at thePledgors’ expense, perform any act which any Pledgor agrees hereunder toperform and which such Pledgor shall fail to perform after being requested inwriting so to perform (it being understood that no such request need be givenafter the occurrence and during the continuance of any Event of Default andafter notice thereof by the Administrative Agent to the affected Pledgor) andthe Administrative Agent may from time-to-time take any other action which theAdministrative Agent reasonably deems necessary for the maintenance,preservation or protection of any of the Pledged Collateral or of its securityinterest therein.  The AdministrativeAgent shall provide notice to the affected Pledgor of any action takenhereunder; provided however, the failure to provide such notice shall not beconstrued as a waiver of any rights of the Administrative Agent provided underthis Pledge Agreement or under applicable law.

 

Section 6.03.          Administrative Agent Has No Duty.  The powers conferred on the AdministrativeAgent hereunder are solely to protect its interest in the Pledged Collateraland shall not impose any duty on it to exercise any such powers.  Except for reasonable care of any PledgedCollateral in its possession and the accounting for moneys actually received byit hereunder, the Administrative Agent shall have no duty as to any PledgedCollateral or responsibility for taking any necessary steps to preserve rightsagainst prior parties or any other rights pertaining to any Pledged Collateral.

 

Section 6.04.          Reasonable Care.  The Administrative Agent shall be deemed tohave exercised reasonable care in the custody and preservation of the PledgedCollateral in its possession if the Pledged Collateral is accorded treatmentsubstantially equal to that which the Administrative Agent accords its ownproperty, it being understood that the Administrative Agent shall have noresponsibility for (a) ascertaining or taking action with respect tocalls, conversions, exchanges, maturities, tenders, or other matters relativeto any Pledged Collateral, whether or not the Administrative Agent has or isdeemed to have knowledge of such matters, or 

 

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(b) taking anynecessary steps to preserve rights against any parties with respect to anyPledged Collateral.

 

**ARTICLE VII.         MISCELLANEOUS.**

** **

Section 7.01.         Expenses.  The Pledgors will upon demand pay to theAdministrative Agent for its benefit and the benefit of the other SecuredParties the amount of any reasonable out-of-pocket expenses, including thereasonable fees and disbursements of its counsel and of any experts, which theAdministrative Agent and the other Lenders may incur in connection with (a) thecustody, preservation, use, or operation of, or the sale, collection, or otherrealization of, any of the Pledged Collateral, (b) the exercise orenforcement of any of the rights of the Administrative Agent or any Lender orany other Lenders hereunder, and (c) the failure by any Pledgor to performor observe any of the provisions hereof.

 

Section 7.02.         Amendments,Etc.  No amendment or waiver of anyprovision of this Pledge Agreement nor consent to any departure by any Pledgorherefrom shall be effective unless made in writing and executed by the affectedPledgor and the Administrative Agent, and such waiver or consent shall beeffective only in the specific instance and for the specific purpose for whichgiven.

 

Section 7.03.         Addressesfor Notices.  All notices and othercommunications provided for hereunder shall be in the manner and to theaddresses set forth in the Credit Agreement.

 

Section 7.04.         ContinuingSecurity Interest; Transfer of Interest.

 

(a)           ThisPledge Agreement shall create a continuing security interest in the PledgedCollateral and, unless expressly released by the Administrative Agent, shall (i) remainin full force and effect until the indefeasible payment in full in cash of, andtermination of, the Secured Obligations and the termination of the Commitmentsunder the Credit Agreement, (ii) be binding upon the Pledgors, theAdministrative Agent, the Lenders and their successors, and assigns, and (iii) inure,together with the rights and remedies of the Administrative Agent hereunder, tothe benefit of and be binding upon, the Administrative Agent, and the Lendersand their respective successors, transferees, and assigns.  Without limiting the generality of theforegoing clause, when any Secured Party assigns or otherwise transfers anyinterest held by it under either the Credit Agreement or other Loan Document toany other Person pursuant to the terms of the Credit Agreement or such otherLoan Document, that other Person shall thereupon become vested with all thebenefits held by such Secured Party under this Pledge Agreement.

 

(b)           Uponthe indefeasible payment in full and termination of the Secured Obligations,the termination of all Commitments under the Credit Agreement, and thetermination of the Credit Agreement in writing, the security interest grantedhereby shall terminate and all rights to the Pledged Collateral shall revert tothe applicable Pledgor to 

 

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the extent such Pledged Collateral shall not have been sold orotherwise applied pursuant to the terms hereof. Upon any such termination, the Administrative Agent will, at thePledgors’ expense, deliver all Pledged Collateral to the applicable Pledgor,execute and deliver to the applicable Pledgor such documents as such Pledgorshall reasonably request and take any other actions reasonably requested toevidence or effect such termination.

 

Section 7.05.         Waivers.  Each Pledgor hereby waives:

 

(a)           promptness,diligence, notice of acceptance, and any other notice with respect to any ofthe Secured Obligations and this Pledge Agreement;

 

(b)           anyrequirement that the Administrative Agent or any Secured Party protect, secure,perfect, or insure any Lien or any Property subject thereto or exhaust anyright or take any action against any Pledgor, any Guarantor, or any otherPerson or any collateral; and

 

(c)           anyduty on the part of the Administrative Agent to disclose to any Pledgor anymatter, fact, or thing relating to the business, operation, or condition of anyPledgor, any Guarantor, or any other Person and their respective assets nowknown or hereafter known by such Person.

 

Section 7.06.         Severability.  Wherever possible each provision of thisPledge Agreement shall be interpreted in such manner as to be effective andvalid under applicable law, but if any provision of this Pledge Agreement shallbe prohibited by or invalid under such law, such provision shall be ineffectiveto the extent of such prohibition or invalidity, without invalidating theremainder of such provision or the remaining provisions of this PledgeAgreement.

 

Section 7.07.         Choiceof Law.  This Pledge Agreement shallbe governed by and construed and enforced in accordance with the laws of theState of Texas, except to the extent that the validity or perfection of thesecurity interests hereunder, or remedies hereunder, in respect of anyparticular Pledged Collateral are governed by the laws of a jurisdiction otherthan the State of Texas.

 

Section 7.08.         Counterparts.  The parties may execute this Pledge Agreementin counterparts, each of which constitutes an original, and all of which,collectively, constitute only one agreement. Delivery of an executed counterpart signature page by facsimile isas effective as executing and delivering this Pledge Agreement in the presenceof the other parties to this Pledge Agreement. In proving this Pledge Agreement, a party must produce or account onlyfor the executed counterpart of the party to be charged.

 

Section 7.09.         Headings.  Paragraph headings have been inserted in thisPledge Agreement as a matter of convenience for reference only and it is agreedthat such paragraph 

 

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headings are not a partof this Pledge Agreement and shall not be used in the interpretation of anyprovision of this Pledge Agreement.

 

Section 7.10.         Reinstatement.  If, at any time after payment in full of allSecured Obligations and termination of the Administrative Agent’s securityinterest, any payments on the Secured Obligations previously made must bedisgorged by any Secured Party for any reason whatsoever, including, withoutlimitation, the insolvency, bankruptcy or reorganization of any Pledgor or anyother Person, this Pledge Agreement and the Administrative Agent’s securityinterests herein shall be reinstated as to all disgorged payments as thoughsuch payments had not been made, and each Pledgor shall sign and deliver to theAdministrative Agent all documents, and shall do such other acts and things, asmay be necessary to reinstate and perfect the Administrative Agent’s securityinterest.  **EACH PLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACHOTHER****SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSEUNDER THIS SECTION 7.10 (INCLUDING REASONABLE ATTORNEYS’ FEES ANDEXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THEINDEMNIFIED****SECURED PARTY’S****OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS,LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENTBY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIEDSECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.**

 

Section 7.11.         Conflicts.  In the event of any explicit or implicitconflict between any provisions of this Pledge Agreement and any provision ofthe Credit Agreement, the terms of the Credit Agreement shall be controlling.

 

Section 7.12.         AdditionalPledgors*.*  Pursuant to Section 6.15 of the CreditAgreement, certain Subsidiaries of the Borrower that were not in existence onthe date of the Credit Agreement are required to enter into this PledgeAgreement as Pledgors.  Upon executionand delivery after the date hereof by the Administrative Agent and suchSubsidiary of an instrument in the form of Annex 1, such Subsidiary shallbecome a Pledgor hereunder with the same force and effect as if originallynamed as a Pledgor herein.  The executionand delivery of any instrument adding an additional Pledgor as a party to thisPledge Agreement shall not require the consent of any other Pledgorhereunder.  The rights and obligations ofeach Pledgor hereunder shall remain in full force and effect notwithstandingthe addition of any new Pledgor as a party to this Pledge Agreement.

 

Section 7.13.         **Subordination and Intercreditor Agreement.  Reference is made to the Subordination andIntercreditor Agreement, dated as of                        ,2008 (as amended, restated, supplemented or otherwise modified from time totime, the “Subordination and ***Intercreditor Agreement***”),among Union Bank of California, N.A., as Senior Agent, and ****UnionBanCalEquities, Inc.,****************asSubordinated Agent, and certain other**

 

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**persons, party or that may becomeparty thereto from time to time.  Notwithstandinganything herein to the contrary, this Pledge Agreement, the Liens grantedto the Administrative Agent pursuant to this Pledge Agreement and the exerciseof any right or remedy by the Administrative Agent or any of the Lendershereunder are subject to the provisions of the Subordination and IntercreditorAgreement.  In the event of any conflictbetween the terms of the Subordination and Intercreditor Agreement and thisPledge Agreement, the terms of the Subordination and Intercreditor Agreementshall govern and control.**

 

Section 7.14.         Entire Agreement.  **THIS PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THEOTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOTBE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THEREARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.**

 

[SIGNATURE PAGES FOLLOW]

 

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The parties hereto havecaused this Pledge Agreement to be duly executed as of the date first abovewritten.

 
|   | **PLEDGOR:**                     |
|--------|----------------------------------|
|   |                             |
|   | CANO PETROLEUM, INC., a Delaware |
|   | corporation                      |
|   |                             |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|   |                             |   |
|   |                             |   |
|   | **ADMINISTRATIVE AGENT:**        |
|   | ** **                       |
|   | UNIONBANCAL EQUITIES, INC.       |
|   |                             |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|        |                                  |  |  |  |  |

 

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SCHEDULE 2.02(a)

 

Attached to and forming apart of that certain Pledge Agreement dated [DATE] by [PLEDGOR] as Pledgor, tothe Administrative Agent.

 
| **Issuer** | ** ** | **Type of Membership   Interest** | ** ** | **% of Membership Interest   Owned** |
|------------|------------|-----------------------------------|------------|--------------------------------------|
|       |       |                              |       |                                 |
|       |       |                              |       |                                 |
|       |       |                              |       |                                 |

 

#### **SCHEDULE 2.02(b)**

#### ** **

Attached to and forming a part of that certain PledgeAgreement dated [DATE] by [PLEDGOR], as Pledgor, to the Administrative Agent.

** **
| **Issue** | ** ** | **Type of Partnership Interest** | ** ** | **% of Partnership Interest   Owned** |
|-----------|------------|----------------------------------|------------|---------------------------------------|
|      |       |                             |       |                                  |
|      |       |                             |       |                                  |
|      |       |                             |       |                                  |

** **

#### **SCHEDULE 2.02(c)**

#### ** **

Attached to and forming apart of that certain Pledge Agreement [DATE] by [PLEDGOR] as Pledgor, to theAdministrative Agent.

 
| **Issuer** | ** ** | **Type of Shares** | ** ** | **Number of   Shares** | ** ** | **% of Shares   Owned** | ** ** | **Certificate No.** |
|------------|------------|--------------------|------------|------------------------|------------|-------------------------|------------|---------------------|
|       |       |               |       |                   |       |                    |       |                |
|       |       |               |       |                   |       |                    |       |                |
|       |       |               |       |                   |       |                    |       |                |

 

SCHEDULE 3

 
| Pledgor:                                  |   |   |
|-------------------------------------------|--------|--------|
|                                      |   |
| Sole  Jurisdiction of Formation / Filing: |   |   |
|                                      |   |
| Type  of Organization:                    |   |   |
|                                      |   |
| Organizational  Number:                   |   |   |
|                                      |   |
| Federal  Tax Identification Number:       |   |   |
|                                      |   |
| Prior  Names:                             |   |   |

 

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Annex1 to the

SubordinatedPledge Agreement

 

SUPPLEMENT NO. [            ]  dated as of[               ](the “Supplement”), to the Pledge Agreement dated as of March       ,2008 (as amended, supplemented or otherwise modified from time to time, the “PledgeAgreement”) by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),each other party signatory hereto (together with the Borrower, the “Pledgors”and individually, each a “Pledgor”) and UnionBanCal Equities, Inc.as Administrative Agent (in such capacity, the “Administrative Agent”) underthe Credit Agreement (as hereinafter defined) for the benefit of the Lenders(as hereinafter defined).

 

**RECITALS**

 

A.            Reference is made to that certainSubordinated Credit Agreement dated as of March       ,2008 (as it may be amended, restated or otherwise modified from time to time,the “Credit Agreement”, among the Borrower, the lenders party theretofrom time to time (the “Lenders”), and the Administrative Agent; and

 

B.            The Pledgors have entered into the Pledge Agreement inorder to induce the Lenders to make the Advances under the CreditAgreement.  Pursuant to Section 6.15of the respective Credit Agreement, each Subsidiary of the Borrower that wasnot in existence on the date of the respective Master Debt Agreement isrequired to enter into the Pledge Agreement as a Pledgor upon becoming aSubsidiary.  Section 7.12 of thePledge Agreement provides that additional Subsidiaries of the Borrower maybecome Pledgors under the Pledge Agreement by execution and delivery of aninstrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the “New Pledgor”) isexecuting this Supplement in accordance with the requirements of the SeniorCredit Agreement to become a Pledgor under the Pledge Agreement.

 

C.            Capitalized terms used herein and not otherwise definedherein shall have the meanings assigned to such terms in the Pledge Agreementand the Credit Agreement.

 

Accordingly, theAdministrative Agent and the New Pledgor agree as follows:

 

(a)           In accordance with Section 7.12of the Pledge Agreement, the New Pledgor by its signature below becomes aPledgor under the Pledge Agreement with the same force and effect as iforiginally named therein as a Pledgor and the New Pledgor hereby agrees (a) toall the terms and provisions of the Pledge Agreement applicable to it as aPledgor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Pledgor thereunder are true andcorrect on and as of the date hereof in all material respects.  In furtherance of the foregoing, the NewPledgor, as security for the payment and performance in full of the SecuredObligations, does hereby create and grant to the Administrative Agent, itssuccessors and assigns, for the benefit of the Secured Parties, theirsuccessors and assigns, a continuing security interest in and lien on all ofthe New Pledgor’s right, title and interest in and 

 

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to the Pledged Collateralof the New Pledgor.  Each reference to a “Pledgor”in the Pledge Agreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporatedherein by reference.

 

(b)           The New Pledgor represents andwarrants to the Administrative Agent and the other Secured Parties that thisSupplement has been duly authorized, executed and delivered by it andconstitutes its legal, valid and binding obligation, enforceable against it inaccordance with its terms (subject to applicable bankruptcy, reorganization,insolvency, moratorium or similar laws affecting creditors’ rights generallyand subject, as to enforceability, to equitable principles of generalapplication (regardless of whether enforcement is sought in a proceeding inequity or at law)).

 

(c)           This Supplement may be executed incounterparts, each of which shall constitute an original, but all of which whentaken together shall constitute a single contract.  This Supplement shall become effective whenthe Administrative Agent shall have received counterparts of this Supplementthat, when taken together, bear the signatures of the New Pledgor and theAdministrative Agent.  Delivery of anexecuted signature page to this Supplement by facsimile transmission shallbe as effective as delivery of a manually signed counterpart of thisSupplement.

 

(d)           The New Pledgor hereby represents andwarrants that (a) set forth on Schedules 2.02(a), 2.02(b), and 2.02(c) attachedhereto are true and correct schedules of all its Membership Interests,Partnership Interests and Pledged Shares, as each term is defined in the PledgeAgreement, and (b) set forth on Schedule 3 attached hereto are its solejurisdiction of formation, type of organization, its federal tax identificationnumber and the organizational number, and all names used by it during the lastfive years prior to the date of this Supplement.

 

(e)           Except as expressly supplementedhereby, the Pledge Agreement shall remain in full force and effect.

 

(f)            THIS SUPPLEMENT SHALL BE GOVERNED BYAND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTSHEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGEDCOLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OFTEXAS.

 

(g)           In case any one or more of theprovisions contained in this Supplement should be held invalid, illegal orunenforceable in any respect, neither party hereto shall be required to complywith such provision for so long as such provision is held to be invalid,illegal or unenforceable, but the validity, legality and enforceability of theremaining provisions contained herein and in the Pledge Agreement shall not inany way be affected or impaired.  Theparties hereto shall endeavor in good-faith negotiations to replace theinvalid, illegal or unenforceable 

 

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provisions with valid provisions the economic effectof which comes as close as possible to that of the invalid, illegal orunenforceable provisions.

 

(h)           All communications and noticeshereunder shall be in writing and given as provided in the PledgeAgreement.  All communications and noticeshereunder to the New Pledgor shall be given to it at the address set forthunder its signature hereto.

 

(i)            The New Pledgor agrees to reimbursethe Administrative Agent for its reasonable out-of-pocket expenses inconnection with this Supplement, including the reasonable fees, other chargesand disbursements of counsel for the Administrative Agent.

 

**THISSUPPLEMENT, THE PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOANDOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIESHERETO.**

 

[SIGNATURES PAGES FOLLOW]

 

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INWITNESS WHEREOF, the New Pledgor and the Administrative Agent have dulyexecuted this Supplement to the Pledge Agreement as of the day and year firstabove written.

 
|   | **NEW PLEDGOR:**           |
|--------|----------------------------|
|   |                       |
|   | [                          | ] |
|   |                       |
|   |                       |
|   | By:                        |   |
|   | Name:                      |   |
|   | Title:                     |   |
|   |                       |   |
|   |                       |   |
|   | **ADMINISTRATIVE AGENT:**  |
|   | ** **                 |
|   | UNIONBANCAL EQUITIES, INC. |
|   |                       |
|   |                       |
|   | By:                        |   |
|   | Name:                      |   |
|   | Title:                     |   |
|        |                            |  |  |  |  |

 

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Schedules

SupplementNo.       

tothe Pledge Agreement

 

#### **Pledged Collateral of the New Pledgor**

#### ** **

#### **SCHEDULE 2.02(a)**

 
| **Issuer** | ** ** | **Type of Membership   Interest** | ** ** | **% of Membership Interest   Owned** |
|------------|------------|-----------------------------------|------------|--------------------------------------|
|       |       |                              |       |                                 |

 

#### **SCHEDULE 2.02(b)**

#### ** **

| **Issue** | ** ** | **Type of Partnership Interest** | ** ** | **% of Partnership Interest   Owned** |
|-----------|------------|----------------------------------|------------|---------------------------------------|
|      |       |                             |       |                                  |

** **

#### **SCHEDULE 2.02(c)**

#### ** **

| **Issuer** | ** ** | **Type of Shares** | ** ** | **Number of   Shares** | ** ** | **% of Shares   Owned** | ** ** | **Certificate No.** |
|------------|------------|--------------------|------------|------------------------|------------|-------------------------|------------|---------------------|
|       |       |               |       |                   |       |                    |       |                |

 

SCHEDULE 3

 
| New  Pledgor:                             |   |   |
|-------------------------------------------|--------|--------|
|                                      |   |
| Sole  Jurisdiction of Formation / Filing: |   |   |
|                                      |   |
| Type  of Organization:                    |   |   |
|                                      |   |
| Organizational  Number:                   |   |   |
|                                      |   |
| Federal  Tax Identification Number:       |   |   |
|                                      |   |
| Prior  Names:                             |   |   |

 

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**EXHIBIT I**

 

**FORM OF SECURITY AGREEMENT**

 

THISSUBORDINATED SECURITY AGREEMENT dated as of March       ,2008 (this “Security Agreement”) is by and among CANO PETROLEUM, INC., aDelaware corporation (“Borrower”), each subsidiary of the Borrower partyhereto from time to time (together with the Borrower, the “Grantors” andindividually, each a “Grantor”) and UnionBanCal Equities, Inc. asadministrative agent (in such capacity the “AdministrativeAgent”)for the ratable benefit of itself and the Lenders (as defined below) (togetherwith the Lenders, individually a “Secured Party”, and collectively, the “SecuredParties”).

 

**RECITALS**

 

A.            Reference is made to that certainSubordinated Credit Agreement dated as of March     ,2008 among the Borrower, the lenders party thereto from time to time (the “Lenders”)and the Administrative Agent (as the same may be amended, restated, supplementedor otherwise modified from time to time, the “Subordinated Credit Agreement”).

 

B.            Each Grantor (other than Borrower)is a Subsidiary of the Borrower and will derive substantial direct and indirectbenefit from the transactions contemplated by the Credit Agreement and theother Loan Documents (as defined in the Credit Agreement).

 

C.            It is a condition precedent to theextension of credit to the Borrower under the Credit Agreement that theGrantors and the Administrative Agent, on behalf of the Lenders, execute anddeliver this Security Agreement.

 

**AGREEMENT**

 

NOW, THEREFORE, in consideration of the foregoing and other good andvaluable consideration, the receipt and sufficiency of which is herebyacknowledged and confessed, each Grantor hereby agrees with the AdministrativeAgent for its benefit and the benefit of the Secured Parties as follows:

 

Section 1.          Definitions; Interpretation.  (a) All capitalized terms not otherwisedefined in this Security Agreement that are defined in the Credit Agreementshall have the meanings assigned to such terms by the Credit Agreement.  Any terms used in this Security Agreementthat are defined in the UCC (as defined below) and not otherwise defined hereinor in the Credit Agreement, shall have the meanings assigned to those terms bythe UCC.  The following terms shall havethe meanings specified below:

 

“Accounts”means an “account” as defined in the UCC, including, without limitation, all ofany Grantor’s rights to payment for goods sold or leased, services performed,or otherwise, whether now in existence or arising from time to time hereafter,including, 

 

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withoutlimitation, rights arising under any of the Contracts or evidenced by anaccount, note, contract, security agreement, Chattel Paper (including, withoutlimitation, tangible Chattel Paper and electronic Chattel Paper), or otherevidence of indebtedness or security, together with all of the right, title andinterest of any Grantor in and to (i) all security pledged, assigned,hypothecated or granted to or held by any Grantor to secure the foregoing, (ii) allof any Grantor’s right, title and interest in and to any goods or services, thesale of which gave rise thereto, (iii) all guarantees, endorsements andindemnifications on, or of, any of the foregoing, (iv) all powers ofattorney granted to any Grantor for the execution of any evidence ofindebtedness or security or other writing in connection therewith, (v) allbooks, correspondence, credit files, records, ledger cards, invoices, and otherpapers relating thereto, including without limitation all similar informationstored on a magnetic medium or other similar storage device and other papersand documents in the possession or under the control of any Grantor or anycomputer bureau from time to time acting for any Grantor, (vi) allevidences of the filing of financing statements and other statements granted toany Grantor and the registration of other instruments in connection therewithand amendments thereto, notices to other creditors or secured parties, andcertificates from filing or other registration officers, (vii) all creditinformation, reports and memoranda relating thereto, and (viii) all otherwritings related in any way to the foregoing.

 

“Cash Collateral”means all amounts from time to time held in any checking, savings, deposit orother account of such Grantor, including, if applicable, the Cash CollateralAccount, all monies, proceeds or sums due or to become due therefrom or thereonand all documents (including, but not limited to passbooks, certificates andreceipts) evidencing all funds and investments held in such accounts.

 

“Chattel Paper”has the meaning set forth in the UCC.

 

“Collateral”has the meaning set forth in Section 2 of this Security Agreement.

 

“Contracts”means all contracts to which any Grantor now is, or hereafter will be bound, orto which such Grantor is or hereafter will be a party, beneficiary or assignee,all Insurance Contracts, and all exhibits, schedules and other attachments tosuch contracts, as the same may be amended, supplemented or otherwise modifiedor replaced from time to time.

 

“ContractDocuments” means all Instruments, Chattel Paper, letters of credit, bonds,guarantees or similar documents evidencing, representing, arising from orexisting in respect of, relating to, securing or otherwise supporting thepayment of, the Contract Rights.

 

“ContractRights” means (i) all (A) of any Grantor’s rights to paymentunder any Contract or Contract Document and (B) payments due and to becomedue to any Grantor under any Contract or Contract Document, in each casewhether as contractual obligations, 

 

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damages orotherwise; (ii) all of any Grantor’s claims, rights, powers, or privilegesand remedies under any Contract or Contract Document; and (iii) all of anyGrantor’s rights under any Contract or Contract Document to makedeterminations, to exercise any election (including, but not limited to,election of remedies) or option or to give or receive any notice, consent,waiver or approval together with full power and authority with respect to anyContract or Contract Document to demand, receive, enforce or collect any of theforegoing rights or any property which is the subject of any Contract orContract Document, to enforce or execute any checks, or other instruments ororders, to file any claims and to take any action which, in the opinion of anySecured Party, may be necessary or advisable in connection with any of the foregoing.

 

“Document”means a bill of lading, dock warrant, dock receipt, warehouse receipt or orderfor the delivery of goods, and also any other document which in the regularcourse of business or financing is treated as adequately evidencing that theperson in possession of it is entitled to receive, hold and dispose of thedocument and the goods it covers.

 

“Equipment”means any equipment now or hereafter owned or leased by any Grantor, or inwhich any Grantor holds or acquires any other right, title or interest,constituting “equipment” under the UCC, including, without limitation, allsurface or subsurface machinery, equipment, facilities, supplies, or othertangible personal property, including tubing, rods, pumps, pumping units andengines, pipe, pipelines, meters, apparatus, boilers, compressors, liquidextractors, connectors, valves, fittings, power plants, poles, lines, cables,wires, transformers, starters and controllers, machine shops, tools, machineryand parts, storage yards and equipment stored therein, buildings and camps,telegraph, telephone, and other communication systems, loading docks, loadingracks, and shipping facilities, and any manuals, instructions, blueprints,computer software (including software that is imbedded in and part of the equipment),and similar items which relate to the above, and any and all additions,substitutions and replacements of any of the foregoing, wherever locatedtogether with all improvements thereon and all attachments, components, parts,equipment and accessories installed thereon or affixed thereto.

 

“Fixtures”means any fixtures now or hereafter owned or leased by any Grantor, or in whichany Grantor holds or acquires any other right, title or interest, constituting “fixtures”under the UCC, including without limitation any and all additions,substitutions and replacements of any of the foregoing, wherever locatedtogether with all improvements thereon and all attachments, components, parts,equipment and accessories installed thereon or affixed thereto.

 

“GeneralIntangibles” means all general intangibles now or hereafter owned by anyGrantor, or in which any Grantor holds or acquires any other right, title orinterest, constituting “general intangibles” or “payment intangibles” under theUCC, including, but not limited to, all trademarks, trademark applications,trademark registrations, tradenames, fictitious business names, business names,company names, business 

 

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identifiers,prints, labels, trade styles and service marks (whether or not registered),trade dress, including logos and/or designs, copyrights, patents, patentapplications, goodwill of any Grantor’s business symbolized by any of theforegoing, trade secrets, license rights, license agreements, permits,franchises, and any rights to tax refunds to which any Grantor is now orhereafter may be entitled.

 

“Hedge Contract”has the meaning set forth in the Senior Credit Agreement.

 

“Instrument”means an “instrument” as defined in the UCC, including, without limitation, anyNegotiable Instrument, or any other writing which evidences a right to thepayment of money and is not itself a security agreement or lease and is of atype which is in the ordinary course of business transferred by delivery withany necessary endorsement or assignment (other than Instruments constitutingChattel Paper).

 

“InsuranceContracts” means all contracts and policies of insurance and re-insurancemaintained or required to be maintained by or on behalf of any Grantor underthe Loan Documents.

 

“Inventory”means all of the inventory of any Grantor, or in which any Grantor holds oracquires any right, title or interest, of every type or description, now ownedor hereafter acquired and wherever located, whether raw, in process or finished,and all materials usable in processing the same and all documents of titlecovering any inventory, including, without limitation, work in process,materials used or consumed in any Grantor’s business, now owned or hereafteracquired or manufactured by any Grantor and held for sale in the ordinarycourse of its business, all present and future substitutions therefor, partsand accessories thereof and all additions thereto, all Proceeds thereof andproducts of such inventory in any form whatsoever, and any other itemconstituting “inventory” under the UCC.

 

“InvestmentProperty” means “investment property” as defined in the UCC, including,without limitation, all securities (whether certificated or uncertificated),security entitlements, securities accounts, commodity contracts, and commodityaccounts.

 

“NegotiableInstrument” means a “negotiable instrument” as defined in the UCC.

 

“Proceeds”means all proceeds (as defined in the UCC) of any or all of the Collateral,including without limitation (i) any and all proceeds of, all claims for,and all rights of any Grantor to receive the return of any premiums for, anyinsurance, indemnity, warranty or guaranty payable from time to time withrespect to any of the Collateral, (ii) any and all payments (in any formwhatsoever) made or due and payable from time to time in connection with anyrequisition, confiscation, condemnation, seizure or forfeiture of all or anypart of the Collateral by any Governmental Authority (or any Person actingunder color of any Governmental Authority), (iii) all proceeds received orreceivable when any or all of the Collateral is sold, exchanged or otherwisedisposed, whether 

 

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voluntarily,involuntarily, in foreclosure or otherwise, (iv) all claims of any Grantorfor damages arising out of, or for breach of or default under, any Collateral, (v) allrights of any Grantor to terminate, amend, supplement, modify or waiveperformance under any Contracts, to perform thereunder and to compelperformance and otherwise exercise all remedies thereunder, and (vi) anyand all other amounts from time to time paid or payable under or in connectionwith any of the Collateral.

 

“SecuredObligations” means all Obligations no or hereafter owed by the Borrower,any Guarantor, or any of their respective Subsidiaries to the Secured Parties,including any extensions, modifications, substitutions, amendments and renewalsthereof, whether for principal, interest, fees, expenses, indemnification, orotherwise.

 

“SecurityAgreement” means this Subordinated Security Agreement, as the same may bemodified, supplemented or amended from time to time in accordance with itsterms.

 

“UCC” shallmean the Uniform Commercial Code as the same may, from time to time, be ineffect in the State of Texas; provided, however, in the event that, by reasonof mandatory provisions of law, any or all of the attachment, perfection orpriority of the security interest in any Collateral is governed by the UniformCommercial Code as in effect in a jurisdiction other than the State of Texas,the term “UCC” shall mean the Uniform Commercial Code as in effect in suchother jurisdiction for purposes of the provisions hereof relating to suchattachment, perfection or priority and for purposes of definitions related tosuch provisions.

 

(b)           All meanings to defined terms, unlessotherwise indicated, are to be equally applicable to both the singular andplural forms of the terms defined. Article, Section, Schedule, and Exhibit references are to Articlesand Sections of and Schedules and Exhibits to this Security Agreement, unlessotherwise specified.  All references toinstruments, documents, contracts, and agreements are references to suchinstruments, documents, contracts, and agreements as the same may be amended,supplemented, and otherwise modified from time to time, unless otherwisespecified.  The words “hereof”, “herein”and “hereunder” and words of similar import when used in this SecurityAgreement shall refer to this Security Agreement as a whole and not to anyparticular provision of this Security Agreement.  As used herein, the term “including” means “including,without limitation,”. Paragraph headings have been inserted in this SecurityAgreement as a matter of convenience for reference only and it is agreed thatsuch paragraph headings are not a part of this Security Agreement and shall notbe used in the interpretation of any provision of this Security Agreement.

 

Section 2.          Assignment, Pledge and Grant ofSecurity Interest.

 

(a)           As collateral security for the promptand complete payment and performance when due of all Secured Obligations, eachGrantor hereby assigns, pledges, and grants to the Administrative Agent for thebenefit of the Secured Parties a lien on and continuing security interest inall of such Grantor’s right, title and interest in, to and under, all itemsdescribed in this 

 

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Section 2, whether now owned or hereafteracquired by such Grantor and wherever located and whether now or hereafterexisting or arising (collectively, the “Collateral”):

 

(i)                             allContracts, all Contract Rights, Contract Documents and Accounts associated withsuch Contracts and each and every document granting security to such Grantorunder any such Contract;

 

(ii)                          allAccounts;

 

(iii)                       allInventory;

 

(iv)                      allEquipment;

 

(v)                         allGeneral Intangibles;

 

(vi)                      allInvestment Property;

 

(vii)                   allFixtures;

 

(viii)                all CashCollateral;

 

(ix)                        anyLegal Requirements now or hereafter held by such Grantor (except that any LegalRequirement which would by its terms or under applicable law become void,voidable, terminable or revocable by being subjected to the Lien of thisSecurity Agreement or in which a Lien is not permitted to be granted underapplicable law, is hereby excluded from such Lien to the extent necessary so asto avoid such voidness, voidability, terminability or revocability);

 

(x)                           anyright to receive a payment under any Hedge Contract in connection with atermination thereof;

 

(xi)                        (A) allpolicies of insurance and Insurance Contracts, now or hereafter held by or onbehalf of such Grantor, including casualty and liability, businessinterruption, and any title insurance, (B) all Proceeds of insurance, and (C) allrights, now or hereafter held by such Grantor to any warranties of anymanufacturer or contractor of any other Person;

 

(xii)                     any andall liens and security interests (together with the documents evidencing suchsecurity interests) granted to such Grantor by an obligor to secure such obligor’sobligations owing under any Instrument, Chattel Paper, or Contract which ispledged hereunder or with respect to which a security interest in such Grantor’srights in such Instrument, Chattel Paper, or Contract is granted hereunder;

 

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(xiii)                 any andall guaranties given by any Person for the benefit of such Grantor whichguarantees the obligations of an obligor under any Instrument, Chattel Paper orContract, which are pledged hereunder;

 

(xiv)                withoutlimiting the generality of the foregoing, all other personal property, goods,Instruments, Chattel Paper, Documents, Fixtures, credits, claims, demands andassets of such Grantor whether now existing or hereafter acquired from time totime; and

 

(xv)                   any andall additions, accessions and improvements to, all substitutions andreplacements for and all products and Proceeds of or derived from all of theitems described above in this Section 2.

 

(b)           Notwithstanding anything containedherein to the contrary, it is the intention of each Grantor, the AdministrativeAgent, and the other Secured Parties that the amount of the Secured Obligationsecured by each Grantor’s interests in any of its Property shall be in, but notin excess of, the maximum amount permitted by fraudulent conveyance, fraudulenttransfer and other similar law, rule or regulation of any GovernmentalAuthority applicable to such Grantor. Accordingly, notwithstanding anything tothe contrary contained in this Security Agreement in any other agreement orinstrument executed in connection with the payment of any of the SecuredObligations, the amount of the Secured Obligations secured by each Grantor’sinterests in any of its Property pursuant to this Security Agreement shall belimited to an aggregate amount equal to the largest amount that would notrender such Grantor’s obligations hereunder or the liens and security interestgranted to the Administrative Agent hereunder subject to avoidance under Section 548of the United States Bankruptcy Code or any comparable provision of any otherapplicable law.

 

Section 3.          Representations and Warranties.  Each Grantor hereby represents and warrantsthe following to the Administrative Agent and the other Secured Parties:

 

(i)            Records.  Such Grantor’s sole jurisdiction of formationand type of organization are as set forth in Schedule 1 attachedhereto.  All records concerning theAccounts, General Intangibles, or any other Collateral applicable to suchGrantor are located at the address for such Grantor on such Schedule 1.  None of the Accounts is evidenced by apromissory note or other instrument.

 

(ii)           Other Liens.  Such Grantor is, and will be the record,legal, and beneficial owner of all of the Collateral pledged by such Grantorfree and clear of any Lien, except for the Permitted Liens.  No effective financing statement or otherinstrument similar in effect covering all or any part of the Collateral is, orwill be, on file in any recording office, except such as may be filed inconnection with this Security Agreement or in connection with other PermittedLiens or for which satisfactory releases have been received by theAdministrative Agent.

 

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(iii)          Lien Priorityand Perfection.

 

Subject only to PermittedLiens, this Security Agreement creates valid and continuing security interestsin the Collateral, securing the payment and performance of all the SecuredObligations.  Upon the filing offinancing statements with the jurisdiction listed in Schedule 1, thesecurity interests granted to the Administrative Agent hereunder willconstitute valid first-priority perfected security interests in all Collateralwith respect to which a security interest can be perfected by the filing of afinancing statement, subject only to Permitted Liens.

 

No consent of any otherPerson and no authorization, approval, or other action by, and no notice to orfiling with any Governmental Authority is required (A) for the grant bysuch Grantor of the pledge, assignment, and security interest granted hereby orfor the execution, delivery, or performance of this Security Agreement by suchGrantor, (B) for the validity, perfection, or maintenance of the pledge,assignment, lien, and security interest created hereby (including the first-priority(subject to Permitted Liens) nature thereof), except for security intereststhat cannot be perfected by filing under the UCC, or (C) for the exerciseby the Administrative Agent of the rights provided for in this SecurityAgreement or the remedies in respect of the Collateral pursuant to thisSecurity Agreement, except (1) those consents to assignment of licenses,permits, approvals, and other rights that are as a matter of law notassignable, (2) those consents, approvals, authorizations, actions, noticesor filings which have been duly obtained or made and, in the case of themaintenance of perfection, the filing of continuation statements under the UCC,and (3) those filings and actions described in Section 3(c)(i).

 

(iv)          Tax Identification Number andOrganizational Number.  The federaltax identification number of such Grantor and the organizational number of suchGrantor are as set forth in Schedule 1.

 

(v)           Tradenames; Prior Names.  Except as set forth on Schedule 1,such Grantor has not conducted business under any name other than its currentname during the last five years prior to the date of this Security Agreement.

 

(vi)          Exclusive Control.  Such Grantor has exclusive possession andcontrol of its respective Equipment and Inventory.

 

Section 4.          Covenants.

 

(i)            Further Assurances.

 

Each Grantor agrees thatfrom time to time, at its expense, such Grantor shall promptly execute anddeliver all instruments and documents, and take all action, that may bereasonably necessary or desirable, or that the Administrative Agent mayreasonably request, in order to perfect and protect any pledge, assignment, orsecurity interest granted or intended to be granted hereby or to enable theAdministrative Agent to exercise and enforce its rights and 

 

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remedies hereunder with respect to anyCollateral.  Without limiting thegenerality of the foregoing, each Grantor (A) at the request of theAdministrative Agent, shall execute such instruments, endorsements or notices,as may be reasonably necessary or desirable or as the Administrative Agent mayreasonably request, in order to perfect and preserve the assignments andsecurity interests granted or purported to be granted hereby, (B) shall,at the reasonable request of the Administrative Agent, mark conspicuously eachmaterial document included in the Collateral, each Chattel Paper included inthe Accounts, and each of its records pertaining to the Collateral with alegend, in form and substance satisfactory to the Administrative Agent,including that such document, Chattel Paper, or record is subject to thepledge, assignment, and security interest granted hereby, (C) shall, ifany Collateral shall be evidenced by a promissory note or other instrument orchattel paper, deliver and pledge to the Administrative Agent hereunder suchnote or instrument or chattel paper duly endorsed and accompanied by dulyexecuted instruments of transfer or assignment, all in form and substancesatisfactory to the Administrative Agent, and (D) authorizes theAdministrative Agent to file any financing statements, amendments orcontinuations without the signature of such Grantor to the extent permitted byapplicable law in order to perfect or maintain the perfection of any securityinterest granted under this Security Agreement (including, without limitation,financing statements using an “all assets” or “all personal property”collateral description).

 

Each Grantor shall payall filing, registration and recording fees and all refiling, re-registrationand re-recording fees, and all other reasonable expenses incident to theexecution and acknowledgment of this Security Agreement, any assurance, and allfederal, state, county and municipal stamp taxes and other taxes, duties,imports, assessments and charges arising out of or in connection with theexecution and delivery of this Security Agreement, any agreement supplementalhereto, any financing statements, and any instruments of further assurance.

 

Each Grantor shallpromptly provide to the Administrative Agent all information and evidence theAdministrative Agent may reasonably request concerning the Collateral to enablethe Administrative Agent to enforce the provisions of this Security Agreement.

 

(ii)           Change of Name;State of Formation.  Each Grantorshall give the Administrative Agent at least 30 days’ prior written noticebefore it (i) in the case of any Grantor that is not a “registeredorganization” (as such term is defined in Section 9-102 of the UCC),changes the location of its principal place of business and chief executiveoffice, (ii) changes the location of its jurisdiction of formation ororganization, (iii) changes the location of the Equipment, Inventory, ororiginal copies of any Chattel Paper evidencing Accounts, or (iv) uses a tradename other than its current name used on the date hereof.  Other than as permitted by Section 6.11of the Credit Agreement, no Grantor shall amend, supplement, modify or restateits articles or certificate of incorporation, bylaws, limited liability companyagreements, or other equivalent organizational documents, nor amend its name orchange its jurisdiction of incorporation, organization or formation.

 

(iii)          Right ofInspection.  Each Grantor shall holdand preserve, at its own cost and expense satisfactory and complete records ofthe Collateral, including, but not limited to, 

 

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Instruments, Chattel Paper, Contracts, and recordswith respect to the Accounts, and will permit representatives of the AdministrativeAgent, upon reasonable advance notice, at any time during normal business hoursto inspect and copy them.  Upon theoccurrence and during the continuation of any Event of Default, at theAdministrative Agent’s request, each Grantor shall promptly deliver copies ofany and all such records to the Administrative Agent.

 

(iv)          Liability Under Contracts andAccounts.  Notwithstanding anythingin this Security Agreement to the contrary, (i) the execution of thisSecurity Agreement shall not release any Grantor from its obligations andduties under any of the Contract Documents, or any other contract or instrumentwhich are part of the Collateral and Accounts included in the Collateral, (ii) theexercise by the Administrative Agent of any of its rights hereunder shall notrelease any Grantor from any of its duties or obligations under any ContractDocuments, or any other Contract or Instrument which are part of the Collateraland Accounts included in the Collateral, and (iii) the AdministrativeAgent shall not have any obligation or liability under any Contract Documents,or any other contract or instrument which are part of the Collateral andAccounts included in the Collateral by reason of the execution and delivery ofthis Security Agreement, nor shall the Administrative Agent be obligated toperform any of the obligations or duties of any Grantor thereunder or to takeany action to collect or enforce any claim for payment assigned hereunder.

 

(v)           Transfer of Certain Collateral;Release of Certain Security Interest. Each Grantor agrees that it shall not sell, assign, or otherwise disposeof any Collateral, except as otherwise permitted under the CreditAgreement.  The Administrative Agentshall promptly, at the Grantors’ expense, execute and deliver all furtherinstruments and documents, and take all further action that a Grantor mayreasonably request in order to release its security interest in any Collateralwhich is disposed of in accordance with the terms of the Credit Agreement.

 

(vi)          Accounts.  Each Grantor agrees that it will usecommercially reasonable efforts to ensure that each Account (i) is andwill be, in all material respects, the genuine, legal, valid, and bindingobligations of the account debtor in respect thereof, representing an unsatisfiedobligation of such account debtor, (ii) is and will be, in all materialrespects, enforceable in accordance with its terms, (iii) is not and willnot be subject to any setoffs, defenses, taxes, counterclaims, except in theordinary course of business, (iv) is and will be, in all materialrespects, in compliance with all applicable laws, whether federal, state, localor foreign, and (v) which if evidenced by Chattel Paper, will not requirethe consent of the account debtor in respect thereof in connection with itsassignment hereunder.

 

(vii)         Negotiable Instrument.  If any Grantor shall at any time hold oracquire any Negotiable Instruments, including promissory notes, such Grantorshall forthwith endorse, assign and deliver the same to the AdministrativeAgent, accompanied by such instruments of transfer or assignment duly executedin blank as the Administrative Agent may from time to time reasonably request.

 

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(viii)        Other Covenants of Grantor.  Each Grantor agrees that (i) any actionor proceeding to enforce this Security Agreement may be taken by theAdministrative Agent either in such Grantor’s name or in the AdministrativeAgent’s name, as the Administrative Agent may deem necessary, and (ii) suchGrantor will, until the indefeasible payment in full in cash of the SecuredObligations and the termination or expiration of the Commitments, warrant anddefend its title to the Collateral and the interest of the Administrative Agentin the Collateral against any claim or demand of any Persons (other thanPermitted Liens) which could reasonably be expected to materially adverselyaffect such Grantor’s title to, or the Administrative Agent’s right or interestin, such Collateral.

 

Section 5.          Termination of Security Interest.  Upon the indefeasible payment in full in cashof the Secured Obligations, the termination or expiration of all Commitmentsand the termination of the Credit Agreement in writing, the security interestgranted hereby shall terminate and all rights to the Collateral shall revert tothe applicable Grantor to the extent such Collateral shall not have been soldor otherwise applied pursuant to the terms hereof.  Upon any such termination, the AdministrativeAgent will, at the Grantors’ expense, execute and deliver to the applicableGrantor such documents (including, without limitation, UCC-3 terminationstatements) as such Grantor shall reasonably request to evidence suchtermination.

 

Section 6.          Reinstatement. If, at any timeafter payment in full of all Secured Obligations and termination of theAdministrative Agent’s security interest, any payments on the SecuredObligations previously made must be disgorged by the Administrative Agent forany reason whatsoever, including, without limitation, the insolvency,bankruptcy or reorganization of any Grantor or any other Person, this SecurityAgreement and the Administrative Agent’s security interests herein shall bereinstated as to all disgorged payments as though such payments had not beenmade, and each Grantor shall sign and deliver to the Administrative Agent alldocuments, and shall do such other acts and things, as may be necessary toreinstate and perfect the Administrative Agent’s security interest.  **EACHGRANTOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHERADMINISTRATIVE AGENT FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COSTOR EXPENSE UNDER THIS SECTION 6 (INCLUDING REASONABLE ATTORNEYS’ FEES ANDEXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THEINDEMNIFIED ADMINISTRATIVE AGENT’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM,DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL,NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTEDFROM SUCH INDEMNIFIED ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFULMISCONDUCT.**

 

Section 7.          Remedies upon Event of Default.

 

(a)           If any Event of Default has occurredand is continuing, the Administrative Agent may (and shall at the writtenrequest of the Majority Lender), (i) proceed to protect and enforce 

 

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the rights vested in it by this Security Agreement orotherwise available to it, including but not limited to, the right to cause allrevenues and other moneys pledged hereby as Collateral to be paid directly toit, and to enforce its rights hereunder to such payments and all other rightshereunder by such appropriate judicial proceedings as it shall deem mosteffective to protect and enforce any of such rights, either at law or in equityor otherwise, whether for specific enforcement of any covenant or agreementcontained in any of the Contract Documents, or in aid of the exercise of anypower therein or herein granted, or for any foreclosure hereunder and saleunder a judgment or decree in any judicial proceeding, or to enforce any otherlegal or equitable right vested in it by this Security Agreement or by law; (ii) causeany action at law or suit in equity or other proceeding to be instituted andprosecuted and enforce any rights hereunder or included in the Collateral,subject to the provisions and requirements thereof; (iii) sell orotherwise dispose of any or all of the Collateral or cause the Collateral to besold or otherwise disposed of in one or more sales or transactions, at suchprices and in such manner as may be commercially reasonable, and for cash or oncredit or for future delivery, without assumption of any credit risk, at publicor private sale, without demand of performance or notice of intention to sellor of time or place of sale (except such notice as is required by applicablestatute and cannot be waived), it being agreed that the Administrative Agentmay be a purchaser on behalf of the Secured Parties or on its own behalf at anysuch sale and that the Administrative Agent, any other Secured Party, or anyother Person who may be a bona fide purchaser for value and without notice ofany claims of any or all of the Collateral so sold shall thereafter hold thesame absolutely free from any claim or right of whatsoever kind, including anyequity of redemption of any Grantor, any such demand, notice or right andequity being hereby expressly waived and released to the extent permitted bylaw; (iv) incur reasonable expenses, including reasonable attorneys’ fees,reasonable consultants’ fees, and other costs appropriate to the exercise ofany right or power under this Security Agreement; (v) perform anyobligation of any Grantor hereunder and make payments, purchase, contest orcompromise any encumbrance, charge or lien, and pay taxes and expenses,without, however, any obligation to do so; (vi) in connection with anyacceleration and foreclosure, take possession of the Collateral and render itusable and repair and renovate the same, without, however, any obligation to doso, and enter upon any location where the Collateral may be located for thatpurpose, control, manage, operate, rent and lease the Collateral, collect allrents and income from the Collateral and apply the same to reimburse theSecured Parties for any cost or expenses incurred hereunder or under any of theLoan Documents and to the payment or performance of any Grantor’s obligationshereunder or under any of the Loan Documents, and apply the balance to theother Secured Obligations and any remaining excess balance to whomsoever islegally entitled thereto; (vii) secure the appointment of a receiver forthe Collateral or any part thereof; (viii) require any Grantor to, andeach Grantor hereby agrees that it will at its expense and upon request of theAdministrative Agent forthwith, assemble all or part of the Collateral asdirected by the Administrative Agent and make it available to theAdministrative Agent at a place to be designated by the Administrative Agentwhich is reasonably convenient to both parties; (ix) exercise any other oradditional rights or remedies granted to a Administrative Agent under the UCC;or (x) occupy any premises owned or leased by any Grantor where the Collateralor any part thereof is assembled for a reasonable period in order to effectuateits rights and remedies hereunder or 

 

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under law, without obligation to any Grantor inrespect of such occupation.  If, pursuantto applicable law, prior notice of sale of the Collateral under this Section isrequired to be given to any Grantor, each Grantor hereby acknowledges that theminimum time required by such applicable law, or if no minimum time isspecified, 10 days, shall be deemed a reasonable notice period.   The Administrative Agent shall not beobligated to make any sale of Collateral regardless of notice of sale havingbeen given.  The Administrative Agent mayadjourn any public or private sale from time to time by announcement at thetime and place fixed therefor, and such sale may, without further notice, bemade at the time and place to which it was so adjourned.

 

(b)           All reasonable costsand expenses (including reasonable attorneys’ fees and expenses) incurred bythe Administrative Agent in connection with any suit or proceeding inconnection with the performance by the Administrative Agent of any of theagreements contained in any of the Contract Documents, or in connection withany exercise of its rights or remedies hereunder, pursuant to the terms of thisSecurity Agreement, shall constitute additional indebtedness secured by thisSecurity Agreement and shall be paid on demand by the Grantors to theAdministrative Agent on behalf of the Secured Parties.

 

Section 8.          Remedies Cumulative; Delay NotWaiver.

 

(a)           No right, power or remedy hereinconferred upon or reserved to the Administrative Agent is intended to beexclusive of any other right, power or remedy and every such right, power andremedy shall, to the extent permitted by law, be cumulative and in addition toevery other right, power and remedy given hereunder or now or hereafterexisting at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder orotherwise shall not prevent the concurrent assertion or employment of any otherappropriate right or remedy.  Resort toany or all security now or hereafter held by the Administrative Agent may betaken concurrently or successively and in one or several consolidated orindependent judicial actions or lawfully taken nonjudicial proceedings, orboth.

 

(b)           No delay or omissionof the Administrative Agent to exercise any right or power accruing upon theoccurrence and during the continuance of any Event of Default as aforesaidshall impair any such right or power or shall be construed to be a waiver ofany such Event of Default or an acquiescence therein; and every power andremedy given by this Security Agreement may be exercised from time to time, andas often as shall be deemed expedient, by the Administrative Agent.

 

Section 9.          Contract Rights.  After the occurrence andduring the continuance of an Event of Default, the Administrative Agent may exercise any of theContract Rights and remedies of any Grantor under or in connection with theInstruments, Chattel Paper, or Contracts which represent Accounts, the GeneralIntangibles, or which otherwise relate to the Collateral, including, withoutlimitation, any rights of any Grantor to demand or otherwise require payment ofany amount under, or performance of any provisions of, the Instruments, ChattelPaper, or Contracts which represent Accounts, or the General Intangibles.

 

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Section 10.        Accounts.

 

(a)           After the occurrenceand during the continuance of an Event of Default, the Administrative Agentmay, or may direct any Grantor to, take any action the Administrative Agentdeems necessary or advisable to enforce collection of the Accounts, including,without limitation, notifying the account debtors or obligors under anyAccounts of the assignment of such Accounts to the Administrative Agent anddirecting such account debtors or obligors to make payment of all amounts dueor to become due directly to the Administrative Agent.  Upon such notification and direction, and atthe expense of the Grantors, the Administrative Agent may enforce collection ofany such Accounts, and adjust, settle, or compromise the amount or paymentthereof in the same manner and to the same extent as any Grantor might havedone.

 

(b)           After receipt by anyGrantor of the notice referred to in Section 10(a) above that anEvent of Default has occurred and is continuing, all amounts and Proceeds(including instruments) received by such Grantor in respect of the Accountsshall be received in trust for the benefit of the Administrative Agenthereunder, shall be segregated from other funds of such Grantor, and shallpromptly be paid over to the Administrative Agent in the same form as soreceived (with any necessary indorsement) to be held as Collateral.  No Grantor shall adjust, settle, orcompromise the amount or payment of any Account, nor release wholly or partlyany account debtor or obligor thereof, nor allow any credit or discount thereonother than in the ordinary course of business and consistent with pastpractices.

 

Section 11.        Application of Collateral.  The proceeds of any sale, or otherrealization (other than that received from a sale or other realizationpermitted by the Senior Credit Agreement) upon all or any part of theCollateral pledged by any Grantor shall be applied by the Administrative Agentas set forth in Section 7.06 of the Credit Agreement.

 

Section 12.        Administrative Agent as Attorney-in-Factfor Grantor.  Each Grantor herebyconstitutes and irrevocably appoints the Administrative Agent, acting for andon behalf of itself and the Secured Parties and each successor or assign of theAdministrative Agent and the Secured Parties, the true and lawfulattorney-in-fact of such Grantor, with full power and authority in the placeand stead of such Grantor and in the name of such Grantor, the AdministrativeAgent or otherwise to, following the occurrence and during the continuation ofan Event of Default, take any action and execute any instrument at the writtendirection of the Secured Parties and enforce all rights, interests and remediesof such Grantor with respect to the Collateral, including the right:

 

(i)            to ask, require, demand, receive andgive acquittance for any and all moneys and claims for moneys due and to becomedue under or arising out of the any of the other Collateral, including withoutlimitation, any Insurance Contracts;

 

(ii)           to elect remedies thereunder and toendorse any checks or other instruments or orders in connection therewith;

 

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(iii)          to file any claims or take any actionor institute any proceedings in connection therewith which the AdministrativeAgent may deem to be necessary or advisable;

 

(iv)          to pay, settle or compromise all billsand claims which may be or become liens or security interests against any orall of the Collateral, or any part thereof, unless a bond or other securitysatisfactory to the Administrative Agent has been provided; and

 

(v)           upon foreclosure, to do any and everyact which any Grantor may do on its behalf with respect to the Collateral orany part thereof and to exercise any or all of such Grantor’s rights andremedies under any or all of the Collateral; provided, however,that the Administrative Agent shall not exercise any such rights except uponthe occurrence and continuation of an Event of Default.  **This power of attorney isa power coupled with an interest and shall be irrevocable.**

 

Section 13.        Administrative Agent May Perform.  The Administrative Agent may fromtime-to-time perform any act which any Grantor has agreed hereunder to performand which such Grantor shall fail to perform after being requested in writingso to perform (it being understood that no such request need be given after theoccurrence and during the continuance of any Event of Default and after noticethereof by the Administrative Agent to any Grantor) and the AdministrativeAgent may from time-to-time take any other action which the AdministrativeAgent deems necessary for the maintenance, preservation or protection of any ofthe Collateral or of its security interest therein, and the reasonable expensesof the Administrative Agent incurred in connection therewith shall be part ofthe Secured Obligations and shall be secured hereby.

 

Section 14.        Administrative Agent Has No Duty.  The powers conferred on the AdministrativeAgent hereunder are solely to protect its interest in the Collateral and shallnot impose any duty on it to exercise any such powers.  Except for reasonable care of any Collateralin its possession and the accounting for moneys actually received by ithereunder, the Administrative Agent shall have no duty as to any Collateral orresponsibility for taking any necessary steps to preserve rights against priorparties or any other rights pertaining to any Collateral.

 

Section 15.        Reasonable Care.  The Administrative Agent shall be deemed tohave exercised reasonable care in the custody and preservation of theCollateral in its possession if the Collateral is accorded treatmentsubstantially equal to that which the Administrative Agent accords its ownProperty.

 

Section 16.        Payments Held in Trust.  During the continuance of an Event ofDefault, all payments received by any Grantor under or in connection with anyCollateral shall be received in trust for the benefit of the AdministrativeAgent, and shall be segregated from other funds of such Grantor and shall beforthwith paid over to the Administrative Agent in the same form as received(with any necessary endorsement).

 

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Section 17.        Miscellaneous.

 

(a)           Expenses.  Each Grantor will upon demand pay to theAdministrative Agent for its benefit and the benefit of the Secured Parties theamount of any reasonable out-of-pocket expenses, including the reasonable feesand disbursements of its counsel and of any experts, which the AdministrativeAgent may incur in connection with (i) the custody, preservation, use, oroperation of, or the sale, collection, or other realization of, any of theCollateral, (ii) the exercise or enforcement of any of the rights of theAdministrative Agent hereunder, and (iii) the failure by any Grantor toperform or observe any of the provisions hereof.

 

(b)           Amendments; Etc.  No amendment or waiver of any provision ofthis Security Agreement nor consent to any departure by any Grantor herefromshall be effective unless the same shall be in writing and executed by theaffected Grantor and the Administrative Agent, and then such waiver or consentshall be effective only in the specific instance and for the specific purposefor which given.

 

(c)           Addresses for Notices.  All notices and other communications providedfor hereunder shall be made in the manner and to the addresses set forth in theCredit Agreement.

 

(d)           Continuing Security Interest;Transfer of Interest.  This SecurityAgreement shall create a continuing security interest in the Collateral and,unless expressly released by the Administrative Agent, shall (a)  remainin full force and effect until the indefeasible payment in full in cash of theSecured Obligations, the termination or expiration of all Commitments, and thetermination of the Credit Agreement in writing, (b) be binding upon eachGrantor and its successors, tranferees and assigns, and (c) inure,together with the rights and remedies of the Administrative Agent hereunder, tothe benefit of and be binding upon, the Administrative Agent, the Lenders andtheir respective successors, transferees, and assigns.  Without limiting the generality of theforegoing clause, when any Lender assigns or otherwise transfers any interestheld by it under the Credit Agreement or other Loan Document to any otherPerson pursuant to the terms of the Credit Agreement or such other LoanDocument, that other Person shall thereupon become vested with all the benefitsheld by such Lender under this Security Agreement.

 

(e)           Severability.  Wherever possible each provision of thisSecurity Agreement shall be interpreted in such manner as to be effective andvalid under applicable law, but if any provision of this Security Agreementshall be prohibited by or invalid under such law, such provision shall beineffective to the extent of such prohibition or invalidity, withoutinvalidating the remainder of such provision or the remaining provisions ofthis Security Agreement.

 

(f)            Choice of Law.  This Security Agreement shall be governed byand construed and enforced in accordance with the laws of the State of Texas,except to the extent that the validity or perfection of the security interestshereunder, or remedies hereunder, in respect of any particular Collateral aregoverned by the laws of a jurisdiction other than the state of Texas.

 

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(g)           Counterparts.  The parties may execute this SecurityAgreement in counterparts, each of which constitutes an original, and all ofwhich, collectively, constitute only one agreement.  Delivery of an executed counterpart signaturepage by facsimile is as effective as executing and delivering thisSecurity Agreement in the presence of the other parties to this SecurityAgreement.  In proving this SecurityAgreement, a party must produce or account only for the executed counterpart ofthe party to be charged.

 

(h)           Headings.  Paragraph headings have been inserted in thisSecurity Agreement as a matter of convenience for reference only and it isagreed that such paragraph headings are not a part of this Security Agreementand shall not be used in the interpretation of any provision of this SecurityAgreement.

 

(i)            Conflicts.**** In the event of any explicit or implicitconflict between any provision of this Security Agreement and any provision ofthe Credit Agreement, the terms of the Senior Credit Agreement shall becontrolling.

 

(j)            Additional Grantors*.*  Pursuant to Section 6.15of the Credit Agreement, each Subsidiary of the Borrower that was not inexistence on the date of the Credit Agreement is required to enter into thisSecurity Agreement as a Grantor upon becoming a Subsidiary of theBorrower.  Upon execution and deliveryafter the date hereof by the Administrative Agent and such Subsidiary of aninstrument in the form of Annex 1, such Subsidiary shall become aGrantor hereunder with the same force and effect as if originally named as aGrantor herein.  The execution anddelivery of any instrument adding an additional Grantor as a party to thisSecurity Agreement shall not require the consent of any other Grantorhereunder.  The rights and obligations ofeach Grantor hereunder shall remain in full force and effect notwithstandingthe addition of any new Grantor as a party to this Security Agreement.

 

(k)           **Subordination andIntercreditor Agreement. Reference is made to the Subordination and Intercreditor Agreement,dated as of                        ,2008 (as amended, restated, supplemented or otherwise modified from time totime, the “Subordination and ***Intercreditor Agreement***”),among Union Bank of California, N.A., as Senior Agent, and ****UnionBanCalEquities, Inc.,****************asSubordinated Agent, and certain other persons, party or that may become partythereto from time to time.  Notwithstandinganything herein to the contrary, this Security Agreement, the Liens grantedto the Administrative Agent pursuant to this Security Agreement and theexercise of any right or remedy by the Administrative Agent or any of theLenders hereunder are subject to the provisions of the Subordination andIntercreditor Agreement.  In the event ofany conflict between the terms of the Subordination and Intercreditor Agreementand this Security Agreement, the terms of the Subordination and IntercreditorAgreement shall govern and control**.

 

(l)            Entire Agreement.  **THIS SECURITY AGREEMENTAND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIESAND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,**

 

17

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**CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OFTHE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.**

 

[SIGNATURE PAGES FOLLOW]

 

18

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The parties hereto havecaused this Security Agreement to be duly executed as of the date first abovewritten.

 
|   | **GRANTORS:**                    |
|--------|----------------------------------|
|   |                             |
|   | CANO PETROLEUM, INC., a Delaware |
|   | corporation                      |
|   |                             |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|   |                             |   |
|   | [GUARANTORS]                     |
|   | ** **                       |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|   |                             |   |
|   |                             |   |
|   | **ADMINISTRATIVE AGENT:**        |
|   |                             |   |
|   | UNIONBANCAL EQUITIES, INC.       |
|   |                             |   |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|        |                                  |  |  |  |  |

 

19

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**SCHEDULE 1**

**to Security Agreement**

 
| **Grantor:**                            |   | Cano  Petroleum, Inc.    |
|-----------------------------------------|--------|-------------------------------|
|                                    |   |                          |
| **Jurisdiction of Formation / Filing:** |   | Delaware                      |
|                                    |   |                          |
| **Type of Organization:**               |   | corporation                   |
|                                    |   |                          |
| **Address where records for**           |   |                          |
| **Collateral are kept:**                |   | [ADDRESS]                     |
|                                    |   | [CITY,  STATE ZIP]            |
|                                    |   |                          |
| **Organizational Number:**              |   |                          |   |
|                                    |   |                          |
| **Federal Tax Identification Number:**  |   |                          |   |
|                                    |   |                          |
| **Prior Names:**                        |   |                          |   |
|                                    |   |                          |
|                                    |   |                          |
| **Grantor:**                            |   | Ladder  Companies, Inc.  |
|                                    |   |                          |
| **Jurisdiction of Formation / Filing:** |   | Delaware                      |
|                                    |   |                          |
| **Type of Organization:**               |   | corporation                   |
| ** **                              |   |                          |
| **Address where records for**           |   |                          |
| **Collateral are kept:**                |   | [ADDRESS]                     |
|                                    |   | [CITY,  STATE ZIP]            |
|                                    |   |                          |
|                                    |   |                          |
| **Organizational Number:**              |   |                          |   |
|                                    |   |                          |
| **Federal Tax Identification Number:**  |   |                          |   |
|                                    |   |                          |
| **Prior Names:**                        |   |                          |   |
|                                    |   |                          |
| **Grantor:**                            |   | Square  One Energy, Inc. |
|                                    |   |                          |
| **Jurisdiction of Formation / Filing:** |   | Texas                         |
|                                    |   |                          |
| **Type of Organization:**               |   | corporation                   |

 

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| **Address where records for**          |   |               |
|----------------------------------------|--------|--------------------|
| **Collateral are kept:**               |   | [ADDRESS]          |
|                                   |   | [CITY,  STATE ZIP] |
|                                   |   |               |
| **Organizational Number:**             |   |               |   |
| ** **                             |   |               |
| **Federal Tax Identification Number:** |   |               |   |
| ** **                             |   |               |
| **Prior Names:**                       |   |               |   |

 

2

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Annex1 to the

SecurityAgreement

 

SUPPLEMENT NO. [            ]  dated as of[               ](the “Supplement”), to the Security Agreement dated as of March     ,2008 (as amended, supplemented or otherwise modified from time to time, the “SecurityAgreement”), by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),each subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”and individually, a “Grantor”) and UnionBanCal Equities, Inc., asadministrative agent (the “Administrative Agent”) for the ratablebenefit of itself, the Lenders (as defined below) (together with the Lenders,individually a “Secured Party”, and collectively, the “SecuredParties”).

 

A.            Reference is made to that certainSubordinated Credit Agreement dated as of March       ,2008 by and among the Borrower, the lenders party thereto from time to time(individually, a “Lender”, and collectively, the “Lenders”), andthe Administrative Agent (as it may be amended, restated or otherwise modifiedfrom time to time, the “Credit Agreement”).

 

B.            Capitalized terms used herein andnot otherwise defined herein shall have the meanings assigned to such terms inthe Security Agreement and the Credit Agreement.

 

C.            The Grantors have entered into theSecurity Agreement in order to induce the Lenders to make Advances.  Pursuant to Section 6.15 of the CreditAgreement, each Subsidiary of the Borrower that was not in existence on thedate of the Credit Agreement is required to enter into the Security Agreementas a Grantor upon becoming a Subsidiary. Section 17(j) of the Security Agreement provides thatadditional Subsidiaries of the Borrower may become Grantors under the SecurityAgreement by execution and delivery of an instrument in the form of thisSupplement.  The undersigned Subsidiaryof the Borrower (the “New Grantor”) is executing this Supplement inaccordance with the requirements of the Credit Agreement to become a Grantorunder the Security Agreement.

 

Accordingly, theAdministrative Agent and the New Grantor agree as follows:

 

(a)           In accordance with Section 17(j) ofthe Security Agreement, the New Grantor by its signature below becomes aGrantor under the Security Agreement with the same force and effect as if originallynamed therein as a Grantor and the New Grantor hereby agrees (a) to allthe terms and provisions of the Security Agreement applicable to it as aGrantor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Grantor thereunder are true andcorrect on and as of the date hereof in all material respects.  In furtherance of the foregoing, the NewGrantor, as security for the payment and performance in full of the SecuredObligations (as defined in the Security Agreement), does hereby create andgrant to the Administrative Agent, its successors and assigns, for the benefitof the Secured Parties, their successors and assigns, a continuing securityinterest in and lien on all of the New Grantor’s right, title and interest inand to the Collateral (as defined in the Security Agreement) 

 

1

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of the New Grantor. Each reference to a “Grantor” in the Security Agreement shall be deemedto include the New Grantor.  The SecurityAgreement is hereby incorporated herein by reference.

 

(b)           The New Grantor represents andwarrants to the Administrative Agent that this Supplement has been dulyauthorized, executed and delivered by it and constitutes its legal, valid andbinding obligation, enforceable against it in accordance with its terms(subject to applicable bankruptcy, reorganization, insolvency, moratorium orsimilar laws affecting creditors’ rights generally and subject, as toenforceability, to equitable principles of general application (regardless ofwhether enforcement is sought in a proceeding in equity or at law)).

 

(c)           This Supplement may be executed incounterparts, each of which shall constitute an original, but all of which whentaken together shall constitute a single contract.  This Supplement shall become effective whenthe Administrative Agent shall have received counterparts of this Supplementthat, when taken together, bear the signatures of the New Grantor and theAdministrative Agent.  Delivery of an executedsignature page to this Supplement by facsimile transmission shall be aseffective as delivery of a manually signed counterpart of this Supplement.

 

(d)           The New Grantor hereby represents andwarrants that set forth on Schedule 1 attached hereto are (a) itssole jurisdiction of formation and type of organization, (b) the locationof all records concerning its Accounts, General Intangibles, or any otherCollateral, (c) its federal tax identification number and theorganizational number, and (d) all names used by it during the last fiveyears prior to the date of this Supplement.

 

(e)           Except as expressly supplementedhereby, the Security Agreement shall remain in full force and effect.

 

(f)            THIS SUPPLEMENT SHALL BE GOVERNED BYAND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTSHEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGEDCOLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OFTEXAS.

 

(g)           In case any one or more of theprovisions contained in this Supplement should be held invalid, illegal orunenforceable in any respect, neither party hereto shall be required to complywith such provision for so long as such provision is held to be invalid,illegal or unenforceable, but the validity, legality and enforceability of theremaining provisions contained herein and in the Security Agreement shall notin any way be affected or impaired.  Theparties hereto shall endeavor in good-faith negotiations to replace theinvalid, illegal or unenforceable provisions with valid provisions the economiceffect of which comes as close as possible to that of the invalid, illegal orunenforceable provisions.

 

2

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(h)           All communications and noticeshereunder shall be in writing and given as provided in the SecurityAgreement.  All communications andnotices hereunder to the New Grantor shall be given to it at the address setforth under its signature hereto.

 

(i)            The New Grantor agrees to reimbursethe Administrative Agent for its reasonable out-of-pocket expenses inconnection with this Supplement, including the reasonable fees, other chargesand disbursements of counsel for the Administrative Agent.

 

**THIS SUPPLEMENT, THE SECURITYAGREEMENT AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THEPARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THERE ARENO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.**

 

IN WITNESS WHEREOF, the New Grantor and the Administrative Agent haveduly executed this Supplement to the Security Agreement as of the day and yearfirst above written.

 
|   | [Name of New Grantor], |
|--------|------------------------|
|   |                   |
|   | By:                    |   |
|   | Name:                  |   |
|   | Title:                 |   |
|   |                   |
|   | Address:               |   |
|   |                   |
|   |                   |
|   |                   |
|   | [ADMINISTRATIVE AGENT] |
|   |                   |
|   |                   |
|   | By:                    |   |
|   | Name:                  |   |
|   | Title:                 |   |
|        |                        |  |  |  |  |

 

3

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Schedule1

SupplementNo.      

tothe Security Agreement

 
|                                    |   |                           |
|-----------------------------------------|--------|--------------------------------|
| **New Grantor:**                        |   | [GRANTOR]                      |
| ** **                              |   |                           |
| **Jurisdiction of Formation / Filing:** |   | [STATE]                        |
|                                    |   |                           |
| **Type of Organization:**               |   | [ENTITY  TYPE]                 |
| ** **                              |   |                           |
| **Address where records for**           |   |                           |
| **Collateral are kept:**                |   | [ADDRESS]                      |
| ** **                              |   | [CITY,  STATE   ZIP] |
|                                    |   |                           |
| **Organizational Number:**              |   |                           |   |
| ** **                              |   |                           |
| **Federal Tax Identification Number:**  |   |                           |   |
| ** **                              |   |                           |
| **Prior Names:**                        |   |                           |   |

 

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** **

**EXHIBIT J**

** **

**FORM OF TRANSFERLETTERS**

** **

                                  ,20     

 

                                       

                                       

                                       

Re:                               Agreement dated                              ,by and between                                    ,as Seller, and                                                       ,as Buyer (the “Contract”).

 

Ladies and Gentlemen:

 

Cano Petroleum, Inc., aDelaware corporation (“Mortgagor”), has executed a mortgage or deed oftrust dated effective as of                  , 2008 (“Mortgage”) for the benefit ofUnionBanCal Equities, Inc., as Administrative Agent for the ratablebenefit of itself and the Lenders (as defined in the Mortgage), which Mortgagehas been recorded in the Real Property Records of the Counties listed on theattached Exhibit A.  A copyof the Mortgage is enclosed.  Theproperties covered by the Mortgage include all of the oil, gas and otherhydrocarbons and/or other minerals attributable to the above-referencedContract to which we understand you are currently a party and includes the wellor wells listed on the attached Exhibit A with respect to which youare remitting proceeds of production to the Mortgagor.  Your division order or lease numbers for suchwell or wells are set forth on the attached Exhibit A.

 

Pursuant to Article IIIof the Mortgage, the Administrative Agent is entitled to receive all ofMortgagor’s interest in all Hydrocarbons (as defined in the Mortgage), whichare covered by the above-referenced Contract, all products obtained orprocessed therefrom, and the revenues and proceeds attributable thereto.  The assignment of the Hydrocarbons, productsand proceeds was effective as of 7:00 A.M., (Dallas, Texas Time), on                            ,2008 (“Effective Date”).  TheLenders and the Administrative Agent, however, as provided in Article III,have permitted Mortgagor to collect the Hydrocarbons and the revenues andproceeds attributable thereto until the Administrative Agent or the Mortgagorshall have instructed the seller or purchaser of production to deliver suchHydrocarbons and all proceeds therefrom directly to the Administrative Agent.  The purpose of this letter is to notify youthat, commencing immediately upon the receipt hereof, and in accordance withthe terms and conditions of the Mortgage, you are to deliver all proceedsattributable to the sale of such Hydrocarbons pursuant to the above-referencedContract directly to the Administrative Agent at its office at 445 SouthFigueroa Street, 13th Floor, Los Angeles, California 90071, Telephone(      )                ,Facsimile:(        )                  ,Attention:                      ,or to such other address of which we may subsequently notify you inwriting.  If you require the execution oftransfer or division orders, please forward the transfer or division orders tothe Administrative Agent at its address at indicated above, Attention:                            .

 

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Should you have anyquestions in connection with any of the foregoing, please do not hesitate tocontact us.

 
|   | Very truly yours,                |
|--------|----------------------------------|
|   |                             |
|   |                             |
|   | UNIONBANCAL EQUITIES,  INC., as  |
|   | Administrative Agent             |
|   |                             |
|   |                             |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|   |                             |
|   |                             |
|   | CANO PETROLEUM, INC., a Delaware |
|   | corporation                      |
|   |                             |
|   |                             |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|        |                                  |  |  |  |  |  |

 

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** **

**EXHIBIT K**

 

**FORM OF BORROWER’S COUNSEL OPINION**

 

March 17,2008

 

UnionBanCalEquities, Inc.

  AdministrativeAgent and a Lender, and all the

  otherLenders party to the Subordinated Credit Agreement

  describedbelow

445South Figueroa Street

13thFloor

LosAngeles, California 90071

 

Ladiesand Gentlemen:

 

Wehave acted as Texas counsel to Cano Petroleum, Inc., a Delawarecorporation (“***Borrower***”),Ladder Companies, Inc., a Delaware corporation (“***Ladder***”), Square OneEnergy, Inc., a Texas corporation (“***Square One***”), W.O. Energy of Nevada, Inc.,a Nevada corporation (“***WOEN***”),WO Energy, Inc., a Texas corporation (“***WOE***”), W.O. Operating Company, Ltd., aTexas limited partnership (“***Operating***”), W.O. Production Company, Ltd., a Texaslimited partnership (“***Production***”),Cano Petro of New Mexico, Inc., a Texas corporation (“***CPNM***”)and Pantwist, LLC, a Texas limited liability company (“***Pantwist***”,and together with Ladder, Square One, WOEN, WOE, Operating, Production andCPNM, the “***Guarantors***”;Borrower and the Guarantors are each a “***Loan Party***” and collectively, the “***Loan Parties***”;Borrower and Ladder are collectively, the “***Delaware Loan Parties***”; and Square One, WOE,Operating, Production, CPNM and Pantwist are collectively, the “***Texas Loan Parties***”)in connection with that certain Subordinated Credit Agreement (herein socalled) dated as of even date herewith, executed by Borrower, UnionBanCalEquities, Inc., as Administrative Agent (in such capacity, the *“**Administrative Agent**”*), andeach financial institution party thereto as a Lender (collectively, the “***Lenders***”).  Capitalized terms used herein shall, unlessotherwise provided herein, have the respective meanings set forth in theSubordinated Credit Agreement.

 

Forthe purpose of rendering the opinions set forth herein, we have been furnishedwith and have reviewed the following documents each dated of even date with theSubordinated Credit Agreement unless otherwise indicated (collectively, the “***Transaction Documents***”):

 

(a)           the Subordinated Credit Agreement;

 

(b)           the Note, executed by Borrower andpayable to the order of the Administrative Agent in the original principalamount of $25,000,000;

 

1

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(c)           the Security Agreement, executed bythe Loan Parties, in favor of the Administrative Agent;

 

(d)           the Guaranty, executed by theGuarantors, in favor of the Administrative Agent, for the benefit of theBeneficiaries (as defined therein);

 

(e)           the Deed of Trust, SecurityAgreement, Financing Statement, Fixture Filing and Assignment of Productiondated March 17, 2008, executed by Square One, WOEN, WOE, Operating andProduction as Mortgagors made to Henry Park as the Trusteefor the benefit of the Administrative Agent as the Mortgagee (the “***SOWWOP******Texas Mortgage***”);

 

(f)            the Deed of Trust, SecurityAgreement, Financing Statement, Fixture Filing and Assignment of Productiondated March 17, 2008, executed by Pantwist as Mortgagor made to Henry Park, as the Trustee forthe benefit of the Administrative Agent as the Mortgagee (the “***Pantwist Texas Mortgage***”, and together withthe SOWWOP Texas Mortgage, the “***Texas Mortgages***”)

 

(g)           the Mortgage, Line of CreditMortgage, Assignment, Security Agreement, Fixture Filing and FinancingStatement dated March 17, 2008, executed by Borrower and Ladder asMortgagors in favor of the Administrative Agent as the Mortgagee (the “***Oklahoma Mortgage***”**)**;

 

(h)           the Mortgage, Line of CreditMortgage, Assignment, Security Agreement, Fixture Filing and FinancingStatement dated March 17, 2008, executed by CPNM as Mortgagor in favor ofthe Administrative Agent as the Mortgagee (the “***New Mexico Mortgage***”**)**;

 

(i)            the Pledge Agreement, executed byBorrower, WOEN, and WOE in favor of the Administrative Agent (the “***Pledge Agreement***”);

 

(j)            the Subordination and IntercreditorAgreement;

 

(k)           the UCC-1 Financing Statementreflecting Borrower as debtor and the Administrative Agent as secured party, tobe filed in the Office of the Secretary of State of Delaware (the “***Borrower Financing Statement***”);

 

(l)            the UCC-1 Financing Statementreflecting Ladder as debtor and the Administrative Agent as secured party, tobe filed in the Office of the Secretary of State of Delaware (the “***Ladder Financing Statement***”,and together with the Borrower Financing Statement, the “***Delaware Financing Statements***”);

 

(m)          the UCC-1 Financing Statementreflecting Square One as debtor and the Administrative Agent as secured party,to be filed in the Office of the Secretary of State of Texas (the “***Square One Financing Statement***”);

 

2

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(n)           the UCC-1 Financing Statementreflecting WOE as debtor and the Administrative Agent as secured party, to befiled in the Office of the Secretary of State of Texas (the “***WOE Financing Statement***”);

 

(o)           the UCC-1 Financing Statementreflecting Operating as debtor and the Administrative Agent as secured party,to be filed in the Office of the Secretary of State of Texas (the “***Operating Financing Statement***”);

 

(p)           the UCC-1 Financing Statementreflecting Production as debtor and the Administrative Agent as secured party,to be filed in the Office of the Secretary of State of Texas (the “***Production Financing Statement***”);

 

(q)           the UCC-1 Financing Statementreflecting CPNM as debtor and the Administrative Agent as secured party, to befiled in the Office of the Secretary of State of Texas (the “***CPNM Financing Statement***”);and

 

(r)            the UCC-1 Financing Statementreflecting Pantwist as debtor and the Administrative Agent as secured party, tobe filed in the Office of the Secretary of State of Texas (the “***Pantwist Financing Statement***”,and together with the Square One Financing Statement, the WOE FinancingStatement, the Operating Financing Statement, the Production FinancingStatement and the CPNM Financing Statement, the “***TexasFinancing Statements***”; the Delaware Financing Statements and theTexas Financing Statements are collectively, the “***Financing Statements***”).

 

(s)           the UCC-1 Financing Statementreflecting Borrower as debtor and the Administrative Agent as secured party, tobe filed in County Filing Offices, as defined below (the “***Borrower County Financing Statement***”);

 

(t)            the UCC-1 Financing Statementreflecting Ladder as debtor and the Administrative Agent as secured party, tobe filed in the County Filing Offices (the “***Ladder County Financing Statement***”);

 

(u)           the UCC-1 Financing Statementreflecting Square One as debtor and the Administrative Agent as secured party,to be filed in the County Filing Offices (the “***Square One County Financing Statement***”);

 

(v)           the UCC-1 Financing Statementreflecting WOE as debtor and the Administrative Agent as secured party, to befiled in the County Filing Offices (the “***WOE County Financing Statement***”);

 

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(w)          the UCC-1 Financing Statementreflecting Operating as debtor and the Administrative Agent as secured party,to be filed in the County Filing Offices (the “***Operating County Financing Statement***”);

 

(x)           the UCC-1 FinancingStatement reflecting Production as debtor and the Administrative Agent as securedparty, to be filed in the County Filing Offices (the “***Production County FinancingStatement***”); and

 

(y)           the UCC-1 Financing Statementreflecting Pantwist as debtor and the Administrative Agent as secured party, tobe filed in the County Filing Offices (the “***Pantwist County Financing Statement***”,and together with the Square One County Financing Statement, the WOE CountyFinancing Statement, the Operating County Financing Statement, the ProductionCounty Financing Statement, the Borrower County Financing Statement, and theLadder County Financing Statement, collectively, the “***CountyFinancingStatements***”).

 

Asused herein, the term “***Collateral***”shall mean the non-fixture equipment, accounts, inventory, and generalintangibles and other personal property that is *“Collateral”* (as defined in the Security Agreement); *provided that* the Collateral shall excludeall real property, real estate, leases, and fixtures that are not personalproperty.  As used herein, the term “***Real Property Collateral***”shall mean the real property, real estate, leases, and fixtures described inthe Texas Mortgages.  As used herein, theterm “***Pledged Collateral***”shall mean the “Pledged Collateral” as defined in the Pledge Agreement.

 

Inaddition to the Transaction Documents, other documents we have reviewed inrendering this opinion, and upon which we have relied, include the following:

 

(a)           the Certificate of Incorporation ofBorrower, certified by the Secretary of State of the State of Delaware on March 6,2008;

 

(b)           an Officer’s Certificate of Borrower(the “***Borrower’s Officer’sCertificate***”) dated as of March 17, 2008, certifying (i) theCertificate of Incorporation of Borrower, (ii) the Bylaws of Borrower, (iii) Resolutionsadopted by the Board of Directors of Borrower authorizing the execution,delivery, and performance of the Transaction Documents executed by Borrower,and (iv) the incumbency of officers of Borrower;

 

(c)           a certificate from the Secretary ofState of the State of Delaware indicating that Borrower is in existence and goodstanding as of March 3, 2008 (the “***Borrower’s Existence and Good Standing Certificate***”);

 

(d)           the Certificate of Incorporation ofLadder, certified by the Secretary of State of the State of Delaware on March 6,2008;

 

4

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(e)           an Officer’s Certificate of Ladder (“***Ladder’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Certificate ofIncorporation of Ladder, (ii) the Bylaws of Ladder, (iii) Resolutionsadopted by the Board of Directors of Ladder authorizing the execution,delivery, and performance of the Transaction Documents executed by Ladder, and (iv) theincumbency of officers of Ladder;

 

(f)            a certificate from the Secretary ofState of the State of Delaware indicating that Ladder is in existence and goodstanding as of March 5, 2008 (“***Ladder’s Existence and Good Standing Certificate***”);

 

(g)           the Articles of Incorporation ofSquare One, certified by the Secretary of State of the State of Texas on March 6,2008;

 

(h)           an Officer’s Certificate of SquareOne (“***Square One’sOfficer’s Certificate***”) dated as of March 17, 2008certifying (i) the Articles of Incorporation of Square One, (ii) theBylaws of Square One, (iii) Resolutions adopted by the Board of Directorsof Square One authorizing the execution, delivery, and performance of theTransaction Documents executed by Square One, and (iv) the incumbency ofofficers of Square One;

 

(i)            a certificate from the Secretary ofState of the State of Texas indicating that Square One is in existence as of March 3,2008 (“***Square One’sExistence Certificate***”);

 

(j)            a certificate, dated March 12,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by Square One of all franchise and similar taxes (“***Square One’s Good StandingCertificate***”);

 

(k)           the Articles of Incorporation ofWOEN, certified by the Secretary of State of the State of Nevada on March 6,2008;

 

(l)            an Officer’s Certificate of WOEN (“***WOEN’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Articles ofIncorporation of WOEN, (ii) the Bylaws of WOEN, (iii) Resolutionsadopted by the Board of Directors of WOEN authorizing the execution, delivery,and performance of the Transaction Documents executed by WOEN, and (iv) theincumbency of officers of WOEN;

 

(m)          a certificate from the Secretary ofState of the State of Nevada indicating that WOEN is in existence and goodstanding as of March 3, 2008 (“***WOEN’s Existence and Good Standing Certificate***”);

 

(n)           the Articles of Incorporation of WOE,certified by the Secretary of State of the State of Texas on March 6,2008;

 

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(o)           an Officer’s Certificate of WOE (“***WOE’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Articles ofIncorporation of WOE, (ii) the Bylaws of WOE, (iii) Resolutionsadopted by the Board of Directors of WOE authorizing the execution, delivery,and performance of the Transaction Documents executed by WOE, and (iv) theincumbency of officers of WOE;

 

(p)           a certificate from the Secretary ofState of the State of Texas indicating that WOE is in existence as of March 3,2008 (“***WOE’s ExistenceCertificate***”);

 

(q)           a certificate, dated March 12,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by WOE of all franchise and similar taxes (“***WOE’s Good Standing Certificate***”);

 

(r)            the Certificate of LimitedPartnership of Operating, certified by the Secretary of State of the State ofTexas on March 6, 2008 and amended on March 14, 2008 as certified bythe Secretary of State of the State of Texas on March 17, 2008;

 

(s)           an Officer’s Certificate of WOE,acting in its capacity as the sole General Partner of Operating (“***Operating’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Certificate of LimitedPartnership of Operating, (ii) the Agreement of Limited Partnership ofOperating, (iii) Resolutions adopted by Board of Directors of WOE, actingin its capacity as the sole General Partner of Operating, authorizing theexecution, delivery, and performance of the Transaction Documents executed bythe officers of WOE acting in its capacity as the sole General Partner ofOperating, and (iv) the incumbency of officers of WOE;

 

(t)            a certificate from the Secretary ofState of the State of Texas indicating that Operating is in existence as of March 3,2008 (“***Operating’sExistence Certificate***”);

 

(u)           the Certificate of LimitedPartnership of Production, certified by the Secretary of State of the State ofTexas on March 6, 2008 and amended on March 14, 2008 as certified bythe Secretary of State of the State of Texas on March 17, 2008;

 

(v)           an Officer’s Certificate of WOE,acting in its capacity as the sole General Partner of Production (“***Production’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Certificate of LimitedPartnership of Production, (ii) the Agreement of Limited Partnership ofProduction, (iii) Resolutions adopted by Board of Directors of WOE, actingin its capacity as the sole General Partner of Production, authorizing theexecution, delivery, and performance of the Transaction Documents executed bythe officers of WOE, acting in its capacity as the sole General Partner ofProduction, and (iv) the incumbency of officers of WOE;

 

(w)          a certificate from the Secretary ofState of the State of Texas indicating that Production is in existence as of March 3,2008 (“***Production’sExistence Certificate***”);

 

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(x)            the Articles of Incorporation ofCPNM, certified by the Secretary of State of the State of Texas on March 6,2008;

 

(y)           an Officer’s Certificate of CPNM (“***CPNM’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Articles ofIncorporation of CPNM, (ii) the Bylaws of CPNM, (iii) Resolutionsadopted by the Board of Directors of CPNM authorizing the execution, delivery,and performance of the Transaction Documents executed by CPNM, and (iv) theincumbency of officers of CPNM;

 

(z)            a certificate from the Secretary ofState of the State of Texas indicating that CPNM is in existence as of March 3,2008 (“***CPNM’s ExistenceCertificate***”);

 

(aa)         a certificate, dated March 12,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by CPNM of all franchise and similar taxes (“***CPNM’s Good Standing Certificate***”);

 

(bb)         the Certificate of Formation ofPantwist, certified by the Secretary of State of the State of Texas on March 6,2008;

 

(cc)         an Officer’s Certificate of Pantwist (“***Pantwist’s Officer’s Certificate***”)dated as of March 17, 2008 certifying (i) the Certificate ofFormation of Pantwist, (ii) the Company Agreement of Pantwist, (iii) Resolutionsadopted by the Sole Manager of Pantwist authorizing the execution, delivery, andperformance of the Transaction Documents executed by Pantwist, and (iv) theincumbency of officers of Pantwist;

 

(dd)         a certificate from the Secretary ofState of the State of Texas indicating that Pantwist is in existence as of March 3,2008 (“***Pantwist’sExistence Certificate***”);

 

(ee)         a certificate, dated March 12,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by Pantwist of all franchise and similar taxes (“***Pantwist’s Good Standing Certificate***”);and

 

(ff)           a certificate from the officer of theBorrower, Ladder, Square One, WOEN, WOE, CPNM and Pantwist and WOE as generalpartner of Operating and Production dated as of March 17, 2008, certifyingas to certain factual matters, including the Material Agreements.

 

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**Scope of Examination and General**

**Assumptions and Qualifications**

 

We have been furnished with and examinedoriginals or copies, certified or otherwise identified to our satisfaction, ofall such records of the Loan Parties, agreements and other instruments,certificates of officers and representatives of the Loan Parties, certificatesof public officials, and other documents as we have deemed necessary ordesirable as a basis for the opinions hereinafter expressed.  As to questions of fact material to suchopinions, we have, without independent verification of their accuracy, reliedto the extent we deem reasonably appropriate upon the representations and warrantiesof the Loan Parties made in the Transaction Documents and upon their respectiveOfficer’s Certificates.

 

Inmaking such examinations, we have assumed, with your consent (a) thegenuineness of all signatures (other than the signatures of officers of theLoan Parties), (b) the authenticity of all documents submitted to us asoriginals, (c) the conformity to original documents of all documentssubmitted to us as certified or photostatic copies, (d) the authenticityof the originals of the documents referred to in the immediately preceding ***clause (c)***, (e) theprompt and proper recordation of any Transaction Documents in which recordationis anticipated, (f) that each party to the Transaction Documents (otherthan the Delaware Loan Parties and the Texas Loan Parties) has full power,authority, and legal right to enter into and perform all agreements to which itis a party and has duly authorized, executed, and delivered each suchTransaction Document, (g) that the Transaction Documents (other than theOklahoma and New Mexico Mortgages) constitute the valid, binding, andenforceable agreement of all the parties thereto (other than the Loan Parties),and (h) the correctness and accuracy of all the facts set forth in allcertificates and reports identified in this opinion.

 

Wehave been advised by officers of the Loan Parties (and with your consent haverelied on that advice) that the agreements described on ***Exhibit A***attached hereto (the “***MaterialAgreements***”) are the only agreements and there are no orders,writs, judgments, or decrees that are material to Borrower or applicable LoanParty and which, if violated by the execution, delivery, or performance of theTransaction Documents, could reasonably be expected to have a material adverseeffect on the validity, performance, or enforceability of any TransactionDocument or the ability of any Loan Party to fulfill its material obligationsunder the Transaction Documents.  Weadvise you that we have not reviewed, and have not devoted substantiveattention to, any other agreements (other than those described on ***Exhibit A***) forthe purposes of rendering the opinion set forth in ***Paragraph 15***below.  We have made no examination of,and express no opinion with respect to, any financial, accounting, or similarcovenant or provision contained in the Material Agreements to the extent thatany such covenant or provision would require a determination as to anyfinancial or accounting matters.  Inaddition, we express no opinion as to any breach of any confidentialityprovision contained in any Material Agreement caused by any TransactionDocument or Borrower’s or applicable Loan Party’s actions pursuant thereto orin contemplation thereof.  We note thatsome of the Material Agreements are not governed by Texas law.** **Therefore,we have assumed that a court would enforce the Material Agreements as 

 

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written,and we have limited our opinion to matters readily ascertainable from the faceof the Material Agreements.  We also notethat some of the Material Agreements are not assignable by Borrower orapplicable Loan Party (the “***Non-Assignable Material Agreements***”).  As a result, to the extent that theCollateral includes Borrower’s or applicable Loan Party’s rights under theMaterial Agreements, we have relied upon *Section 9.408(a) *ofthe UCC (defined below).  We note thatany assignment of Non-Assignable Material Agreements is subject to thelimitations set forth in *Section 9.408(d) *ofthe UCC.

 

Ouropinions set forth below are limited solely to matters governed by the laws ofthe State of Texas, the federal laws of the United States of America, and theGeneral Corporation Law of the State of Delaware (collectively, “***Applicable Law***”) and we express noopinion as to questions concerning the laws of any other jurisdiction.  The opinions expressed herein are limited tothe *Uniform Commercial Code* asadopted in the State of Texas (the “***Texas UCC***”) and the State of Delaware (the “***Delaware UCC***”) ineffect on the date hereof (the Texas UCC and the Delaware UCC are collectively,the “***UCC***”).

 

**SpecificLimitations and Qualifications on**

**OpinionsRegarding Enforceability**

 

Withrespect to our opinion set forth in ***Paragraph 14*** under the heading “Opinions”below, we advise you that:

 

1.             The enforceability of theTransaction Documents is subject to (a) the effects of (i) applicablebankruptcy, insolvency, reorganization, fraudulent transfer, moratorium,rearrangement, liquidation, conservatorship, or similar laws of generalapplication now or hereafter in effect relating to or affecting the rights ofcreditors generally, (ii) general equity principles, and (iii) statutoryprovisions of the *Federal Bankruptcy Code* and the *UniformFraudulent Transfer Act* as adopted by the State of Texas (andrelated court decisions) pertaining to the voidability of preferential orfraudulent transfers, conveyances, and obligations, (b) the application ofa standard of “*good faith*” suchas that imposed by *Section 1.304*of the Texas UCC, and (c) the rights of the UnitedStates under the *Federal Tax Lien Act of1966*, as amended; *provided, however*, that anylimitations referred to under ***clauses (a)(ii) ***and ***(a)(iii) ***ofthis paragraph imposed by such laws on the enforceability of any TransactionDocument will not render any Transaction Document invalid as a whole or preventyou from the ultimate realization of the practical benefits of such TransactionDocument, except for the economic consequences of any judicial, administrative,or other procedural delay which may result from such laws.

 

2.             The opinion that the TransactionDocuments are enforceable is also subject to the qualification that certain ofthe remedial, waiver, and other provisions of the Transaction Documents may notbe enforceable; but such unenforceability will not, in our judgment, render theTransaction Documents invalid as a whole or substantially interfere with therealization of the principal legal benefits and/or security intended to beprovided by the Transaction Documents, except to the extent of any proceduraldelay which may result therefrom.

 

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3.             We express no opinion as to: (a) theenforceability of provisions of the Transaction Documents to the extent thatsuch provisions: (i) purport to waive or affect any rights to noticesrequired by law and that are not subject to waiver under *Section 9.602*of the Texas UCC; (ii) purport to waive trial by jury; (iii) statethat any Lender’s failure or delay in exercising rights, powers, privileges orremedies under the Transaction Documents shall not operate as a waiver thereof;(iv) purport to indemnify any Lender for such Lender’s violations offederal or state securities laws or environmental laws, or any obligation tothe extent such obligation arises from or is a result of such Lender’s ownfraud, negligence, or willful misconduct or to the extent that suchindemnification is inconsistent with public policy; (v) purport toestablish or satisfy certain factual standards or conditions (e.g.,standards of “*commercial reasonableness*” or “*reasonable care*” under *Article 9*of the Texas UCC) in a manner not permitted by *Sections 9.602*and *9.603* of the Texas UCC; (vi) purportto sever unenforceable provisions from the Transaction Documents, to the extentthat the enforcement of remaining provisions would frustrate the fundamentalintent of the parties to such documents; (vii) restrict access to legal orequitable remedies; (viii) purport to waive any claim of any Loan Partyagainst any Lender arising out of, or in any way related to, the TransactionDocuments; (ix) purport to provide remedies inconsistent with applicablelaw; or (x) providing that decisions by a party are conclusive or may bemade in its sole discretion; (b) whether a court would grant specificperformance or any other equitable remedy with respect to enforcement of anyprovision contained in the Transaction Documents; (c) the enforceabilityof any provision in the Transaction Documents that purports to appoint an agentfor service of process or establish or otherwise affect jurisdiction, venue,evidentiary standards, or limitation periods, or procedural rights in any suitor other proceeding; (d) the enforceability of any provision in theTransaction Documents that purports to waive, subordinate, or otherwiserestrict or deny access to rights, benefits, claims, causes of action, orremedies that cannot be waived, subordinated, or otherwise restricted ordenied; (e) the enforceability of any provision in the TransactionDocuments that allows any Lender to accelerate the maturity date of theobligations evidenced by the Transaction Documents, to institute foreclosureproceedings, or to exercise any similar right, without notice to the person orentity signatory thereto or bound thereby; or (f) the enforceability ofany provision contained in the Transaction Documents relating to theappointment of a receiver, to the extent that appointment of a receiver isgoverned by applicable statutory requirements, and to the extent that suchprovision may not be in compliance with such requirements.

 

4.             We express no opinion on any Lender’sability to foreclose on, become the owner of, or validly transfer or assume,all of the rights and duties of any Loan Party (other than the right to receivepayments thereunder and the right to receive an assignment of accounts receivablearising thereunder) as a party to the Non-Assignable Material Agreements, underwhich such Loan Party’s rights, obligations, or duties are not freelyassignable or transferable.

 

5.             We express no opinion regarding theenforceability of any documents or agreements referenced in the TransactionDocuments (other than the Transaction Documents).

 

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6.             We express no opinion regarding anyLender’s ability to exercise any rights or remedies against any collateral thatis personal property pursuant to the Transaction Documents other than inaccordance with the Texas UCC or the Delaware UCC.

 

7.             We express no opinion regarding (a) theenforceability of provisions of the Texas Mortgages that grant the right tobecome a mortgagee in possession of the Real Property Collateral prior to aforeclosure of the lien of the Transaction Documents or provide for thecollection of (or the perfection or effectiveness of your lien in) rents andprofits prior to actual or constructive possession of the Real PropertyCollateral, (b) the enforceability of any waiver of any right to anappraisal of the Real Property Collateral, to the extent one is providedpursuant to *Texas Property Code AnnotatedSections 51.003-51.005*, which rights are not waivable under Texaslaw, or (c) compliance with, or the effect of land use, zoning, building,sanitation, environmental, or ecological laws or regulations affecting the RealProperty Collateral.

 

**Specific Limitations and Qualifications on**

**Opinions Regarding Texas Usury Laws**

 

The opinions expressed in ***Paragraphs 14*** and ***16***under the heading “Opinions”below are also subject to the following:

 

1.             Wehave assumed that (a) no fees, charges, or other compensation will be paidto Lenders, or for their benefit, except as specified in the TransactionDocuments, and (b) no interest will accrue on the unfunded portion of theindebtedness evidenced by the Transaction Documents.

 

2.             We have assumed that Lenders willcomply with and give effect to all of the provisions of the TransactionDocuments with respect to the computation of the interest rate and the chargingand collection of interest thereunder, including without limitation, the “***Savings Clause***”(herein so called) (*i.e.*, aclause to the effect that Borrower shall never be required to pay, and Lendersshall never be entitled to collect or receive, interest on the loans evidencedby the Subordinated Credit Agreement at a rate in excess of the maximum ratepermitted by applicable law).  We adviseLenders that, if Borrower repays, or Lenders accelerate or otherwise demandpayment of, the loans made under the Subordinated Credit Agreement prior to thescheduled maturity date thereof, then Lenders will have to return any excessiveinterest received as the result of such prepayment in order to give effect tothe Savings Clause.

 

3.             We express no opinion as to whetherthe fees denominated in the Subordinated Credit Agreement as “*commitment fees*” or other fees andexpenses (other than those explicitly designated as interest) payable toLenders under the Transaction Documents are interest or in certain cases,whether any fees should be deducted from the principal of the loan evidenced bythe Transaction Documents in determining interest chargeable under such loan.  We assume that Lenders will comply withapplicable law in the treatment of such items under such loan.

 

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4.             *Section 2.09(d) *ofthe Subordinated Credit Agreement limits the reduction in the contract rate ofinterest in certain circumstances in order to recoup the contracted rate ofinterest for the prior period where the contracted rate was capped at a lowerrate by the maximum lawful rate.  Whilethere is a Texas statute and established precedent for the spreading ofinterest forward over the anticipated life of a loan, we are aware of no casespermitting “*backward*”spreading.  Notwithstanding the lack ofcase law, however, backward spreading, we believe, is consistent with theprinciples underlying forward spreading and should be permissible under Texaslaw.

 

**Specific Limitations and Qualifications on**

**Opinions Regarding Laws and Consents**

 

Withrespect to our opinions in ***Paragraphs16***and***17***under the heading “Opinions” below with respect to no violation of anyapplicable law and as to the lack of any required consents, approvals, orauthorizations of governmental authorities, our opinions are expressed onlywith respect to statutes or regulations that a lawyer in Texas or Delaware, asapplicable, exercising customary professional diligence would reasonablyrecognize as being applicable to the Loan Parties or the transactionscontemplated by the Transaction Documents. In addition, we express no opinion as to the following: (a) federalsecurities laws and regulations administered by the Securities and ExchangeCommission, State of Texas “Blue Sky” laws and regulations, and laws andregulations relating to commodity (and other) futures and indices and othersimilar instruments; or (b) the statutes and ordinances, theadministrative decisions, and the rules and regulations of counties,towns, municipalities, and special political subdivisions (whether created orenabled through legislative action at the federal, state, or regional level),and any judicial decisions to the extent they deal with any of the foregoing.

 

**Specific Limitations and Qualifications on**

**Opinions Regarding Perfection of Liens**

**and Security Interests in the Collateral**

 

With respect to the opinionsexpressed below regarding the perfection of the Administrative Agent’s liensand security interests in the Collateral, we advise you that:

 

1.             We express no opinion regarding (a) theaccuracy or completeness of any property descriptions contained in theTransaction Documents; however such descriptions are in sufficient form,assuming accuracy and completeness, (b) title to the Collateral, (c) thecreation or perfection of the Administrative Agent’s liens and securityinterests in the Collateral insofar as the laws of a jurisdiction *other than* the State of Texas (withrespect to creation) or the States of Texas and Delaware (with respect toperfection) govern the creation or perfection of such liens and securityinterests, or (d) the creation or perfection of the Administrative Agent’sliens and security interests in Collateral that is not described in theTransaction Documents.

 

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2.             We have assumed, with yourpermission, the following facts: (a) the Loan Parties, as applicable, havegood and sufficient title to the Collateral; (b) the Loan Parties, asapplicable, have “*rights in the collateral*”as that term is used in *Section 9.203*of the Texas UCC; (c) value has been given within the meaning of*Section 9.203* of the Texas UCC; (d) theDelaware Loan Parties are each solely incorporated, formed, or organized, asthe case may be, under the laws of the State of Delaware, the Texas LoanParties are each solely incorporated, formed, or organized, as the case may be,under the laws of the State of Texas and WOEN is solely incorporated under thelaws of the State of Nevada; and (e) the Administrative Agent’s address iscorrectly set forth on the Financing Statements and the County FinancingStatements.

 

3.             The opinions given in ***Paragraphs 18, 19, and 20*** under theheading “Opinions” below as to the creation and perfection of securityinterests do not cover real property and other property transactions excludedfrom the coverage of the Texas UCC pursuant to*Section 9.109* of the Texas UCC.

 

4.             We advise you that (a) in thecase of Collateral consisting of motor vehicles for which certificates of titlehave been issued and for which the exclusive manner of perfecting a securityinterest is by noting the Administrative Agent’s security interests on thecertificate of title in accordance with the *TexasCertificate of Title Act* or other comparable law of other states,the Administrative Agent’s security interest therein cannot be perfected by thefiling of the Financing Statements, but will be perfected only if theAdministrative Agent’s security interests are so noted, (b) thecontinuation of any security interests and perfection of any security interestsin Collateral consisting of proceeds is limited to the extent set forth in theUCC, (c) continuation statements complying with the UCC must be filed notmore than six (6) months prior to the expiration of a five (5) yearperiod dating from the date of filing of the Financing Statements (or otherwisewithin the time permitted by the UCC) and subsequent continuation statementsmust be filed within six (6) months prior to the end of each subsequentfive (5) year period and amendments or supplements to the FinancingStatements and/or additional financing statements may be required to be filedin the event of a change of name, identity, or corporate structure of any ofthe Delaware Loan Parties or any of the Texas Loan Parties, or if any of theDelaware Loan Parties or any of the Texas Loan Parties changes the jurisdictionof its incorporation, organization, or formation, as the case may be, (d) inthe case of property which becomes Collateral after the date hereof, *Section 552*of the *Federal Bankruptcy Code*limits the extentto which property acquired by a debtor after the commencement of a case underthe *Federal Bankruptcy Code*maybe subject to a security interest arising from a security agreement enteredinto by the debtor before the commencement of the case, (e) although thefiling of a financing statement will perfect a security interest in chattelpaper, negotiable documents, instruments, and investment property, (i) sucha perfected security interest in chattel paper, negotiable documents, andinstruments is subject to rights of prior or subsequent holders who obtainpossession of such Collateral, and (ii) such a perfected security interestin investment property is subject to rights of prior or subsequent holders whoobtain *“control”* (as such term isdefined in the UCC) of such Collateral, *unless*the secured party obtains *“control”*of such Collateral in accordance with the UCC, and (f) as against thirdparties having or acquiring an interest in or a lien on the real 

 

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propertyto which any fixtures are attached, the rights and duties of the law of thestate relating to real property and fixtures may apply.

 

5.             We express no opinion as to theperfection of liens and security interests in the Collateral constitutinggeneral intangibles consisting of copyrights, patents, trademarks, andtradenames to the extent security interests in such property may be perfectedonly by the filing of the appropriate documents in the United States CopyrightOffice and the United States Patent and Trademark Office.

 

6.             We have assumed that none of theCollateral consists or will consist of consumer goods, farm products, crops, ortimber, or accounts resulting from the sale of timber.

 

7.             We also note that a security interestin after-acquired property may attach and become enforceable and may becomeperfected only when the debtor has obtained rights in such Collateral.

 

8.             We express no opinion regarding thepriority of any liens and security interests created by the TransactionDocuments, except as explicitly set forth in ***Paragraph20*** under the heading “Opinions” below.  We express no opinion as to the priority ofany security interest in the Pledged Collateral or portions thereof that are orbecome subject to liens for taxes, assessments, levies, fees and othergovernmental and similar charges, and other claims of any type of anygovernmental authority, in each case that may be afforded priority over thesecurity interests of Lender by Applicable Law.

 

9.             We have made no review of theCollateral, the books and records relating to the Collateral, or any complianceby any of the Loan Parties with applicable rules and regulations governingthe ownership, use, leasing, maintenance, or charter of the Collateral, andtherefore we give no opinion concerning same.

 

10.           We have assumed, with yourpermission, that (a) that no party executing the Security Agreement is abroker or securities intermediary, as such terms are defined in the UCC, and (b) anyoriginal certificates evidencing the Pledged Collateral have been delivered to,and possession thereof will be held by, the Administrative Agent in the Stateof Texas.

 

11.           We note that in order to enforceLenders’ remedies and rights of foreclosure by sale, after default, of thePledged Collateral, Lenders will be required to comply with applicable federaland state securities laws.

 

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**Opinions**

 

Based upon the foregoing,and subject to the qualifications set forth below, we are of the opinion that:

 

1.             Borroweris, based solely upon, and as of the date of, the Borrower’s Existence and GoodStanding Certificate, validly existing and in good standing under the laws ofthe State of Delaware.

 

2.             Ladder is, based solely upon, andas of the date of, Ladder’s Existence and Good Standing Certificate, validlyexisting and in good standing under the laws of the State of Delaware.

 

3.             Square One is, based solely upon,and as of the date of, Square One’s Existence Certificate and Square One’s GoodStanding Certificate, validly existing and in good standing under the laws ofthe State of Texas.

 

4.             WOEN is, based solely upon, and asof the date of, WOEN’s Existence and Good Standing Certificate, validlyexisting and in good standing under the laws of the State of Nevada.

 

5.             WOE is, based solely upon, and asof the date of, WOE’s Existence Certificate and WOE’s Good StandingCertificate, validly existing and in good standing under the laws of the Stateof Texas.

 

6.             Operating is, based solely upon,and as of the date of, Operating’s Existence Certificate, validly existingunder the laws of the State of Texas.

 

7.             Production is, based solely upon,and as of the date of, Production’s Existence Certificate, validly existingunder the laws of the State of Texas.

 

8.             CPNM is, based solely upon, and asof the date of, CPNM’s Existence Certificate and CPNM’s Good StandingCertificate, validly existing and in good standing under the laws of the Stateof Texas.

 

9.             Pantwist is, based solely upon, andas of the date of, Pantwist’s Existence Certificate and Pantwist’s GoodStanding Certificate, validly existing and in good standing under the laws ofthe State of Texas.

 

10.           Borrower and Ladder each have thecorporate power and authority under the *GeneralCorporation Law of the State of Delaware* and their respectiveCertificates of Incorporation and Bylaws to execute, deliver, and perform theirobligations under the Transaction Documents. The Transaction Documents to which Borrower and/or Ladder is a partyhave been duly authorized by all necessary corporate action on the part ofBorrower and/or 

 

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Ladder,as appropriate, and have been duly executed and delivered by Borrower and/orLadder, as appropriate.

 

11.           Square One, WOE and CPNM each havethe corporate power and authority under the *TexasBusiness Corporation Act*orthe *Texas Business Organizations Code* and their respective Articles of Incorporation and Bylaws to execute,deliver, and perform their obligations under the Transaction Documents.  The Transaction Documents to which SquareOne, WOE and/or CPNM is a party have been duly authorized by all necessarycorporate action on the part of Square One, WOE and/or CPNM, as appropriate,and have been duly executed and delivered by Square One, WOE and/or CPNM, asappropriate.

 

12.           Pantwist has the limited liabilitycompany power and authority under the Texas Limited Liability Company Law,Title 3 of the Texas Business Organization Code, as the same may be amendedfrom time to time, and its Certificate of Formation and Company Agreement toexecute, deliver, and perform its obligations under the TransactionDocuments.  The Transaction Documents towhich Pantwist is a party have been duly authorized by all necessary limited liabilitycompany action on the part of Pantwist and have been duly executed anddelivered by Pantwist.

 

13.           Operating and Production each havethe partnership power and authority under the *TexasRevised Limited Partnership Act* and their respective Certificates ofLimited Partnership and Limited Partnership Agreements to execute, deliver, andperform their obligations under the Transaction Documents.  The Transaction Documents to which Operatingand/or Production is a party have been duly authorized by all necessarypartnership action on the part of Operating and/or Production and their generalpartners, as appropriate, and have been duly executed and delivered byOperating and/or Production (or their general partners on their behalf), asappropriate.

 

14.           The Transaction Documents (other thanthe Oklahoma and New Mexico Mortgages) to which any Loan Party is a party areenforceable against such Loan Party in accordance with their respective terms.

 

15.           The execution and delivery by eachLoan Party of, and performance of its agreements in, the Transaction Documentsdo not (a) violate the Certificate of Incorporation, Articles ofIncorporation, Bylaws, Certificate of Limited Partnership or LimitedPartnership Agreement, each as applicable, of any Loan Party, or (b) breachor result in a default under any obligation of any Loan Party under, or requirea consent under, or result in the creation of any Lien (except for the Lienscreated pursuant to the Transaction Documents) upon any of the properties,revenues, or other assets of any Loan Party pursuant to, any MaterialAgreement.

 

16.           The execution and delivery of theTransaction Documents, the consummation of the transactions contemplatedthereby, and compliance by the Loan Parties with the provisions thereof will notviolate any Applicable Law.

 

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17.           No consent, approval, waiver,license, or authorization or any other action by or filing with anygovernmental authority is required under Applicable Law in connection with theexecution and delivery by the Loan Parties of the Transaction Documents, exceptfor those already obtained or completed.

 

18.           The Security Agreement creates infavor of the Administrative Agent, for the benefit of the Secured Parties (asdefined therein), a valid security interest in all of the Loan Parties’ right,title, and interest in and to that portion of the Collateral in which asecurity interest may be created under the Texas UCC.  Under the Texas UCC and the Delaware UCC,upon the acceptance of filing of the Financing Statements in the Office of theSecretary of State of Texas or the Office of the Secretary of State ofDelaware, as appropriate, the Administrative Agent shall have a perfectedsecurity interest, for the benefit of the Secured Parties (as defined in theSecurity Agreement) in the Collateral in which a security interest may beperfected by filing of financing statements under the Texas UCC or DelawareUCC, as appropriate.

 

19.           The Pledge Agreement createsin favor of the Administrative Agent for the benefit of the Secured Parties (asdefined therein) a valid security interest in all right, title, and interest ofeach Loan Party a party thereto in the Pledged Collateral enforceable againsteach such Loan Party, securing the Secured Obligations (as defined in thePledge Agreement).

 

20.           Upon the filing of the DelawareFinancing Statements in the Office of the Secretary of State of Delaware andthe Texas Financing Statements in the Office of the Secretary of State ofTexas, the Administrative Agent shall have a perfected security interest in thePledged Collateral.

 

21.           The form of the Texas Mortgages andthe form of the description of the Mortgaged Property (as such term is definedtherein and so used herein) situated in the State of Texas are in satisfactoryform for filing and recording in the offices described in ***Paragraph 22*** below.

 

22.           Upon filing and recording ofthe Texas Mortgages with the real property records of the Texas counties, asapplicable, the Texas Mortgages will create a valid and binding perfectedmortgage lien in favor of the Administrative Agent on the Real PropertyCollateral.  The proper recordings of theTexas Mortgages in the real property records of the respective Texas countiesidentified therein (the “***County Filing Offices***”)are the only filings, recordings, and registrations necessary to publish noticeand preserve the liens of the Texas Mortgages in the Real PropertyCollateral.  Each Texas Mortgage createsa valid security interest in favor of the Administrative Agent to the extentprovided therein in all right, title and interest of each Loan Party partythereto in that portion of the “Collateral” (as defined therein) (other thanthe Real Property Collateral) which constitutes personal property.  Upon the proper filing in the real propertyrecords of the County Filing Offices of the County Financing Statements, theAdministrative Agent will have a perfected security interest within the meaningof Chapter 9 of 

 

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theTexas UCC in that portion of the Collateral (as defined in the Texas Mortgages)that is personal property and constitutes fixtures located on the Real PropertyCollateral or as-extracted collateral from such Real Property Collateral inwhich a security interest may be perfected by filing a financing statementsubject, however, with respect to proceeds, to Section 9.315 of the TexasUCC.

 

23.           No state or local mortgageregistration tax, stamp tax, or other similar fee, tax, or governmental charge(other than filing and recording fees to be paid upon filing) is required to bepaid to the State of Texas or any subdivision thereof in connection with theexecution, delivery, filing, or recording of any of the Texas Mortgages or theconsummation of the transactions contemplated therein.  Except for the payment of recording or filingfees and taxes associated with filings made with respect to the FinancingStatements and the Texas Mortgages, no other taxes or governmental fees orcharges are required under Applicable Law in connection with (a) thecreation, perfection, or the recording of the Liens purported to be created bythe Transaction Documents, (b) the execution and delivery of any of theTransaction Documents, or (c) the obtaining of credit under theSubordinated Credit Agreement.

 

24.           The Advances to be made on the datehereof and the application of the proceeds thereof as provided for in theSubordinated Credit Agreement do not violate Regulation U or X of the Board ofGovernors of the Federal Reserve System.

 

25.           No Loan Party is an “investmentcompany” or a company “controlled by” an “investment company” within themeaning of the Investment Company Act of 1940, as amended.

 

Thisopinion (a) has been furnished to you at your request, and we consider itto be a confidential communication that may not be furnished, reproduced,distributed or disclosed to anyone (other than your permitted successors andassigns under the Subordinated Credit Agreement) without our prior writtenconsent, (b) is rendered solely for your information and assistance inconnection with the above transaction, and may not be relied upon by any otherperson (other than your permitted successors and assigns under the SubordinatedCredit Agreement) or for any other purpose without our prior written consent, (c) isrendered as of the date hereof, and we undertake no, and hereby disclaim anykind of obligation to advise you of any changes for any new developments thatmight affect any matters or opinions set forth herein, and (d) is limitedto the matters stated herein and no opinions may be inferred or implied beyondthe matters expressly stated herein.

 

Sincerely,

 

**HAYNES AND BOONE, LLP**

 

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**EXHIBIT A**

 

**MATERIAL AGREEMENTS**

 

Securities PurchaseAgreement dated August 25, 2006 by and among Cano Petroleum, Inc. andthe Buyers listed therein.

 

Registration RightsAgreement dated August 25, 2006 by and among Cano Petroleum, Inc. andthe Buyers listed therein.

 

Certificateof Designations, Preferences and Rights of Series D Convertible PreferredStock of Cano Petroleum, Inc. filed August 31, 2006 with the DelawareSecretary of State.

 

Cano Petroleum, Inc.2005 Long-Term Incentive Plan dated December 7, 2005, incorporated byreference from Exhibit 10.1 to the Current Report on Form 8-K filedon December 9, 2005.

 

Amendment No. 1 tothe Cano Petroleum, Inc. 2005 Long-Term Incentive Plan effective December 28,2006.

 

Employment Agreementbetween Cano Petroleum, Inc. and S. Jeffrey Johnson dated effective January 1,2006.

 

Employment Agreement ofMorris B. Smith effective June 1, 2006.

 

First Amendment toEmployment Agreement of Morris B. Smith dated June 29, 2007.

 

Employment Agreement ofMichael J. Ricketts effective July 1, 2006.

 

First Amendment toEmployment Agreement of Michael J. Ricketts effective June 29,  2007.

 

Employment Agreement ofPatrick McKinney effective June 1, 2006.

 

First Amendment toEmployment Agreement of Patrick McKinney dated November 9, 2006.

 

Second Amendment toEmployment Agreement of Patrick McKinney dated June 29, 2007.

 

Securities PurchaseAgreement dated November 2, 2007 between Cano Petroleum, Inc. and theinvestors listed therein.

 

Registration RightsAgreement dated November 2, 2007 between Cano Petroleum, Inc. and theinvestors listed therein.

 

Credit Agreement among Cano Petroleum, Inc. as Borrower, TheLenders Party hereto from time to time, as Lenders, and Union Bank ofCalifornia, N.A., as Administrative Agent and as issuing Lender, dated November 29,2005, including its Amendments (1-9) and all associated agreements.

 

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