**Exhibit10.1**

 

**SUBORDINATEDPROMISSORY NOTE**

 
| **$2,000,000.00** | ** ** | **May 6, 2008** |
|-------------------|------------|----------------------|

 

**FOR VALUE RECEIVED**, **CUBIC ENERGY, INC.**, a Texas corporation (“*Debtor*”) unconditionally promises topay to the order of **DIVERSIFIED DYNAMICSCORPORATION**(together with its successors and assigns, “*Lender*”), without setoff, at itsoffices                                                                                   , or at such other place as may be designated by Lender, the principal amountof **TWO MILLION AND NO/100 DOLLARS ($2,000,000.00)**,or so much thereof as may be advanced from time to time in immediatelyavailable funds, together with interest computed daily on the outstandingprincipal balance hereunder, at an annual interest rate (the “*Rate*”), and in accordance with thepayment schedule, indicated below.

 

# **1.             Rate**.** **TheRate shall be the lesser of (a) the **MAXIMUMRATE**, or (b): the **PRIME RATE**plus**TWO PERCENT (2.00%)**perannum.  The term “*PrimeRate*” means a variable rate of interest per annum equal to theprime rate as published from time to time in the “Bonds, Rates &Yields” table of *The Wall Street Journal*.  If the prime rate is no longer published inthe “Bonds, Rates & Yields” table of *The WallStreet Journal*, then Lender will choose and notify Debtor of asubstitute index that is based upon comparable information.  Notwithstanding any provision of this Note orany other agreement or commitment between Debtor and Lender, whether written ororal, express or implied, Lender shall never be entitled to charge, receive, orcollect, nor shall amounts received hereunder be credited so that Lender shallbe paid, as interest a sum greater than interest at the Maximum Rate. It is theintention of the parties that this Note, and all instruments securing thepayment of this Note or executed or delivered in connection therewith, shallcomply with applicable law.  If Lenderever contracts for, charges, receives or collects anything of value which isdeemed to be interest under applicable law, and if the occurrence of anycircumstance or contingency, whether acceleration of maturity of this Note,prepayment of this Note, delay in advancing proceeds of this Note, or any otherevent, should cause such interest to exceed the maximum lawful amount, anyamount which exceeds interest at the Maximum Rate shall be applied to thereduction of the unpaid principal balance of this Note or any otherindebtedness owed to Lender by Debtor, and if this Note and such otherindebtedness are paid in full, any remaining excess shall be paid to Debtor.  In determining whether the interest exceedsinterest at the Maximum Rate, the total amount of interest shall be spread,prorated and amortized throughout the entire term of this Note until itspayment in full. The term “*Maximum Rate*” as used in this Notemeans the maximum nonusurious rate of interest per annum permitted by whicheverof applicable United States federal law or Texas law permits the higherinterest rate, including to the extent permitted by applicable law, anyamendments thereof hereafter or any new law hereafter coming into effect to theextent a higher Maximum Rate is permitted thereby.   If at any time the Rate shall exceedthe Maximum Rate, the Rate shall be automatically limited to the Maximum Rateuntil the total amount of interest accrued hereunder equals the amount ofinterest which would have accrued if there had been no limitation to theMaximum Rate.   To the extent, if any, that Chapter303 of the Texas Finance Code, as amended, (the “*Act*”)is relevant to Lender for purposes of determining the Maximum Rate, the partieselect to determine the Maximum Rate under the Act pursuant to the “weeklyceiling” from time to time in effect, as referred to and defined in§303.001-303.016 of the Act; subject, however, to any right Lender subsequentlymay have under applicable law to change the method of determining the MaximumRate.

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# **2.             AccrualMethod**.**** Interest on the indebtedness evidenced by thisNote shall be computed on the basis of a **THREEHUNDRED SIXTY (360)**day year and shall accrue on the actual numberof days elapsed for any whole or partial month in which interest is beingcalculated.  In computing the number ofdays during which interest accrues, the day on which funds are initiallyadvanced shall be included regardless of the time of day such advance is made,and the day on which funds are repaid shall be included unless repayment iscredited prior to the close of business on the business day received asprovided herein.

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# **3.             RateChange Date**.** **The Rate will change each time andas of the date that the Prime Rate changes.

 

# **4.             PaymentSchedule**. The outstanding principal balance of this Note, plus accrued andunpaid interest thereon shall be due and payable on the earlier of (i) theacceleration of the indebtedness hereunder; (ii) **April 30, 2010**, or (iii) suchother date as may be established by a written instrument between Debtor andLender, from time to time (the “*Maturity Date*”).  Accrued and unpaid interest on theoutstanding principal balance of this 

 

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# Note shall be due and payable monthly commencing on **June 1, 2008** and continuing on the **SAME** day of each calendar month thereafter(or if no such corresponding date, on the **LAST**date of such calendar month).

 

# **5.             NetProfits Interest**.

#  

As consideration for theloans made by Lender pursuant to this Note, Debtor agrees to convey to Lenderupon the repayment in full of the indebtedness evidenced by this Note and therepayment in full of the Senior Indebtedness, an undivided 0.375% (0.375 OF ONEPERCENT) net profits interest (the “Net Profits Interest”) in the futureproduction of hydrocarbons from or attributable to Debtor’s interest in theSubject Properties (as that term is defined in the Assignment of Net ProfitsInterest by and between Debtor and Lender in the form attached hereto as Exhibit A)which conveyance shall be effective as of the date the indebtedness evidencedby this Note and the Senior Indebtedness is repaid in full and evidenced by aninstrument substantially in the form attached hereto as Exhibit A.

#  

Should Debtor elect, atany time subsequent to the conveyance of the Net Profits Interests, to sell itsinterest in any of the Subject Properties, then Debtor agrees to extend toLender, by way of prompt written notice setting forth the terms of any suchtransaction, the right to sell the Net Profits Interests burdening the relevantSubject Properties to be sold by Debtor on the same terms (including, withoutlimitation, price based on per unit of production) as those for the sale byDebtor.  Such right may be exercised atthe sole discretion of Lender and, should Lender elect not to exercise suchright, the Subject Properties so sold shall be conveyed by way of instrument(s) ofconveyance made expressly subject to the Net Profits Interests and theprovisions of this Note applicable thereto and shall remain subject to the NetProfits Interests.

 

# **6.             Prepayments**.  Prepayments may be made in whole or in partat any time in whole or in part without premium or penalty.

#  

# **7.             Eventof Default. **Uponthe commencement of any bankruptcy, reorganization, arrangement, adjustment ofdebt, relief of debtors, dissolution, insolvency or liquidation or similarproceeding of any jurisdiction relating to Debtor, the unpaid principal amounthereof shall become immediately due and payable without presentment, demand,protest or notice of any kind in connection with this Note.

 

# **8.             Waiver**.  The failure at any time of Lender to exerciseany of its options or any other rights hereunder shall not constitute a waiverthereof, nor shall it be a bar to the exercise of any of its options or rightsat a later date.  All rights and remediesof Lender shall be cumulative and may be pursued singly, successively ortogether, at the option of Lender.  Theacceptance by Lender of any partial payment shall not constitute a waiver ofany default or of any of Lender’s rights under this Note.  No waiver of any of its rights hereunder, andno modification or amendment of this Note, shall be deemed to be made by Lenderunless the same shall be in writing, duly signed on behalf of Lender; each suchwaiver shall apply only with respect to the specific instance involved, andshall in no way impair the rights of Lender or the obligations of Debtor toLender in any other respect at any other time.

#  

# **9.             ApplicableLaw, Venue and Jurisdiction**.  Debtor agrees that this Note shall be deemedto have been made in the State of Texas at Lender’s address indicated at thebeginning of this Note and shall be governed by, and construed in accordancewith, the laws of the State of Texas and is performable in the City and Countyof Texas indicated at the beginning of this Note.  In any litigation in connection with or toenforce this Note or any indorsement or guaranty of this Note, Debtorirrevocably consents to and confers personal jurisdiction on the courts of theState of Texas or the United States courts located within the State ofTexas.  Nothing contained herein shall,however, prevent Lender from bringing any action or exercising any rightswithin any other state or jurisdiction or from obtaining personal jurisdictionby any other means available under applicable law.

#  

# **10.          PartialInvalidity**. The unenforceability or invalidity of any provision of this Note shallnot affect the enforceability or validity of any other provision herein and theinvalidity or unenforceability of any provision of this Note to any person orcircumstance shall not affect the enforceability or validity of such provisionas it may apply to other persons or circumstances.

 

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# **11.          BindingEffect**. This Note shall be binding upon and inure to the benefit of Debtor andLender and their respective successors, assigns, heirs and personalrepresentatives, provided, however, that no obligations of Debtor hereunder canbe assigned without prior written consent of Lender.

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# **12.          ControllingDocument**. To the extent that this Note conflicts with or is in any wayincompatible with any other document related specifically to the loan evidencedby this Note, this Note shall control over any other such document, and if thisNote does not address an issue, then each other such document shall control tothe extent that it deals most specifically with an issue.

#  

# **13.          COMMERCIALPURPOSE**.  **DEBTOR REPRESENTS TO LENDER THAT THE PROCEEDS OF THISLOAN ARE TO BE USED PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURALPURPOSES.  DEBTOR ACKNOWLEDGES HAVINGREAD AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS AND CONDITIONS OF THISNOTE.**

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# **14.          Collection**.  Ifthis Note is placed in the hands of an attorney for collection, or if it iscollected through any legal proceeding at law or in equity or in bankruptcy,receivership or other court proceedings, Debtor agrees to pay all costs ofcollection, including, but not limited to, court costs and reasonable attorneys’fees.

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# **15.          Notice of Balloon Payment**.  Atmaturity (whether by acceleration or otherwise), Debtor must repay the entireprincipal balance of this Note and unpaid interest then due.

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# **16.          WAIVEROF JURY TRIAL**. **DEBTOR HEREBY IRREVOCABLY AND UNCONDITIONALLYWAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, ORCOUNTERCLAIM THAT RELATES TO OR ARISES OUT OF THIS NOTE OR THE ACTS OR FAILURETO ACT OF OR BY LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR PROVISIONS OFTHIS NOTE OR THE OTHER LOAN DOCUMENTS.**

 

**17.          Subordination.**

 

### **ThisNote shall, to the extent and in the manner provided herein, be subordinatedand junior in right of payment to the prior payment in full of all SeniorIndebtedness, as hereinafter defined. Senior Indebtedness of any type or from any lender shall not be deemedto have been paid in full until the termination of all commitments or otherobligations for such Senior Indebtedness, including under hedge agreements, andthe payment in full in cash thereof (and for all purposes hereof the term “paidin full” or any variation thereof with respect to Senior Indebtedness shallmean that payment in full has been made in cash and that all commitments of theholders of the Senior Indebtedness shall have been terminated).**

 

### **By accepting this Note, Lenderhereof covenants and agrees that this Note shall be subject to the provisionsof this section 17; and each person holding this Note, whether upon originalissue or upon transfer or assignment hereof, accepts and agrees to be bound bysuch provisions.  This Note may not betransferred or assigned unless the transferee or assignee has acknowledged in awriting its acceptance of the provisions set forth in this section 17.  The provisions of this section 17 shallconstitute a continuing offer to all persons who, in reliance upon suchprovisions, become holders of, or continue to hold, Senior Indebtedness, andsuch provisions are made for the benefit of the holders of Senior Indebtedness,and such holders are hereby made obligees under such provisions and the same asif their names were written herein as such, and they and/or each of them mayproceed to enforce such provisions.**

### ** **

### **The term “SeniorIndebtedness”shall mean (a) the principal of, the premium, if any, and interest(including, without limitation, interest that accrues after the filing of apetition initiating any action or proceeding under the U.S. Bankruptcy Code orany other bankruptcy, insolvency or similar law or statute protecting creditorsin effect in any jurisdiction, whether or not such interest accrues after thefiling of such petition for purposes of the U.S. Bankruptcy Code or such otherlaw or statute or is an allowed claim in any such action or proceeding (“Post-PetitionInterest”)) on, and all other obligations, liabilities, fees, premiums,indemnifications, costs, expenses (whether for enforcement, protection ofcollateral or otherwise) or otherwise, whether secured or unsecured, in wholeor in part, and whether outstanding on the date of this Note or hereaftercreated, incurred or assumed, with respect to, or created, governed orevidenced by the Credit Agreement dated as of March 5, 2007, by and among**

 

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### **Wells Fargo Energy Capital, Inc.(the “Senior Lender”) and Debtor (the “Senior Credit Agreement”)or any other related documents or any prior, concurrent, or subsequent notes,instruments or agreements or indebtedness, liability or obligations of any typeor form whatsoever relating thereto, and (b) all deferrals, renewals,extensions, refinancings and refundings of any such indebtedness or anyamendments, restatements, supplements or other modifications thereof.  Debtor and the holders of the SeniorIndebtedness may amend or modify the Senior Credit Agreement or any relateddocuments without the consent of Lender without impairing or releasing thesubordination of the debt evidenced by this Note to the repayment of the SeniorIndebtedness as set forth herein.**

 

## Until the prior payment in full of the Senior Indebtedness, Lendershall not receive or accept any payment from Debtor including, withoutlimitation, payment of principal, interest, default interest or other fees orexpenses; provided, however, so long as no Event of Default or Unmatured Eventof Default (as such terms are defined in the Senior Credit Agreement) exists atthe time of making such payment or immediately after giving effect Debtor canmake regularly scheduled payments of interest to Lender.

### ** **

### **Until the Senior Indebtedness hasfinally been paid in full, the holder of this Note will not take or omit totake any action or assert any claim with respect to the indebtedness evidencedby this Note or otherwise which is inconsistent with the provisions of section17.  Until the Senior Indebtedness hasbeen finally paid in full, the holder of this Note will not assert, collect orenforce the indebtedness evidenced by this Note or any part thereof or take anyaction to foreclose or realize upon such indebtedness or any part thereof.  Until the Senior Indebtedness has beenfinally paid in full in, the holder of this Note shall not have any right ofsubrogation, reimbursement, restitution, contribution or indemnity whatsoeverfrom any assets of Debtor or any guarantor of or provider of collateralsecurity for the Senior Indebtedness.  Inno event shall this Note be accelerated while there is outstanding SeniorIndebtedness.  Any payment collected orreceived by the holder of this Note in violation of this Section 17 shallbe held in trust for the benefit of, and shall be paid over or delivered to,the holders of Senior Indebtedness.**

 

Interest shallcontinue to accrue on the principal balance of this Note at any time duringwhich there exists an Event of Default or Unmatured Event of Default (as suchterms are defined in the Senior Credit Agreement).

 

***REMAINDER OF PAGE LEFTINTENTIONALLY BLANK***

 

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**EXECUTED** as of the date first written above.

 
| ***DEBTOR:***          | *** ***                    | ***ADDRESS:***  |
|------------------------|---------------------------------|-----------------|
|                   |                            |            |
| **CUBIC ENERGY, INC.** |                            | 9870 Plano Road |
|                   |                            |            | Dallas, Texas 75238 |
| By:                    | /s/ Calvin A.  Wallen, III |            |   |
| Name:                  |                            |            |   |
| Title:                 |                            |            |   |

 

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**EXHIBIT A**

 

**ASSIGNMENTOF NET PROFITS INTEREST**

 

**SEEATTACHED.**

 

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**EXHIBIT A**

 

All of Assignor’s working interests in oil and gas leaseholds in CaddoParish and Desoto Parish, Louisiana located in T15N, R16W; T14N, R16W; T16N,R15W; T15N, R15W; T14N, R15W; and T17N, R16W.

 

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**ASSIGNMENT OF NET PROFITSINTEREST**

 

THISASSIGNMENT OF NET PROFITS INTEREST (“Assignment”) is dated and effectiveas of 7:00 a.m. Central Standard or Daylight Savings Time, as the case maybe                          ,           (the “EffectiveDate”), and is from **CUBIC ENERGY, INC.**,a corporation formed under the laws of the State of Texas (“Assignor”),with principal offices at 9870 Plano Road, Dallas, Texas 75238, to **DIVERSIFIED DYNAMICS CORPORATION** (“Assignee”), withprincipal offices at                                            .

 

1.

 

GRANTING PROVISION

 

Forand in consideration of One Hundred and No/100 Dollars ($100.00) and other goodand valuable consideration, the receipt and sufficiency of which are herebyacknowledged, Assignor does, subject to the terms and provisions of thisAssignment, hereby SELL, ASSIGN, TRANSFER and SET OVER to Assignee, as a netprofits interest (the “Net Profits Interest”), an undivided 0.375%(0.375 OF ONE PERCENT) interest in and to Assignor’s “Net Profits”, as thatterm is defined in Section 3.2 hereinbelow, attributable to all ofAssignor’s right, title and interest in and to:

 

(a)                                  the oil, gas,and mineral leases and the leasehold estates created thereby and/or the landscovered thereby; the oil, gas and other minerals (regardless of the manner ofextraction) in, on and under the lands; and all overriding royalty interests,net profits interests, production payment interests and other payments out ofor measured by production in the lands; all as described more particularly on Exhibit Aattached hereto and made a part hereof for all purposes; and in any landspooled or unitized with any of the foregoing (collectively, the “Leases”,regardless of the actual character of any of the foregoing);

 

(b)                                 all oil, gas,other hydrocarbons, including casinghead gas, other liquid or gaseoussubstances produced in conjunction therewith or derived or manufacturedtherefrom and any other minerals (collectively, “Hydrocarbons”)produced, mined, otherwise extracted, saved, and marketed from or attributableto the Leases;

 

(c)                                  any agreementsextending the term of any of the Leases or any renewal leases taken withrespect to any of the Leases by Assignor or Assignor’s successors and assignseither while the relevant Lease or 

 

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Leases remain in force and effect or within six (6) months afterthe lapse of the relevant Lease or Leases; and

 

(d)                                 any and allother rights, titles, and interests in or with respect to all voluntary orcompulsory pooling and unitization agreements or orders, farmout agreements,farmin agreements, operating agreements, Hydrocarbon purchase and saleagreements, and all other contracts of any kind whatsoever covering oraffecting the production, extraction or marketing of Hydrocarbons from orattributable to the Leases (collectively, the “Property Agreements”),

 

suchundivided interest in and to the preceding items (a), (b), (c), and (d) beingreferred to hereinafter as the “Subject Properties”.

 

TOHAVE AND TO HOLD the Net Profits Interest, together with all rights andappurtenances thereto, unto Assignee and its successors and assigns forever,subject, however, to the further provisions of this Assignment.

 

ThisAssignment is made without warranty of title, either express or implied, exceptas to claims arising by, through or under Assignor, and is made with fulltransfer and subrogation of all rights and actions against all former owners ofall or any part of the Subject Properties or any interest therein, and is madeexpressly subject to the following terms and provisions.

 

2.

 

GOVERNING DOCUMENTS

 

ThisAssignment is expressly made and accepted by Assignee subject to:  (a) all applicable local, state, andfederal statutes, ordinances, rules, and regulations; (b) the terms andprovisions of the Leases; and (c) the Property Agreements, if any.

 

3.

 

CALCULATION, CHARACTERISTICS,AND DISBURSEMENT

OF NET PROFITS INTEREST

 

3.1           For purposes of calculating the NetProfits Interest, Assignor shall maintain an account for the Subject Properties(the “Net Profits Account”) in accordance with the terms of thisAssignment and good accounting practices that sets forth the charges andcredits made thereto pursuant to this Assignment on a calendar monthbasis.  Assignor 

 

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shallfurnish to Assignee, within thirty (30) days after the end of each calendarmonth, commencing with that calendar month in which the Effective Date falls, areport, in form and substance reasonably satisfactory to Assignee, that setsforth the charges and credits made to the Net Profits Account through the endof the relevant calendar month.

 

3.2           The term “Net Profits” shallmean an amount (not less than zero) determined for each calendar month,commencing with that in which the Effective Date falls, by (a) deductingthe aggregate of any negative balance existing in the Net Profits Account atthe first of such month, plus the total charges properly made thereto duringsuch month, from (b) the total credits properly made thereto duringsuch month.  To the extent that theaggregate charges exceed aggregate credits at the end of any such month, suchexcess charges shall be carried forward to the succeeding month.  All Payments made to Assignee on account ofthe Net Profits Interest shall be made entirely and exclusively out of the sumscredited to the Net Profits Account pursuant to Section 3.3 hereof.

 

3.3           Each calendar month commencing withthat in which the Effective Date falls, the Net Profits Account shall becredited with an amount equal to the sum of:

 

(a)                                 the proceeds(or the market value of any proceeds not received in the form of cash or cashequivalents) actually received during such calendar month by Assignor from thesale or other disposition of all Hydrocarbons produced from or attributable tothe Subject Properties after the Effective Date, after deducting therefromthose proceeds attributable to all royalties, overriding royalties, productionpayments, net profits interests, and other burdens upon, measured by, orpayable out of production from or attributable to the Subject Properties thatare outstanding in third parties immediately prior to the Effective Date;

 

(b)                                 monies received by Assignorattributable to any future contracts, forward contracts, swap, cap or collarcontracts, option contracts, hedging contracts or other derivative contracts orsimilar agreements covering oil and gas commodities or prices with respect toHydrocarbons produced from the Subject Properties;

 

(c)                                  monies receivedby Assignor under any “take-or-pay” or similar provision of any PropertyAgreement pertaining to the Subject Properties;

 

(d)                                 monies receivedby Assignor pursuant to any gas balancing agreement pertaining to the SubjectProperties;

 

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(e)                                the proceedsfrom the sale or rental of fixtures and equipment used with respect to theSubject Properties;

 

(f)                                  monies receivedby Assignor pursuant to a farmout of all or a portion of the SubjectProperties;

 

(g)                               bottom holecontributions or payments made in connection with the Subject Properties;

 

(h)                               amountsreceived by Assignor as an adjustment of any or leasehold equipment upon thepooling or unitization of the Subject Properties;

 

(i)                                   amountsreceived by Assignor as a result of an expense audit of all or a portion of theSubject Properties;

 

(j)                                   the proceeds ofall insurance collected by or on behalf of Assignor on account of its ownershipof the Subject Properties as a consequence of the loss of or damage to theSubject Properties, the personal property or equipment located thereon orHydrocarbons therefrom;

 

(k)                                amountsreceived by Assignor as a result of a refund of taxes previously paid on theSubject Properties;

 

(l)                                   the proceeds ofall judgments and claims collected by Assignor as the result of damage or lossof the Subject Properties;

 

(m)                             rentalsreceived by Assignor pursuant to subsurface Hydrocarbon storage or otherreservoir use arrangements concerning the Subject Properties;

 

(n)                                any paymentsmade to Assignor in connection with the drilling or deferral of drilling of anyon the Subject Properties;

 

(o)                                any paymentsreceived by Assignor for processing or transporting third party Hydrocarbons;

 

(p)                                all delayrentals, shut-in payments, minimum royalties, and other payments made toAssignor in connection with the maintenance of any Hydrocarbon lease granted byAssignor and relating to the Subject Properties; and

 

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(q)                                 any bonus orother consideration received by Assignor in connection with the grant byAssignor of any Hydrocarbon lease relating to the Subject Properties.

 

3.4           Each calendar month commencing withthat in which the Effective Date falls, there shall be charged against the NetProfits Account an amount equal to the sum of the following items of cost andexpense actually paid by Assignor during such calendar month from and after theEffective Date, insofar only as such items of cost and expense are attributableto the interest of Assignor in the Subject Properties, are properly allocableto the Subject Properties and the production and marketing of Hydrocarbonstherefrom, have not previously been deducted in any remittance to Assignor anddo not arise from or relate to gross negligence, willful misconduct or badfaith of Assignor:

 

(a)                                  All costs andexpenses incurred in drilling, deepening, sidetracking, plugging-back, coring,testing, logging, completing, recompleting and equipping for production(including, without limitation, the cost of wellhead facilities, storage tanks,separators, pumping equipment, flow lines, salt water disposal equipment, andother similar production facilities) of the Subject Properties;

 

(b)                                 all costs andexpenses incurred in the operation and maintenance of the Subject Propertiesand the production and marketing of Hydrocarbons therefrom, such items of costto include, without limitation:  (i) allcosts of complying with applicable local, state, and federal statutes,ordinances, rules, and regulations; (ii) all costs of lifting andproducing Hydrocarbons from the Subject Properties, including all costs of labor,fuel, equipment (rental and purchase), repairs, hauling, materials, supplies,utility charges, and other costs incident thereto; (iii) all costs ofgathering, compressing, dehydrating, separating, treating, processing,transporting, and marketing Hydrocarbons produced from the Subject Properties,including the costs of constructing and maintaining flow lines and gatheringlines necessary in connection with gathering, processing and marketingproduction for the Subject Properties; (iv) all direct and indirectoverhead charges and operating charges paid, pursuant to Property Agreements,to Fossil Operating, Inc. and any non-affiliated third party operator oroperators of the Subject Properties or to others for services rendered inconducting operations thereon (provided, however, it being explicitly agreedthat there shall not be charged against the Net Profits Account interest, fees,costs or charges for borrowed funds), (v) all delay rentals, shut-inpayments, minimum royalties, and other payments made in connection 

 

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with the maintenance of the Leases; (vi) the costs of all workoverand other remedial servicing operations, to the extent not within the scope ofthe costs and expenses addressed in (a) above; (vii) the cost of allfluid injection, pressure maintenance, secondary recovery, recycling, and otherenhanced recovery operations; (viii) the costs of plugging and abandoningany wells now or hereafter located on the Subject Properties that have onceproduced Hydrocarbons in paying quantities; and (ix) amounts paid undergas balancing agreements, farm-in agreements, bottom hole agreements andexpense audits;

 

(c)                                  monies paid by Assignorattributable to any future contracts, forward contracts, swap, cap or collarcontracts, option contracts, hedging contracts or other derivative contracts orsimilar agreements covering oil and gas commodities or prices with respect toHydrocarbons produced from the Subject Properties;

 

(d)                                 the expenses oflitigation, collections, liens, judgments, liquidated liabilities, and claimsincurred and paid by Assignor on account of its ownership of the SubjectProperties, or directly incident to the operation or maintenance thereof;

 

(e)                                  all taxes(except income taxes) paid by Assignor for the benefit of the parties hereto, including,without limitation, advalorem, property, production, severance,gathering, windfall profit, occupation, and any other similar taxes assessedagainst or attributable to the Subject Properties or Hydrocarbons producedtherefrom; provided, however, that if Assignee bears taxes individually whichare not assessed against or attributable to the Subject Properties, the taxeswhich Assignee bears individually shall not be charged to the Net ProfitsAccount;

 

(f)                                  insurancepremiums paid by Assignor on account of its ownership of the Subject Propertiesfor insurance directly relating to the Subject Properties or any part thereof,together with all expenditures incurred and paid in settlement of any and alllosses, claims, damages, judgments and other expense, including legal servicesdirectly relating to the Subject Properties or operations thereon;

 

(g)                                 proceedsreclaimed from or returned by the Assignor as the result of the insolvency,bankruptcy, or reorganization of a purchaser of production which proceeds havebeen previously paid to Assignee; and

 

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(h)                                 amounts payableby Assignor as an adjustment of any leasehold equipment upon the pooling orunitization of the Subject Properties.

 

3.5           Assignee shall never be personallyresponsible for the payment of any part of the costs and expenses chargedagainst the Net Profits Account nor for any liabilities incurred in connectionwith the development, exploration, equipping, and operation of the SubjectProperties.  Assignor hereby covenantsand agrees to indemnify and to hold harmless Assignee, its agents, employees,successors and assigns from and against any and all such responsibility andliability, except to the extent such responsibility and liability arises out ofthe gross negligence or willful misconduct of Assignee.

 

3.6           As between Assignor and Assignee,Assignor shall have exclusive charge and control of the marketing of allHydrocarbons allocable to the Net Profits Interest.  Assignor shall market the productionallocable to the Net Profits Interest with and on the same terms as Assignor’sshare of production from the Subject Properties and shall collect and receivethe proceeds from the sale of all such production.

 

3.7           To the extent that, at the end of anycalendar month after the Effective Date, there exists a credit balance in theNet Profits Account, Assignor shall disburse to Assignee, within thirty (30)days after the end of the relevant calendar month, all Net Profits that haveaccrued to the Net Profits Interest as of the end of such calendar month.

 

4.

 

GENERAL COVENANTS ANDPROVISIONS

 

4.1           Assignor agrees, to the extent thatAssignor controls such matters:  (a) tocomply with the terms and provisions of the Leases; (b) to conduct, or touse reasonable efforts to cause to be conducted, all operations with respect tothe Subject Properties with reasonable and prudent business judgment and inaccordance with good oilfield practices, the provisions of the Leases, and allapplicable federal, state, and local statutes, ordinances, rules, and regulations;(c) to cause all wells located on the Subject Properties to be operated ina good, prudent, and workmanlike manner and to cause all improvements andequipment necessary or useful to the operation thereof to be provided; and (d) otherwiseto cause to be done all that a prudent operator would do with respect to theSubject Properties to the end that the Leases are maintained in full force andeffect and each well located on the Subject Properties that is capable ofproducing Hydrocarbons in paying quantities shall be produced to maximize thereturn both to Assignor and Assignee. Nothing herein contained shall obligate Assignor, however, to continueto operate any well when the well ceases to produce, or is not capable ofproducing, Hydrocarbons in paying quantities, but with the term “payingquantities” being determined without consideration of the Net ProfitsInterest.  Assignee and 

 

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itsrepresentatives shall at the risk and expense of Assignee and to the extentpermitted by Property Agreements, have access at all reasonable times to theSubject Properties and to all operations of Assignor related to the SubjectProperties, and the right to observe all operations conducted thereon.  Assignor shall on reasonable request promptlyfurnish Assignee with any and all information in Assignor’s possession andpertaining to the Subject Properties.

 

4.2           Assignor agrees to at all timesmaintain true and correct books and records sufficient to determine the amountspayable to Assignee hereunder and such books and records shall be open toAssignee for inspection and audit upon reasonable notice during normal businesshours.

 

4.3           Assignee hereby agrees that the ownerof the Subject Properties shall have the right, without further approval byAssignee, to pool and unitize the Subject Properties and the lands affectedthereby, or portions thereof, with other lands or leases to form one or morepooled units in accordance with the pooling authority granted in the Leases,any agreement subsequently obtained by the owner of the Subject Properties fromany lessor with reference to pooling, and applicable rules and regulationsof any State or Federal governmental authority having jurisdiction over theLeases (collectively, the “Jurisdictional Agencies”).  As to each unit so created, Assignee shall beentitled to receive, in lieu of the Net Profits Interest created herein withrespect to the relevant Lease, either (a) that proportion of the NetProfits Interest that the amount of surface acreage affected thereby and placedin the relevant unit bears to the entire surface area of such unit, or (b) ifparticipation in the relevant unit is determined by reference to factors otherthan the number of surface areas covered by each lease included therein, theportion of the Net Profits Interest attributable to the participation of theSubject Properties in the relevant unit. In addition, if a Jurisdictional Agency orders the revision of any unitcreated subject hereto, Assignor and Assignee agrees to execute such additionaldocuments as may be necessary to vest Assignee with title of record to aninterest in and to the Leases or production therefrom, insofar as the Leasescover and relate to the relevant unit as so revised, consistent with theintents and purposes of this Assignment.

 

4.4           If any of the Leases covers aninterest in the lands covered thereby less than the entire mineral estatetherein (regardless of whether the relevant Lease purports to cover only thelessor’s interest therein), then, as to such Lease, the Net Profits Interest,insofar only as it affects and applies to Hydrocarbons produced from orattributable to such portion of the lands covered by such Lease, shall bepayable to Assignee in the proportion that the mineral interest in such landsactually covered by the relevant Lease bears to the entire, undivided mineralestate in such lands.  Similarly, ifAssignor owns less than the full leasehold estate in and to any of the Leases,then, as to such Lease, the Net Profits Interest, insofar only as it affectsand applies to Hydrocarbons produced from or attributable to such 

 

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Lease,shall be payable to Assignee in the proportion that the aggregate leaseholdinterest in the relevant Lease actually owned by Assignor bears to the entireleasehold interest in and to such Lease.

 

4.5           All of the covenants of Assignor andAssignee herein contained shall be covenants running with the land, and thisAssignment and the covenants herein contained shall inure to the benefit of andbe binding upon the successors and assigns of Assignor and Assignee.

 

4.6           This Assignment may be executed inany number of counterparts, and each counterpart hereof shall be deemed to bean original instrument, but all counterparts shall constitute but oneAssignment.

 

4.7           Should Assignor elect, at any time tosell its interest in any of the Subject Properties, then Assignor agrees toextend to Assignee, by way of prompt written notice setting forth the terms ofany such transaction, the right to sell the Net Profits Interests burdening therelevant Subject Properties to be sold by Assignor on the same terms(including, without limitation, price based on per unit of production) as thosefor the sale by Assignor.  Such right maybe exercised at the sole discretion of Assignee and, should Assignee elect notto exercise such right, the Subject Properties so sold shall be conveyed by wayof instrument(s) of conveyance made expressly subject to the Net ProfitsInterests and the provisions of this Assignment applicable thereto and shallremain subject to the Net Profits Interests.

 

**EXECUTED** on the         day of               ,        , but effective as of theEffective Date.

** **
|       |   | **ASSIGNOR:**                     |   |
|------------|--------|-----------------------------------|--------|
|       |   |                              |   |
|       |   | CUBIC  ENERGY, INC.               |   |
| WITNESSES: |   |                              |   |
|       |   | By:                               |   |
|       |   | Printed  Name:                    |   |
|       |   | Title:                            |   |
|       |   |                              |   |
|       |   |                              |   |
|       |   | **ASSIGNEE:**                     |   |
|       |   |                              |   |
|       |   |                              |   |
| WITNESSES: |   | DIVERSIFIED  DYNAMICS CORPORATION |   |
|       |   |                              |   |
|       |   | By:                               |   |
|       |   | Printed  Name:                    |   |
|       |   | Title:                            |   |
|       |   |                              |   |
|            |        |                                   |        |  |  |  |  |

 

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| STATE  OF TEXAS |   | § |
|-----------------|--------|--------|
|            | § |
| COUNTY  OF      |   | § |
|                 |        |        |  |

 

 

Onthis          day of                 ,         , before me appeared                                          ,to me personally known, who, being by me duly sworn did say that he is the                           of Cubic Energy, Inc., a Texas corporation, and that said instrument wassigned before me and in the presence of the two witnesses whose names arethereto subscribed as such, being competent witnesses, and who acknowledged inmy presence and in the presence of said witnesses that he signed the saidinstrument on behalf of said corporation by authority of its board of directorsand said                              acknowledged said instrument to be the free act and deed of said Cubic Energy, Inc.

 

Givenunder witness my hand and seal of office this           day of                         ,                .

 

 

 
|                    |   |                             |
|-------------------------|--------|----------------------------------|
|                    |   | Notary  Public in and for the    |
|                    |   | State  of Texas                  |
| My  Commission Expires: |   |                             |
|                    |   |                             |
|                    |   | (Printed  Name of Notary Public) |

 

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| STATE  OF  |   | § |
|------------|--------|--------|
|       | § |
| COUNTY  OF |   | § |
|            |        |        |  |

 

Onthis          day of                         ,             ,before me appeared                                       ,to me personally known, who, being by me duly sworn did say that he is the                                          ofDiversified Dynamics Corporation, and that said instrument was signed before meand in the presence of the two witnesses whose names are thereto subscribed assuch, being competent witnesses, and who acknowledged in my presence and in thepresence of said witnesses that he signed the said instrument on behalf of saidcorporation by authority of its board of directors and said                                          acknowledged said instrument to be the free act and deed of said DiversifiedDynamics Corporation.

 

Givenunder witness my hand and seal of office this        day of                           ,           .

 

 

 
|                    |   |                             |
|-------------------------|--------|----------------------------------|
|                    |   | Notary  Public in and for the    |
|                    |   | State  of Texas                  |
| My  Commission Expires: |   |                             |
|                    |   |                             |
|                    |   | (Printed  Name of Notary Public  |
|                    |   |                             |
|                    |   |                             |
|                    |   |                             |
|                    |   | (Printed  Name of Notary Public) |

 

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