Document:

Exhibit 10.1

 

Execution Copy

 

SECURITIES
PURCHASE AGREEMENT

 

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

 

WHEREAS:

 

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

 

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

 

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

 

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

 

 

 

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

 

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

 

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

 

(a)                                  Preferred
Shares, Common Shares and Warrants. Subject to the satisfaction (or waiver)
of the conditions set forth in Sections 6 and 7 below, the Company shall issue
and sell to each Buyer, and each Buyer severally, but not jointly, agrees to
purchase from the Company on the Closing Date (as defined below), (i) the
number of Preferred Shares as is set forth opposite such Buyer’s name in column
(3) on the Schedule of Buyers, if any, (ii) the number of Common Shares as is
set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers,
if any, and (iii) Warrants to acquire up to that number of Warrant Shares as is
set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers,
if any.

 

(b)                                 Closing.
The closing (the “Closing”) of
the purchase of the Preferred Shares, the Common Shares and the Warrants by the
Buyers shall occur at the offices of Schulte Roth & Zabel LLP, 919 Third
Avenue, New York, New York 10022. The date and time of the Closing (the “Closing Date”) shall be 10:00 a.m., New
York City Time, on the date hereof after the notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Sections 6 and 7 below
(or such other date and time as is mutually agreed to by the Company and each
Buyer).

 

(c)                                  Purchase
Price. The aggregate purchase price for the Preferred Shares, the Common
Shares and the Warrants to be purchased by each Buyer (the “Purchase Price”) shall be the amount set forth
opposite such Buyer’s name in column (6) on the Schedule of Buyers. Each Buyer
shall pay $1,000.00 for each Preferred Share and $4.83 for each Common Share and
related Warrants to be purchased by such Buyer at the Closing.

 

(d)                                 Form
of Payment. On the Closing Date, (A) each Buyer shall pay its portion of
the Purchase Price to the Company for the Preferred Shares and/or the Common
Shares and related Warrants, as applicable, to be issued and sold to such Buyer
at the Closing, by wire transfer of immediately available funds in accordance
with the Company’s written wire instructions, the amount withheld pursuant to
Section 4(g)) and (B) the Company shall deliver to each Buyer the
Preferred Shares (in such denominations as is set forth opposite such Buyer’s name
in column (3) on the Schedule of Buyers), if any, one or more stock
certificates, free and clear of all restrictive legends (except as expressly
provided in Section 2(g) hereof), evidencing the number of Common Shares as is
set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers,
if any, and the Warrants (exercisable for the number of shares of Common Stock
as is set forth opposite such Buyer’s name in column (5) on the Schedule of
Buyers), if any, each duly executed on behalf of the Company and registered on
the transfer books of the Company in the name of such Buyer or its designee.

 

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2.                                       BUYER’S REPRESENTATIONS AND WARRANTIES.

 

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

 

(a)                                  Organization;
Authority. Such Buyer is an entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization with the
requisite power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents (as defined below) to which it is a
party and otherwise to carry out its obligations hereunder and thereunder.

 

(b)                                 No
Public Sale or Distribution. Such Buyer is (i) acquiring the Preferred
Shares and/or the Common Shares and the Warrants, as applicable, (ii) upon
conversion of the Preferred Shares will acquire the Conversion Shares, and
(iii) upon exercise of the Warrants will acquire the Warrant Shares, in each
case, for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act. Such Buyer is
acquiring the Securities hereunder in the ordinary course of its business. Such
Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.

 

(c)                                  Accredited
Investor Status. Such Buyer is an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D.

 

(d)                                 Reliance
on Exemptions. Such Buyer understands that the Securities are being offered
and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the availability
of such exemptions and the eligibility of such Buyer to acquire the Securities.

 

(e)                                  Information.
Such Buyer and its advisors, if any, have been furnished with all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Securities which have been requested by
such Buyer. Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to
its acquisition of the Securities.

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(f)                                    No
Governmental Review. Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities
passed upon or endorsed the merits of the offering of the Securities.

 

(g)                                 Transfer
or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being
registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated
under the 1933 Act, as amended, (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made in reliance
on Rule 144 may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the Person (as defined in Section 3(s))
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the 1933 Act) may require compliance with some other exemption
under the 1933 Act or the rules and regulations of the SEC thereunder; and
(iii) neither the Company nor any other Person is under any obligation to register
the Securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder. The Securities may
be pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document (as
defined in Section 3(b)), including, without limitation, this Section 2(g).

 

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

 

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

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

 

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

 

(i)                                     Validity;
Enforcement. This Agreement and the Registration Rights Agreement have been
duly and validly authorized, executed and delivered on behalf of such Buyer and
shall constitute the legal, valid and binding obligations of such Buyer
enforceable against such Buyer in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

 

(j)                                     No
Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such
Buyer of the transactions contemplated hereby and thereby will not (i) result
in a violation of the organizational documents of such Buyer or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Buyer is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws) applicable to such Buyer, except in the case
of clauses (ii) and (iii) above, for such conflicts, defaults, rights or
violations which would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the ability of such Buyer to
perform its obligations hereunder.

 

(k)                                  Residency.
Such Buyer is a resident of that jurisdiction specified below its address on
the Schedule of Buyers.

 

(l)                                     Vote
for Stockholder Approval. Such Buyer, to the extent such Buyer owns any
shares of Common Stock at the time of the vote contemplated by the Stockholder
Approval, hereby agrees to vote such shares of Common Stock in favor of the
transactions contemplated hereby in connection with the Stockholder Approval.

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(m)                               Certain
Trading Activities. Other than with respect to the transactions
contemplated herein, since the time that such Buyer was first contacted by the
Company, either of the Agents or any other Person regarding this investment in
the Company neither the Buyer nor any Affiliate of such Buyer which (x) had
knowledge of the transactions contemplated hereby, (y) has or shares discretion
relating to such Buyer’s investments or trading or information concerning such
Buyer’s investments and (z) is subject to such Buyer’s review or input
concerning such Affiliate’s investments or trading (collectively, “Trading Affiliates”)
has directly or indirectly, nor has any Person acting on behalf of or pursuant
to any understanding with such Buyer or Trading Affiliate, effected or agreed
to effect any transactions in the securities of the Company. Such Buyer hereby
covenants and agrees not to, and shall cause its Trading Affiliates not to,
engage, directly or indirectly, in any transactions in the securities of the
Company or involving the Company’s securities during the period from the date
hereof until such time as (i) the transactions contemplated by this Agreement
are first publicly announced as described in Section 4(i) hereof or (ii) this
Agreement is terminated in full pursuant to Section 8 hereof.

 

3.                                       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

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

 

(a)                                  Organization
and Qualification. The Company and its “Subsidiaries”
(which for purposes of this Agreement means any joint venture or any entity in
which the Company, directly or indirectly, owns capital stock or holds an
equity or similar interest) are entities duly organized and validly existing
and in good standing under the laws of the jurisdiction in which they are
formed, and have the requisite power and authorization to own their properties
and to carry on their business as now being conducted. Each of the Company and
its Subsidiaries is duly qualified as a foreign entity to do business and is in
good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not reasonably be expected to have a Material Adverse Effect. As used in
this Agreement, “Material Adverse Effect” means any
material adverse effect on the business, properties, assets, operations,
results of operations, condition (financial or otherwise) or prospects of the
Company, its Subsidiaries, individually or taken as a whole, or on the
transactions contemplated hereby or in the other Transaction Documents or by
the agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents (as defined below). The Company has
no Subsidiaries except as set forth on

Schedule 3(a).

 

(b)                                 Authorization;
Enforcement; Validity. The Company has the requisite power and authority to
enter into and perform its obligations under this Agreement, the Certificate of
Designations, the Warrants, the Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions (as defined in Section 5(b)) and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the Securities in
accordance with the terms hereof and thereof. The execution and delivery of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation,
the issuance of the Preferred Shares and the Common

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

 

(c)                                  Issuance
of Securities. The issuance of the Preferred Shares, the Common Shares and
the Warrants are duly authorized and upon issuance in accordance with the terms
of the Transaction Documents shall be free from all taxes, liens and charges
with respect to the issue thereof, and the Preferred Shares shall be entitled
to the rights and preferences set forth in the Certificate of Designations. As
of the Closing, the Company shall have reserved from its duly authorized
capital stock not less than the sum of (i) 130% of the maximum number of shares
of Common Stock issuable upon conversion of the Preferred Shares (assuming for
purposes hereof, that the Preferred Shares are convertible at the Conversion
Price and without taking into account any limitations on the conversion of the
Preferred Shares set forth in the Certificate of Designations) and (ii) 100% of
the maximum number of shares of Common Stock issuable upon exercise of the
Warrants (without taking into account any limitations on the exercise of the
Warrants set forth in the Warrants). Upon issuance or conversion in accordance
with the Certificate of Designations or exercise in accordance with the
Warrants, as the case may be, the Conversion Shares and the Warrant Shares,
respectively, will be validly issued, fully paid and nonassessable and free
from all preemptive or similar rights, taxes, liens and charges with respect to
the issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. Subject to the representations and warranties of the
Buyers in this Agreement, the offer and issuance by the Company of the
Securities is exempt from registration under the 1933 Act.

 

(d)                                 No
Conflicts. Except as set forth on Schedule 3(d), the execution,
delivery and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Preferred Shares, the
Common Shares, the Warrants and reservation for issuance of the Conversion
Shares and the Warrant Shares) will not (i) result in a violation of the
Certificate of Incorporation (as defined in Section 3(r)) of the Company or any
certificate of incorporation, certificate of formation, any certificate of
designations or other constituent document of any of its Subsidiaries, any
capital stock of the Company or Bylaws (as defined in Section 3(r)) or the
Certificate of Designations or any other certificates of designations of the
Company or any of its Subsidiaries bylaws or (ii) conflict with, or constitute
a default (or 

 7
 

 

 

an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to
which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and regulations
of the American Stock Exchange (the “Principal
Market”) applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected.

 

(e)                                  Consents.
Except as set forth on Schedule 3(e), neither the Company nor any of its
Subsidiaries is required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which
the Company is required to obtain pursuant to the preceding sentence will be
obtained or effected on or prior to the Closing Date, and the Company and its
Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence. The Company is not in violation of
the requirements of the Principal Market and has no knowledge of any facts
which would reasonably lead to delisting or suspension of the Common Stock in
the foreseeable future.

 

(f)                                    Acknowledgment
Regarding Buyer’s Purchase of Securities. The Company acknowledges and
agrees that each Buyer is acting solely in the capacity of arm’s length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and except as set forth on Schedule 3(f),
that no Buyer is (i) an officer or director of the Company, (ii) an “affiliate”
of the Company or any of its Subsidiaries (as defined in Rule 144) or (iii) to
the knowledge of the Company, a “beneficial owner” of more than 10% of the
shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the “1934 Act”)). The
Company further acknowledges that no Buyer is acting as a financial advisor or
fiduciary of the Company or any of its Subsidiaries (or in any similar
capacity) with respect to the Transaction Documents and the transactions
contemplated hereby and thereby, and any advice given by a Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer’s purchase of the Securities. The Company further represents to each
Buyer that the Company’s decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.

 

(g)                                 No
General Solicitation; Placement Agent’s Fees. Neither the Company, nor any
of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of
the Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for persons engaged by any Buyer or its investment advisor) relating to or
arising out of the transactions contemplated hereby. The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim. The Company acknowledges that it has engaged
Banc of America Securities and Coker & Palmer, Inc. as placement agent

 8
 

 

 

(collectively, the “Agent”)
in connection with the sale of the Securities. Other than the Agent, neither
the Company nor any of its Subsidiaries has engaged any placement agent or
other agent in connection with the sale of the Securities.

 

(h)                                 No
Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system
on which any of the securities of the Company are listed or designated. None of
the Company, its Subsidiaries, their affiliates and any Person acting on their
behalf will take any action or steps referred to in the preceding sentence that
would require registration of any of the Securities under the 1933 Act or cause
the offering of the Securities to be integrated with other offerings.

 

(i)                                     Dilutive
Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Preferred Shares will
increase in certain circumstances. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Preferred Shares
in accordance with this Agreement and the Certificate of Designations and its
obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.

 

(j)                                     Application
of Takeover Protections; Rights Agreement. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or any
certificates of designations or the laws of the jurisdiction of its formation
or incorporation which is or could become applicable to any Buyer as a result
of the transactions contemplated by this Agreement, including, without
limitation, the Company’s issuance of the Securities and any Buyer’s ownership
of the Securities. The Company has not adopted a stockholder rights plan or
similar arrangement relating to accumulations of beneficial ownership of Common
Stock or a change in control of the Company.

 

(k)                                  SEC
Documents; Financial Statements. Since May 26, 2004, the Company has filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the 1934 Act
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or
their respective representatives true, correct and complete copies of each of
the SEC Documents not available on the EDGAR system that have been requested by
each Buyer. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC, 

 9
 

 

 

contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto as in effect as of the time of filing.
Such financial statements have been prepared in accordance with generally
accepted accounting principles, consistently applied, during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto, or (ii) in the case of unaudited interim statements, to
the extent they may exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of its operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). No other information
provided on or behalf of the Company to the Buyers which is not included in the
SEC Documents, including, without limitation, information referred to in
Section 2(e) of this Agreement, contains any untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstance under which they are or
were made, not misleading.

 

(l)                                     Absence
of Certain Changes. Except as disclosed in Schedule 3(l), since June
30, 2005, nothing has occurred that could reasonably be expected to have a
Material Adverse Effect. Except as disclosed in Schedule 3(l), since
June 30, 2005, neither the Company nor any of its Subsidiaries has (i) declared
or paid any dividends, (ii) sold any assets, individually or in the aggregate,
in excess of $250,000 outside of the ordinary course of business or (iii) had
capital expenditures, individually or in the aggregate, in excess of $500,000. Neither
the Company nor any of its Subsidiaries has taken any steps to seek protection
pursuant to any bankruptcy law nor does the Company have any knowledge or reason
to believe that its creditors intend to initiate involuntary bankruptcy
proceedings or any actual knowledge of any fact which would reasonably lead a
creditor to do so. The Company and its Subsidiaries, individually and on a
consolidated basis, are not as of the date hereof, and after giving effect to
the transactions contemplated hereby to occur at the Closing will not, be
Insolvent (as defined below). For purposes of this Section 3(l), “Insolvent” means, with respect to any Person (as defined in
Section 3(s)) (i) the present fair saleable value of such Person’s assets is
less than the amount required to pay such Person’s total Indebtedness (as
defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to incur or
believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now
conducted and is proposed to be conducted.

 

(m)                               No
Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable securities
laws on a registration statement on Form S-1 filed with the SEC relating to an
issuance and sale by the Company of its Common Stock and which has not been
publicly announced.

 10
 

 

 

(n)                                 Conduct
of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under its Certificate of
Incorporation, the Certificate of Designations, any other certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or Bylaws or their organizational charter or certificate
of incorporation or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries,
and neither the Company nor any of its Subsidiaries will conduct its business
in violation of any of the foregoing, except in all cases for possible
violations which could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Without limiting the generality of
the foregoing, the Company is not in violation of any of the rules, regulations
or requirements of the Principal Market and has no knowledge of any facts or
circumstances that would reasonably lead to delisting or suspension of the
Common Stock by the Principal Market in the foreseeable future. Since May 5,
2005, (i) the Common Stock has been designated for quotation on the Principal
Market, (ii) trading in the Common Stock has not been suspended by the SEC or
the Principal Market and (iii) the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension
or delisting of the Common Stock from the Principal Market. The Company and its
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit.

 

(o)                                 Foreign
Corrupt Practices. Neither the Company nor any of its Subsidiaries nor any
director, officer, agent, employee or other Person acting on behalf of the
Company or any of its Subsidiaries has, in the course of its actions for, or on
behalf of, the Company or any of its Subsidiaries (i) used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee.

 

(p)                                 Sarbanes-Oxley
Act. The Company is in compliance with any and all applicable requirements
of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and
any and all applicable rules and regulations promulgated by the SEC thereunder
that are effective as of the date hereof.

 

(q)                                 Transactions
With Affiliates. Except as set forth in the SEC Documents filed at least
ten (10) days prior to the date hereof and other than the grant of stock
options or restricted stock disclosed on Schedule 3(q), none of the
officers, directors or employees of the Company or any of its Subsidiaries is
presently a party to any transaction with the Company or any of its
Subsidiaries (other than for ordinary course services as employees, officers or
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise 

 11
 

 

 

requiring payments to or from any such officer, director or employee
or, to the knowledge of the Company or any of its Subsidiaries, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.

 

(r)                                    Equity
Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 50,000,000 shares of Common Stock, of which as of the
date hereof, 26,992,941 are issued and outstanding and 1,055,000 shares are
reserved for issuance pursuant to securities (other than the Preferred Shares
and the Warrants) exercisable or exchangeable for, or convertible into, shares
of Common Stock and (ii) 5,000,000 shares of preferred stock of which, as of
the date hereof, none are issued and outstanding. All of such outstanding
shares have been, or upon issuance will be, validly issued and are fully paid
and nonassessable. Except as disclosed in Schedule 3(r): (i) none of the
Company’s capital stock is subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company; (ii)
there are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, or exercisable or exchangeable for, any capital stock
of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional capital stock of the Company or any
of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness (as defined in Section 3(s))
of the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the
aggregate, filed in connection with the Company or any of its Subsidiaries; (v)
there are no agreements or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of their securities under
the 1933 Act (except pursuant to the Registration Rights Agreement); (vi) there
are no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries; (vii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities; (viii) the Company does not have
any stock appreciation rights or “phantom stock” plans or agreements or any
similar plan or agreement; and (ix) the Company and its Subsidiaries have no
liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its Subsidiaries’ respective businesses. The
Company has furnished to the Buyers true, correct and complete copies of the
Company’s Certificate of Incorporation, as amended and as in effect on the date
hereof (the “Certificate of Incorporation”),
and the Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into,
or exercisable or exchangeable for, shares of Common Stock and the material
rights of the holders thereof in respect thereto. Schedule 3(r) sets
forth the shares of Common Stock owned beneficially or of record and Common
Stock Equivalents (as defined below) held by each director and executive
officer.

 

 12
 

 

 

(s)                                  Indebtedness
and Other Contracts. Except as set forth in Schedule 3(s), neither
the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness
(as defined below), (ii) is a party to any contract, agreement or instrument,
the violation of which, or default under which, by the other party(ies) to such
contract, agreement or instrument could reasonably be expected to result in a
Material Adverse Effect, (iii) is in material violation of any term of or in
material default under any material contract, agreement or instrument relating
to any Indebtedness, or (iv) is a party to any contract, agreement or
instrument relating to any Indebtedness, the performance of which, in the
judgment of the Company’s officers, has or is expected to have a Material
Adverse Effect. Schedule 3(s) provides a detailed description of the
material terms of any such outstanding Indebtedness. For purposes of this
Agreement: (x) “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, “capital leases” in
accordance with generally accepted accounting principles) (other than trade
payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(E) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with
respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through (F)
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or
assets (including accounts and contract rights) owned by any Person, even
though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (H) all Contingent Obligations
in respect of indebtedness or obligations of others of the kinds referred to in
clauses (A) through (G) above; (y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or
otherwise, of that Person with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto; and (z) “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

 

(t)                                    Absence
of Litigation. Except as set forth in Schedule 3(t), there is no
action, suit, proceeding, inquiry or investigation before or by the Principal
Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened against
or affecting the Company or any of its Subsidiaries, the Common Stock or any of
the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’
officers or directors, whether of a civil or criminal nature or otherwise.

 

 13
 

 

 

(u)                                 Insurance.
The Company and each of its Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect.

 

(v)                                 Employee
Relations. (i) Neither the Company nor any of its Subsidiaries is a party
to any collective bargaining agreement or employs any member of a union. The
Company and its Subsidiaries believe that their relations with their employees
are good. No executive officer of the Company or any of its Subsidiaries (as
defined in Rule 501(f) of the 1933 Act) has notified the Company or any such
Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary. No executive officer of the Company or any of its
Subsidiaries is, or is now expected to be, in violation of any material term of
any employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.

 

(ii)                                  The
Company and its Subsidiaries are in compliance with all federal, state, local
and foreign laws and regulations respecting labor, employment and employment
practices and benefits, terms and conditions of employment and wages and hours,
except where failure to be in compliance would not, either individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.

 

(w)                               Title.
Except as set forth on Schedule 3(w), the Company and its Subsidiaries
have (i) good and marketable title in fee simple to all real property other
than oil and gas interests, if any, (ii) good and indefeasible title to its oil
and gas interests and (iii) good and marketable title to all personal property
owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property or
interests and do not interfere with the use made and proposed to be made of
such property or interests by the Company and any of its Subsidiaries. Any real
property and facilities held under lease by the Company or any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries. The net acreage of each of the Barnett Shale Properties and the
Rich Valley Properties (as such terms are defined in the Certificate of
Designations) is as set forth on Schedule 3(w) attached hereto.

 

(x)                                   Intellectual
Property Rights. The Company and its Subsidiaries own or possess adequate
rights or licenses to use all trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, original works of
authorship, trade secrets and other 

 14
 

 

 

intellectual property rights and all applications related thereto (“Intellectual Property Rights”) necessary to conduct their
respective businesses as now conducted except where the failure to so own or
possess would not reasonably be expected to result in a Material Adverse
Effect. None of the Company’s or its Subsidiaries’ Intellectual Property Rights
have expired, terminated or been abandoned, or are expected to expire,
terminate or be abandoned, within three years from the date of this Agreement. The
Company does not have any knowledge of any infringement by the Company or any
of its Subsidiaries of Intellectual Property Rights of others. There is no
claim, action or proceeding being made or brought, or to the knowledge of the
Company, being threatened, against the Company or any of its Subsidiaries
regarding its Intellectual Property Rights. The Company is unaware of any facts
or circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.

 

(y)                                 Environmental
Laws. The Company and its Subsidiaries (i) are in compliance with any and
all Environmental Laws (as hereinafter defined), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term “Environmental
Laws” means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants, or
toxic or hazardous substances or wastes (collectively, “Hazardous
Materials”) into the
environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or
demand letters, injunctions, judgments, licenses, notices or notice letters,
orders, permits, plans or regulations issued, entered, promulgated or approved
thereunder.

 

(z)                                   Subsidiary
Rights. Except as set forth in Schedule 3(z), the Company or one of
its Subsidiaries has the unrestricted right to vote, and (subject to
limitations imposed by applicable law) to receive dividends and distributions
on, all capital securities of its Subsidiaries as owned by the Company or such
Subsidiary.

 

(aa)                            Tax
Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

 

 15
 

 

 

(bb)                          Internal
Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The
Company maintains disclosure controls and procedures (as such term is defined
in Rule 13a-14 under the 1934 Act) that are effective in ensuring that
information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC,
including, without limitation, controls and procedures designed in to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is accumulated and communicated to the
Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure. Except as set forth in Schedule
3(bb), during the twelve months prior to the date hereof neither the
Company nor any of its Subsidiaries have received any notice or correspondence
from any accountant relating to any potential material weakness in any part of
the system of internal accounting controls of the Company or any of its
Subsidiaries.

 

(cc)                            Off
Balance Sheet Arrangements. There is no material transaction, arrangement,
or other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its
1934 Act filings and is not so disclosed.

 

(dd)                          Investment
Company Status. The Company is not, and upon consummation of the sale of
the Securities will not be, an “investment company,” a company controlled by an
“investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company” as such terms are defined in the
Investment Company Act of 1940, as amended.

 

(ee)                            Transfer
Taxes. On the Closing Date, all stock transfer or other taxes (other than
income or similar taxes) which are required to be paid in connection with the
sale and transfer of the Securities to be sold to each Buyer hereunder will be,
or will have been, fully paid or provided for by the Company, and all laws
imposing such taxes will be or will have been complied with.

 

(ff)                                Acknowledgement
Regarding Buyers’ Trading Activity. Except as set forth in Section 2(m) and
Section 4(r), it is understood and acknowledged by the Company (i) that none of
the Buyers have been asked by the Company or its Subsidiaries to agree, nor has
any Buyer agreed with the Company or its Subsidiaries, to desist from
purchasing or selling, long and/or short, securities of the Company, or
“derivative” securities based on securities issued by the Company or to hold
the Securities for any specified term; (ii) that any Buyer, and counterparties
in “derivative” transactions to which any such Buyer is a party, directly or 

 16
 

 

 

indirectly, presently may have a “short” position in the Common Stock,
and (iii) that each Buyer shall not be deemed to have any affiliation with or
control over any arm’s length counterparty in any “derivative” transaction. The
Company further understands and acknowledges that one or more Buyers may engage
in hedging and/or trading activities at various times during the period that
the Securities are outstanding, including, without limitation, during the
periods that the value of the Conversion Shares and the Warrant Shares
deliverable with respect to Securities are being determined and (b) such
hedging and/or trading activities, if any, can reduce the value of the existing
stockholders’ equity interest in the Company both at and after the time the
hedging and/or trading activities are being conducted. The Company acknowledges
that such aforementioned hedging and/or trading activities do not constitute a
breach of this Agreement, the Certificate of Designations, the Warrants or any
of the documents executed in connection herewith.

 

(gg)                          Manipulation
of Price. The Company has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to cause or
to result in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or paid any compensation for soliciting purchases of,
any of the Securities, or (iii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.

 

(hh)                          No
Side Arrangements. Neither the Company nor any of the Company’s directors,
officers, Subsidiaries or any of the Company’s or their Subsidiaries’
affiliates has any arrangements or agreements with any Buyer relating to the
transactions contemplated hereby that is not set forth in the Transaction
Documents and that all the Buyers are not party to. Neither the Company nor any
of the Company’s directors, officers, Subsidiaries or any of the Company’s or
their Subsidiaries’ affiliates shall enter into any arrangements or agreements
with any Buyer relating to the transactions contemplated hereby unless all
Buyers are provided with the same opportunity to be party to any such
arrangement or agreement.

 

(ii)                                  Disclosure.
The Company confirms that neither it nor any other Person acting on its behalf
has provided any of the Buyers or their agents or counsel with any information
that constitutes or could reasonably be expected to constitute material,
nonpublic information. The Company understands and confirms that each of the
Buyers will rely on the foregoing representations in effecting transactions in
securities of the Company. All disclosure provided to the Buyers regarding the
Company and its Subsidiaries, their business and the transactions contemplated
hereby, including the Schedules to this Agreement, furnished by or on behalf of
the Company is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. Each press release issued by the Company or its
Subsidiaries during the twelve (12) months preceding the date of this Agreement
did not at the time of release contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or
its or their business, properties, prospects, operations or financial
conditions, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.

 

 17
 

 

 

4.                                       COVENANTS.

 

(a)                                  Best
Efforts. Each party shall use its best efforts timely to satisfy each of
the conditions to be satisfied by it as provided in Sections 6 and 7 of this
Agreement.

 

(b)                                 Form
D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary
in order to obtain an exemption for or to qualify the Securities for sale to
the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date. The Company
shall make all filings and reports relating to the offer and sale of the
Securities required under applicable securities or “Blue Sky” laws of the
states of the United States following the Closing Date.

 

(c)                                  Reporting
Status. Until the date on which the Buyers shall have sold all the
Conversion Shares, the Common Shares and the Warrant Shares, and none of the Preferred Shares or
Warrants is outstanding (the “Reporting Period”),
the Company shall timely file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would no longer require or otherwise permit
such termination. From the time Form S-3 is available to the Company for the
registration of the Conversion Shares, the Common Shares and the Warrant
Shares, the Company shall take all actions necessary to maintain its
eligibility to register the Conversion Shares, the Common Shares and the
Warrant Shares for resale by the Buyers on Form S-3 and at all times the
Company shall conduct its business in accordance with applicable law.

 

(d)                                 Use
of Proceeds. The Company will use the proceeds from the sale of the
Securities for the repayment of debt, working capital and general corporate
purposes, and not for the redemption or repurchase of any of its or its
Subsidiaries’ equity securities.

 

(e)                                  Financial
Information. The Company agrees to send the following to each Investor (as
defined in the Registration Rights Agreement) during the Reporting Period (i)
unless the following are filed with the SEC through EDGAR and are available to
the public through the EDGAR system, within one (1) Business Day after the
filing thereof with the SEC, a copy of its Annual Reports and Quarterly Reports
on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any consolidated
balance sheets, income statements, stockholders’ equity statements and/or cash
flow statements for any period other than annual, any Current Reports on Form
8-K and any registration statements (other than on Form S-8) or amendments
filed pursuant to the 1933 Act and (ii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders. As used herein “Business Day”
means any day other than a Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain
closed.

 18

 

 

(f)                                    Listing.  The Company shall promptly secure the listing
of all of the Registrable Securities (as defined in the Registration Rights
Agreement) upon each national securities exchange and automated quotation
system, if any, upon which the Common Stock is then listed (subject to official
notice of issuance) and shall maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents.  The Company shall maintain
the Common Stocks' authorization for quotation on the Principal Market or any
Eligible Market.  Neither the Company nor
any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on the
Principal Market.  The Company shall pay
all fees and expenses in connection with satisfying its obligations under this
Section 4(f).

 

(g)                                 Fees.  The Company shall pay or reimburse Schulte
Roth & Zabel LLP or its designee(s) (in addition to any other expense
amounts paid to any Buyer prior to the date of this Agreement) for all
reasonable costs and expenses incurred in connection with the transactions
contemplated by the Transaction Documents (including all reasonable legal fees
and disbursements in connection therewith, documentation and implementation of
the transactions contemplated by the Transaction Documents and due diligence in
connection therewith), which amount shall be non-accountable and paid by the
Company at Closing or upon termination of this Agreement.  The Company shall be responsible for the
payment of any placement agent's fees, financial advisory fees, or broker's
commissions (other than for Persons engaged by any Buyer) relating to or
arising out of the transactions contemplated hereby, including, without limitation,
any fees payable to the Agent.  The
Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, reasonable attorney's fees and
out-of-pocket expenses) arising in connection with any claim relating to  any such payment.

 

(h)                                 Pledge
of Securities.  The Company
acknowledges and agrees that the Securities may be pledged by an Investor (as
defined in the Registration Rights Agreement) in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
Securities.  The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Investor effecting a pledge of Securities shall be required
to provide the Company with any notice thereof or otherwise make any delivery
to the Company pursuant to this Agreement or any other Transaction
Document.  The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such
pledgee by an Investor.

 

(i)                                     Disclosure
of Transactions and Other Material Information.  On or before 8:30 a.m., New York City time,
on the third Business Day following the date of this Agreement, the Company
shall issue a press release and file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Transaction Documents in the
form required by the 1934 Act and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of Certificate of Designations, the form of Warrant and
the form of the Registration Rights Agreement) as exhibits to such filing
(including all attachments, the "8-K Filing").  From and after the filing of the 8-K Filing
with the SEC, no Buyer shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents, that is not disclosed in
the 8-K Filing.  The Company shall not,
and shall cause each of its

 19
 

 

 

Subsidiaries
and its and each of their respective officers, directors, employees and agents,
not to, provide any Buyer with any material, nonpublic information regarding
the Company or any of its Subsidiaries from and after the filing of the 8-K
Filing with the SEC without the express written consent of such Buyer or as may
be required under the terms of the Transaction Documents.  If a Buyer has, or believes it has, received
any such material, nonpublic information regarding the Company or any of its
Subsidiaries directly from the Company, any of its Subsidiaries, any of their
affiliates, officers, directors or any other Person acting on their behalf,  it shall provide the Company with written
notice thereof.  The Company shall,
within five (5) Trading Days (as defined in the Certificate of Designations) of
receipt of such notice, make public disclosure of such material, nonpublic
information.  In the event of a breach of
the foregoing covenant by the Company, any of its Subsidiaries, or any of its
or their respective officers, directors, employees and agents, in addition to
any other remedy provided herein or in the Transaction Documents, a Buyer shall
have the right to make a public disclosure, in the form of a press release,
public advertisement or otherwise, of such material, nonpublic information
without the prior approval by the Company, its Subsidiaries, or any of its or
their respective officers, directors, employees or agents.  No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents for any such disclosure.  Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure
with respect to such transactions (i) in substantial conformity with the 8-K
Filing and contemporaneously therewith and (ii) as is required by applicable
law and regulations (provided that in the case of clause (i) each Buyer shall
be consulted by the Company in connection with any such press release or other
public disclosure prior to its release). 
Without the prior written consent of any applicable Buyer, neither the
Company nor any of its Subsidiaries or affiliates shall disclose the name of
such Buyer in any filing, announcement, release or otherwise, unless such
disclosure is required by law, regulation or the Principal Market.

 

(j)                                     Additional
Registration Statements.  Until the
Effective Date (as defined in the Registration Rights Agreement), the Company
shall not file a registration statement under the 1933 Act relating to
securities that are not the Securities.

 

(k)                                  Corporate
Existence.  So long as any Buyer
beneficially owns any Preferred Shares or Warrants, the Company shall not be
party to any Fundamental Transaction (as defined in the Certificate of
Designations) unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Certificate of
Designations and the Warrants.

 

(l)                                     Reservation
of Shares.  The Company shall take
all action necessary to at all times have authorized, and reserved for the
purpose of issuance, no less than the sum of (i) 130% of the maximum number of
shares of Common Stock issuable upon conversion of the Preferred Shares
(assuming for purposes hereof, that the Preferred Shares are convertible at the
Conversion Price and without taking into account any limitations on the
conversion of the Preferred Shares set forth in the Certificate of Designations)
and (ii) 100% of the maximum number of shares of Common Stock issuable upon
exercise of the Warrants (without taking into account any limitations on the
exercise of the Warrants set forth in the Warrants).

 20
 

 

 

(m)                               Conduct
of Business.  The business of the
Company and its Subsidiaries shall not be conducted in violation of any law,
ordinance or regulation of any governmental entity, except where such
violations would not result, either individually or in the aggregate, in a
Material Adverse Effect.

 

(n)                                 Additional
Issuances of Securities.

 

(i)                                     For purposes of
this Section 4(n), the following definitions shall apply.

 

(1)                                "Convertible Securities" means any
stock or securities (other than Options) convertible into or exercisable or
exchangeable for shares of Common
Stock.

 

(2)                                "Options" means any rights, warrants or options to
subscribe for or purchase shares of Common
Stock or Convertible Securities.

 

(3)                                "Common Stock Equivalents" means,
collectively, Options and Convertible Securities.

 

(ii)                                  From
the date hereof until the date that is one hundred twenty (120) Trading Days
(as defined in the Certificate of Designations) after the Effective Date (the
"Trigger Date"), the Company will
not, directly or indirectly, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any offer, sale, grant or any option to
purchase or other disposition of) any of its or its Subsidiaries' equity or
equity equivalent securities, including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of Common Stock or Common Stock Equivalents (any such
offer, sale, grant, disposition or announcement being referred to as a "Subsequent Placement").

 

(iii)                               From the Trigger Date
until no Preferred Shares remain outstanding, the Company will not, directly or
indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(n)(iii).

 

(1)                                 The
Company shall deliver to each Buyer a written notice (the "Offer Notice") of any proposed or intended issuance or
sale or exchange (the "Offer") of
the securities being offered (the "Offered Securities")
in a Subsequent Placement, which Offer Notice shall (w) identify and describe
the Offered Securities, (x) describe the price and other terms upon which
they are to be issued, sold or exchanged, and the number or amount of the
Offered Securities to be issued, sold or exchanged, (y) identify the persons
or entities (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with such Buyers 30% of the Offered Securities allocated among such
Buyers (a) based on such Buyer's pro rata portion of the aggregate number of
Preferred Shares purchased hereunder (the "Basic Amount"),
and (b) with respect to each Buyer that elects to purchase its Basic Amount,
any additional portion of the Offered Securities attributable to the Basic
Amounts of other Buyers as such Buyer shall indicate it will purchase or
acquire should the other Buyers subscribe for less than their Basic Amounts
(the

 21
 

 

 

"Undersubscription Amount"),
which process shall be repeated until the Buyers shall have an opportunity to
subscribe for any remaining Undersubscription Amount.  

 

(2)                                 To
accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the third (3rd) Business Day after such Buyer's receipt
of the Offer Notice (the "Offer Period"),
setting forth the portion of such Buyer's Basic Amount that such Buyer elects
to purchase and, if such Buyer shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Buyer elects to purchase (in
either case, the "Notice of Acceptance").  If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however,
that if the Undersubscription Amounts subscribed for exceed the difference
between the total of all the Basic Amounts and the Basic Amounts subscribed for
(the "Available Undersubscription Amount"),
each Buyer who has subscribed for any Undersubscription Amount shall be
entitled to purchase only that portion of the Available Undersubscription
Amount as the Basic Amount of such Buyer bears to the total Basic Amounts of
all Buyers that have subscribed for Undersubscription Amounts, subject to
rounding by the Company to the extent its deems reasonably necessary.  Notwithstanding the foregoing, if the Company
desires to modify or amend the terms and conditions of the Offer prior to the
expiration of the Offer Period, the Company may deliver to the Buyers a new
Offer Notice and the Offer Period shall expire on the third (3rd) Business Day after such Buyer's receipt
of such new Offer Notice.

 

(3)                                 The
Company shall have fifteen (15) Business Days from the expiration of the Offer
Period above (i) to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the "Refused Securities")
pursuant to a definitive agreement(s) (the "Subsequent Placement Agreement"), but only to the
offerees described in the Offer Notice (if so described therein) and only upon
terms and conditions (including, without limitation, unit prices and interest
rates) that are not more favorable to the acquiring person or persons or less
favorable to the Company than those set forth in the Offer Notice and (ii) to
publicly announce (a) the execution of such Subsequent Placement Agreement, and
(b) either (x) the consummation of the transactions contemplated by such
Subsequent Placement Agreement or (y) the termination of such Subsequent
Placement Agreement, which shall be filed with the SEC on a Current Report on
Form 8-K with such Subsequent Placement Agreement and any documents
contemplated therein filed as exhibits thereto.

 

(4)                                 In
the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4(n)(iii)(3) above), then each Buyer may, at its sole option and in its
sole discretion, reduce the number or amount of the Offered Securities
specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of the Offered Securities that such Buyer elected to
purchase pursuant to Section 4(n)(iii)(2) above multiplied by a fraction, (i)
the numerator of which shall be the number or amount of Offered Securities the
Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Buyers pursuant to Section 4(n)(iii)(3)
above prior to such reduction) and (ii) the denominator of which shall be the

 22
 

 

 

original amount of the Offered Securities.  In the event that any Buyer so elects to
reduce the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities
have again been offered to the Buyers in accordance with
Section 4(n)(iii)(1) above.

 

(5)                                 Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company
shall issue to the Buyers, the number or amount of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 4(n)(iii)(3) above
if the Buyers have so elected, upon the terms and conditions specified in the
Offer.  The purchase by the Buyers of any
Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Buyers of a purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to the Buyers
and their respective counsel.

 

(6)                                 Any
Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(n)(iii)(3) above may not be issued, sold or exchanged until they
are again offered to the Buyers under the procedures specified in this Agreement.

 

(7)                                 The
Company and the Buyers agree that if any Buyer elects to participate in the
Offer, (x) neither the Subsequent Placement Agreement with respect to such
Offer nor any other transaction documents related thereto (collectively, the
"Subsequent Placement Documents")
shall include any term or provisions whereby any Buyer shall be required to
agree to any restrictions in trading as to any securities of the Company owned
by such Buyer prior to such Subsequent Placement, and (y) any registration
rights set forth in such Subsequent Placement Documents shall be similar in all
material respects to the registration rights contained in the Registration
Rights Agreement.

 

(8)                                 Notwithstanding anything to the contrary in
this Section 4(n) and unless otherwise agreed to by the Buyers, the Company
shall either confirm in writing to the Buyers that the transaction with respect
to the Subsequent Placement has been abandoned or shall publicly disclose its
intention to issue the Offered Securities, in either case in such a manner such
that the Buyers will not be in possession of material non-public information,
by the fifteen (15th)
Business Day following expiration of the Offer Period.  If by the fifteen (15th)
Business Day following expiration of the Offer Period no public disclosure
regarding a transaction with respect to the Offered Securities has been made,
and no notice regarding the abandonment of such transaction has been received
by the Buyers, such transaction shall be deemed to have been abandoned and the
Buyers shall not be deemed to be in possession of any material, non-public
information with respect to the Company. 
Should the Company decide to pursue such transaction with respect to the
Offered Securities, the Company shall provide each Buyer with another Offer
Notice and each Buyer will again have the right of participation set forth in
this Section 4(n)(iii).  The Company
shall not be permitted to deliver more than one such Offer Notice to the Buyers
in any 60 day period.

 

(9)                                 The
restrictions contained in subsections (ii) and (iii) of this Section 4(n) shall
not apply in connection with the issuance of any Excluded Securities (as
defined in the Certificate of Designations).

 

 23
 

 

 

(10)                           In
the event the Company has made a good faith determination that any matters
relating to an Offer Notice required to be provided to any Buyer pursuant to
this Section 4(n) constitute material non-public information, prior to
providing such Offer Notice, the Company shall promptly inquire (either orally
or in writing) to each Buyer whether such Buyer wants to receive any material
nonpublic information (the "Material
Event Notice"). 
Notwithstanding anything contained in this Section 4(n) to the contrary,
the Company shall not deliver an Offer Notice that contains material nonpublic
information to any Buyer that has not affirmatively indicated (either orally or
in writing) that it wishes to receive material nonpublic information.  Until the earlier to occur of (x) the date on
which a Buyer gives notice (either orally or in writing) to the Company
authorizing the delivery of material nonpublic information to the Buyer (the
"Material Event Notice Acceptance")
or (y) the date on which the material non-public information which was to be
set forth in the Offer Notice is publicly disclosed in a filing with the SEC,
the Company shall be relieved of any obligation imposed by this Section 4(n) to
deliver an Offer Notice to the Buyer containing material nonpublic information
and such Buyer shall be deemed to have waived the Buyer’s rights hereunder to
receive such Offer Notice until such time as the Buyer delivers such Material
Event Notice Acceptance to the Company. 
Notwithstanding anything in any Transaction Document to the contrary,
the Company covenants and agrees that it shall not provide the Offer Notice to
any Buyer which contains material non-public information until the earlier to
occur of (x) such time as the Material Event Notice Acceptance is received by
the Company or (y) the material non-public information which was to be set forth
in the Offer Notice has been disclosed in a filing with the SEC.

 

(o)                                 Stockholder
Approval.  The Company shall provide
each stockholder entitled to vote at a special or annual meeting of
shareholders of the Company (the "Stockholder Meeting"),
which initially shall be promptly called and held not later than December 31,
2006 (the "Stockholder Meeting Deadline"),
a proxy statement, substantially in the form which has been previously reviewed
by the Buyers and Schulte Roth & Zabel LLP at the expense of the Company,
soliciting each such stockholder's affirmative vote at the Stockholder Meeting
for approval of resolutions (the "Resolutions")
providing for the Company's issuance of all of the Securities as described in
the Transaction Documents in accordance with applicable law and the rules and
regulations of the Principal Market (such
affirmative approval being referred to herein as the "Stockholder Approval" and the date such approval is
obtained, the "Stockholder Approval Date"),
and the Company shall use its reasonable best efforts to solicit its
stockholders' approval of the Resolutions and to cause the Board to recommend
to the stockholders that they approve the Resolutions.  The Company shall be obligated to seek to obtain
the Stockholder Approval by the Stockholder Meeting Deadline.  If, despite the Company's reasonable best
efforts, the Stockholder Approval is not obtained on or prior to the
Stockholder Meeting Deadline, the Company shall solicit Stockholder Approval at
the annual stockholders meeting each year and use its reasonable best efforts
to obtain such Stockholder Approval until Stockholder Approval is obtained.

 

(p)                                 Withholding
Taxes.  On each Dividend Date (as
defined in the Certificate of Designations), if the Company does not have
current or accumulated "earnings and profits" within the meaning of
Sections 301 and 312 of the Internal Revenue Code of 1986, as amended, through
such Dividend Date, the Company shall not withhold any amount of the applicable
Dividend (as defined in the Certificate of Designations) in respect of U.S.
federal income tax.

 24
 

 

 

On or prior to any such Dividend Date, the Company shall deliver a
transmittal letter to the Buyer or the Buyer's prime broker indicating whether
the Company believes it must withhold any amount of such Dividend, whether the
Company has any "earnings or profits" and the calculations, in
reasonable detail, supporting such calculations.

 

(q)                                 Lock-Up
Agreements.  The Company shall not
amend, waive or modify any of the Lock-Up Agreements or the Existing Lock-Up
Agreements (each as defined below) without the written consent of the Required
Holders (as defined in the Certificate of Designations).

 

(r)                                    Trading
in Common Stock.  For so long as such
Buyer owns any Securities, such Buyer shall not maintain a Net Short
Position.  For purposes of this Section,
a "Net Short Position" by a person
means a position whereby such person has executed one or more sales of Common
Stock that is marked as a short sale and that is executed at a time when such
Buyer has no equivalent offsetting long position in the Common Stock or
contract for the foregoing.  For purposes
of determining whether a Buyer has an equivalent offsetting long position in
the Common Stock, all Common Stock (i) that is owned by such Buyer, (ii) that
may be issued pursuant to the terms of the Certificate of Designations and/or
the Warrants to the Buyer or (iii) that would be issuable upon conversion or
exercise in full of all securities of the Buyer (including the Securities) then
held by such Buyer (assuming that such securities were then fully convertible
or exercisable, notwithstanding any provisions to the contrary, and giving
effect to any conversion or exercise price adjustments that would take effect
given only the passage of time) shall be deemed to be held long by such
Buyer.  Without limiting the foregoing,
the Buyers may engage in hedging activities at various times during the period
following the public announcement of the execution of this Agreement as provided
in Section 4(i), and during the period that any Securities are outstanding.

 

(s)                                  Approval
of Principal Market.  The Company
shall use its best efforts, acting diligently and in good faith, to obtain the
approval of the Principal Market with respect to the transactions contemplated
by the Transaction Documents as soon as practicable.

 

(t)                                    Consent
of Union Bank of California.  The
Company shall use its best efforts, acting diligently and in good faith, to
obtain the consent of Union Bank of California with respect to the transactions
contemplated by the Transaction Documents as soon as practicable.

 

5.                                       REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a)                                  Register.  The Company shall maintain at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to each holder of Securities), a register for the Preferred
Shares, the Common Shares and the Warrants in which the Company shall record
the name and address of the Person in whose name the Preferred Shares, the
Common Shares and the Warrants have been issued (including the name and address
of each transferee), the number of Preferred Shares held by such Person and the
number of Conversion Shares issuable upon conversion of the Preferred Shares
and Warrant Shares issuable upon exercise of the Warrants held by such
Person.  The Company shall keep the
register open

 25
 

 

 

and available at all times during business hours for inspection of any
Buyer or its legal representatives.

 

(b)                                 Transfer
Agent Instructions.  The Company
shall issue irrevocable instructions to its transfer agent, and any subsequent
transfer agent, to issue certificates or credit shares to the applicable
balance accounts at The Depository Trust Company ("DTC"), registered in the name of each
Buyer or its respective nominee(s), for the Common Shares issued at the Closing
and for the Conversion Shares  and the
Warrant Shares in such amounts as specified from time to time by each Buyer to
the Company upon conversion of the Preferred Shares or exercise of the Warrants
in the form of Exhibit D attached hereto (the "Irrevocable
Transfer Agent Instructions"). 
The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5(b), and stop transfer
instructions to give effect to Section 2(h) hereof, will be given by the
Company to its transfer agent with respect to the Securities, and that the
Securities shall otherwise be freely transferable on the books and records of
the Company, as applicable, and to the extent provided in this Agreement and
the other Transaction Documents.  If a
Buyer effects a sale, assignment or transfer of the Securities in accordance
with Section 2(g), the Company shall permit the transfer and shall promptly
instruct its transfer agent to issue one or more certificates or credit shares
to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Buyer to effect such sale, transfer or
assignment.  In the event that such sale,
assignment or transfer involves Conversion Shares, Common Shares and/or Warrant
Shares sold, assigned or transferred pursuant to an effective registration
statement with prospectus delivery (unless an exemption from the prospectus
delivery requirements is available), or pursuant to Rule 144, the transfer
agent shall issue such Securities to the Buyer, assignee or transferee, as the
case may be, without any restrictive legend.

 

(c)                                  Breach.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to a Buyer and that
the remedy at law for a breach of its obligations under this Section 5 will be
inadequate.  In addition, the Company
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5, that a Buyer shall be entitled, in addition to
all other available remedies, to seek an order and/or injunction restraining
any breach and requiring immediate issuance and transfer, without the necessity
of showing economic loss and without any bond or other security being required.

 

(d)                                 Additional
Relief.  If the Company shall fail
for any reason or for no reason to issue to such holder unlegended certificates
within three (3) Business Days of receipt of documents necessary for the
removal of legend set forth above (the "Deadline
Date"), then, in addition to all other remedies available to
the holder, if on or after the Trading Day (as defined in the Certificate of
Designations) immediately following such three Business Day period, the holder
purchases (in an open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by the holder of shares of Common Stock
that the holder anticipated receiving from the Company (a "Buy-In"),
then the Company shall, within three Business Days after the holder's request
and in the holder's discretion, either (i) pay cash to the holder in an amount
equal to the holder's total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased (the "Buy-In
Price"), at which point the Company's obligation to deliver
such certificate (and to issue such shares of Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the holder a certificate or

 26
 

 

 

certificates
representing such shares of Common Stock and pay cash to the holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on the
Deadline Date.  "Closing Bid Price" means, for any security as of any
date, the last closing price for such security on the Principal Market, as
reported by Bloomberg (as defined in the Certificate of Designations), or, if
the Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price then the last bid price of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal
Market is not the principal securities exchange or trading market for such
security, the last closing price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing do not apply, the last closing price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price is reported
for such security by Bloomberg, the average of the bid prices of any market
makers for such security as reported in the "pink sheets" by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Closing Bid Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price of such security on such date shall be the fair market value as mutually
determined by the Company and the holder. 
If the Company and the holder are unable to agree upon the fair market
value of such security, then such dispute shall be resolved pursuant to Section
2(d)(iii) of the Certificate of Designations. 
All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the applicable calculation period.

 

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

 

The obligation of the Company hereunder to issue and sell the Preferred
Shares and/or the Common Shares and Warrants, as applicable, to each Buyer at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:

 

(a)                                  Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

 

(b)                                 Such
Buyer and each other Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares, if any, and the Common Shares and the Warrants,
if any, being purchased by such
Buyer at the Closing by wire transfer of immediately available funds pursuant
to the wire instructions provided by the Company.

 

(c)                                  The
representations and warranties of such Buyer shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date), and such Buyer shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by such Buyer at or
prior to the Closing Date.

 27
 

 

 

(d)                                 The
Company shall have obtained the approval of the Principal Market with respect
to the consummation of the transactions contemplated by the Transaction
Documents.

 

(e)                                  The
Company shall have obtained the consent of Union Bank of California with
respect to the consummation of the transactions contemplated by the Transaction
Documents.  

 

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

 

The obligation of each Buyer hereunder to purchase the Preferred
Shares, the Common Shares and/or
the Warrants, as applicable, at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
these conditions are for each Buyer's sole benefit and may be waived by such
Buyer at any time in its sole discretion by providing the Company with prior
written notice thereof:

 

(a)                                  The
Company shall have duly executed and delivered to such Buyer (A) each of
the Transaction Documents, (B) the Preferred Shares (in such numbers as is set
forth across from such Buyer's name in column (3) of the Schedule of Buyers),
if any, (C) the Common Shares in
such numbers as is set forth across from such Buyer's name in column (4) of the
Schedule of Buyers, if any, and the Warrants (in such numbers as is set forth
across from such Buyer's name in column (5) of the Schedule of Buyers), if any,
being purchased by such Buyer at the Closing pursuant to this Agreement.

 

(b)                                 Such
Buyer shall have received the opinion of Haynes and Boone, LLP, the Company's
outside counsel, dated as of the Closing Date, in a form reasonably acceptable
to the Buyers and their counsel.

 

(c)                                  The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company's transfer agent.

 

(d)                                 The
Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries in each
such entity's jurisdiction of formation issued by the Secretary of State (or
equivalent) of such jurisdiction of formation as of a date within ten (10) days
of the Closing Date.

 

(e)                                  The
Company shall have delivered to such Buyer a certificate evidencing the
Company's qualification as a foreign corporation and good standing issued by
the Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business and is required to so qualify, as of a date within
ten (10)  days of the Closing Date.

 

(f)                                    The
Company shall have delivered to such Buyer a certified copy of the Certificate
of Incorporation as certified by the Secretary of State of the State of
Delaware within ten (10) days of the Closing Date.

 

(g)                                 The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions

 28
 

 

 

consistent with Section 3(b) as adopted by the Company's board of
directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
of Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit E.

 

(h)                                 The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. 
Such Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer in
the form attached hereto as Exhibit F.

 

(i)                                     The
Company shall have delivered to such Buyer a letter from the Company's transfer
agent certifying the number of shares of Common Stock outstanding as of a date
within five days of the Closing Date.

 

(j)                                     The
Common Stock (I) shall be designated for quotation or listed on the Principal
Market and (II) shall not have been suspended, as of the Closing Date, by the
SEC or the Principal Market from trading on the Principal Market nor shall
suspension by the SEC or the Principal Market have been threatened, as of the
Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by
falling below the minimum listing maintenance requirements of the Principal
Market.

 

(k)                                  The
Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities.

 

(l)                                     The
Certificate of Designations in the form attached hereto as Exhibit A
shall have been filed with the Secretary of State of the State of Delaware and
shall be in full force and effect, enforceable against the Company in
accordance with its terms and shall not have been amended.

 

(m)                               Such
Buyer shall have received lock-up agreements (i) in the form attached hereto as
Exhibit G (the "Lock-Up
Agreements"), duly executed and delivered by all directors and
officers of the Company.

 

(n)                                 Such
Buyer shall have received from the Company a copy of each lock-up agreement
between the Company and any Person then in effect (the "Existing Lock-Up Agreements").

 

(o)                                 The
Company shall have obtained the approval of the Principal Market with respect
to the consummation of the transactions contemplated by the Transaction
Documents and shall have delivered a written copy of such approval to the
Buyers or informed the Buyers of such approval orally if the Principal Market
is unwilling to give such approval in writing.

 29
 

 

 

(p)                                 The
Company shall have obtained the consent of Union Bank of California with
respect to the consummation of the transactions contemplated by the Transaction
Documents and shall have delivered a written copy of such consent to the
Buyers.  

 

(q)                                 The
Company shall have paid-off the Subordinated Credit Agreement with Energy
Components SPC EEP Energy Exploration and Production Segregated Portfolio
contemporaneously with the Closing and provided to the Buyers proof of such
pay-off reasonably satisfactory to the Buyers.

 

(r)                                    The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

 

8.                                       TERMINATION.

 

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

 

9.                                       MISCELLANEOUS.

 

(a)                                  Governing
Law; Jurisdiction; Jury Trial.  All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New York or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address for
such notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

 30
 

 

 

(b)                                 Counterparts.  This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original,
not a facsimile signature.

 

(c)                                  Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.

 

(d)                                 Severability.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

 

(e)                                  Entire
Agreement; Amendments.  This
Agreement and the other Transaction Documents supersede all other prior oral or
written agreements between the Buyers, the Company, their Affiliates and
Persons acting on their behalf with respect to the matters discussed herein,
and this Agreement, the other Transaction Documents and the instruments
referenced herein and therein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to
such matters.  No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the Preferred Shares issued
and issuable hereunder, and any amendment to this Agreement made in conformity
with the provisions of this Section 9(e) shall be binding on all Buyers and
holders of Securities, as applicable.  No
provision hereof may be waived other than by an instrument in writing signed by
the party against whom enforcement is sought. 
No such amendment shall be effective to the extent that it applies to
less than all of the holders of the Preferred Shares then outstanding.  No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration also is offered
to all of the parties to the Transaction Documents, holders of Preferred
Shares, holders of the Common Shares or holders of Warrants, as the case may
be.  The Company has not, directly or
indirectly, made any agreements with any Buyers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents. 
Without limiting the foregoing, the Company confirms that, except as set
forth in this Agreement, no Buyer has made any commitment or promise or has any
other obligation to provide any financing to the Company or otherwise.

 

(f)                                    Notices.  Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same.  The addresses and facsimile
numbers for such communications shall be:

 31
 

 

 

If to the Company:

Cano Petroleum, Inc.

801 Cherry St.

Suite 3200

Fort Worth, Texas 76102

Telephone:                            (817) 698-0900

Facsimile:                                (817) 334-0222

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

With a copy (for informational purposes only) to:

W. Bruce Newsome

Haynes and Boone,
LLP

901 Main St.,
Suite 3100

Dallas, TX 75202

Telephone:  (214) 651-5119

Facsimile:  (214) 200-0636

 

 

If to the Transfer Agent:

Interwest Transfer Company

1981 East Murray Holladay Road

Suite 100

P.O. Box 17136

Salt Lake City, UT 84117

Telephone:                            (801) 272-9294

Facsimile:                                (801) 277-3147

Attention:                               Lorraine
Smith

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

with a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP 

919 Third Avenue

New York, New York  10022

Telephone:                               (212)
756-2000

Facsimile:                                    (212)
593-5955

Attention:                                    Eleazer
N. Klein, Esq.

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

 32
 

 

 

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

 

(g)                                 Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns, including any purchasers of the Preferred Shares, the
Common Shares or the Warrants.  The
Company shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the holders of at least a majority of the
aggregate number of the Preferred Shares issued hereunder, including by way of
a Fundamental Transaction (unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Certificate of
Designations and the Warrants).  A Buyer
may assign some or all of its rights hereunder in connection with transfer of
any of its Securities without the consent of the Company, in which event such
assignee shall be deemed to be a Buyer hereunder with respect to such assigned
rights.

 

(h)                                 No
Third Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

 

(i)                                     Survival.  Unless this Agreement is terminated under
Section 8, the representations and warranties of the Company and the Buyers
contained in Sections 2 and 3 and the agreements and covenants set forth in
Sections 4, 5 and 9 shall survive the Closing and the delivery and exercise of
Securities, as applicable.  Each Buyer
shall be responsible only for its own representations, warranties, agreements
and covenants hereunder.

 

(j)                                     Further
Assurances.  Each party shall do and
perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates,
instruments and documents, as any other party may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.

 

(k)                                  Indemnification.  In consideration of each Buyer's execution
and delivery of the Transaction Documents and acquiring the Securities
thereunder and in addition to all of the Company's other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless each Buyer and each other holder of the Securities (other than holders
of Securities purchased on any Eligible Market (as defined in the Certificate
of Designations) or the Principal Market with respect to those Securities), and
all of such Buyer's stockholders, partners, members, officers, directors,
employees and direct or indirect investors and any of the foregoing Persons'
agents or other representatives (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees"),
as incurred, from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses
in connection therewith (irrespective of whether any such Indemnitee is a party
to the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements, but excluding any consequential,
indirect or incidental damages (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to
(a) any misrepresentation or breach of any representation or warranty made by
the

 33
 

 

 

Company in the Transaction Documents, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents
or (c) any cause of action, suit or claim brought or made against such
Indemnitee by a third party (including for these purposes a derivative action
brought on behalf of the Company) and arising out of or resulting from (i) the
execution, delivery, performance or enforcement of the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(ii) any transaction financed or to be financed in whole or in part, directly
or indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities (other than holders of Securities
purchased on any Eligible Market or the Principal Market with respect to those
Securities), as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents. 
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.  Except
as otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

 

(l)                                     No
Strict Construction.  The language
used in this Agreement will be deemed to be the language chosen by the parties
to express their mutual intent, and no rules of strict construction will be
applied against any party.

 

(m)                               Remedies.  Each Buyer and each holder of the Securities
shall have all rights and remedies set forth in the Transaction Documents and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law.  Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. 
Furthermore, the Company recognizes that in the event that it fails to
perform, observe, or discharge any or all of its obligations under the
Transaction Documents, any remedy at law may prove to be inadequate relief to
the Buyers.  The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages and
without posting a bond or other security. 
Notwithstanding anything to the contrary contained herein, no Buyer or
holder of Securities shall be entitled to consequential, indirect or incidental
damages hereunder.  However, the
foregoing shall not in any way limit a Buyer or holder of Securities from being
reimbursed for its costs, fees or expenses, including, without limitation,
reasonable attorneys' fees and disbursements in connection with any of its
rights and remedies hereunder.

 

(n)                                 Rescission and Withdrawal
Right.  Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Buyer exercises a right, election, demand
or option under a Transaction Document and the Company does not timely perform
its related obligations within the periods therein provided, then such Buyer
may rescind or withdraw, in its sole discretion from time to time prior to the
Company's performance upon written notice to the Company, any

 34
 

 

 

relevant
notice, demand or election in whole or in part without prejudice to its future
actions and rights.

 

(o)                                 Payment
Set Aside.  To the extent that the
Company makes a payment or payments to the Buyers hereunder or pursuant to any
of the other Transaction Documents or the Buyers enforce or exercise their
rights hereunder or thereunder, and such payment or payments or the proceeds of
such enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, foreign, state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.

 

(p)                                 Independent
Nature of Buyers' Obligations and Rights. 
The obligations of each Buyer under any Transaction Document are several
and not joint with the obligations of any other Buyer, and no Buyer shall be
responsible in any way for the performance of the obligations of any other
Buyer under any Transaction Document. 
Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as, and the Company acknowledges that the Buyers do not
so constitute, a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Buyers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents and
the Company acknowledges that the Buyers are not acting in concert or as a
group, and the Company will not assert any such claim, with respect to
such obligations or the transactions contemplated by the Transaction
Documents.  The Company acknowledges and
each Buyer confirms that it has independently participated in the negotiation
of the transaction contemplated hereby with the advice of its own counsel and
advisors.  Each Buyer shall be entitled
to independently protect and enforce its rights, including, without limitation,
the rights arising out of this Agreement or out of any other Transaction
Documents, and it shall not be necessary for any other Buyer to be joined as an
additional party in any proceeding for such purpose.

 

[Signature
Page Follows]

 35

 

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

	
  

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  Title:

  	
  Chairman and CEO

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  WILLIAM HERBERT HUNT TRUST 

  
	
   

  	
  ESTATE

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

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

  	
   

  
	
   

  	
   

  	
  Name:

  	
  J. W. Beavers, Jr.

  
	
   

  	
   

  	
  Title:

  	
  Trustee

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  S.A.C. CAPITAL ASSOCIATES, LLC

  
	
   

  	
   

  
	
   

  	
  By:  
  S.A.C. Capital Advisors, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Peter Nussbaum

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Peter Nussbaum

  
	
   

  	
   

  	
  Title:

  	
  General Counsel

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  RADCLIFFE SPC, LTD., for and on

  behalf of the Class A Convertible

  Crossover Segregated Portfolio

  
	
   

  	
   

  
	
   

  	
  By:   RG
  Capital Management, L.P.

  
	
   

  	
   

  
	
   

  	
  By:   RGC
  Management Company, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven B. Katznelson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Steven B. Katznelson

  
	
   

  	
   

  	
  Title:

  	
  Managing Director

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  D.E. SHAW LAMINAR PORTFOLIOS,

  L.L.C.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Julies Gaudio

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Julies Gaudio

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  INVESTCORP
  INTERLACHEN MULTI-STRATEGY

  MASTER FUND LIMITED

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Interlachen Capital Group LP,

  Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gregg T. Colburn

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Gregg T. Colburn

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  ING VP
  NATURAL RESOURCES

  TRUST c/o ING Investment Management

  Co.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Sal DiGanzi

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Sal DiGanzi

  
	
   

  	
   

  	
  Title:

  	
  VP Compliance

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  ING
  GLOBAL RESOURCES 

  
	
   

  	
  PORTFOLIO
  c/o ING Investment 

  
	
   

  	
  Management
  Co.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Sal DiGanzi

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Sal DiGanzi

  
	
   

  	
   

  	
  Title:

  	
  VP Compliance

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  TRUK
  OPPORTUNITY FUND, LLC

  
	
   

  	
   

  
	
   

  	
  By:   Atoll Asset Management, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael E. Fein

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Michael E. Fein

  
	
   

  	
   

  	
  Title:

  	
  Principal

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  TRUK
  INTERNATIONAL FUND, LP

  
	
   

  	
   

  
	
   

  	
  By:   Atoll Asset Management, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael E. Fein

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Michael E. Fein

  
	
   

  	
   

  	
  Title:

  	
  Principal

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  FORT
  MASON MASTER, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dan German

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Dan German

  
	
   

  	
   

  	
  Title:

  	
  Managing Member

  
	
   

  	
   

  	
   

  	
  Fort Mason Capital, LLC

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  FORT
  MASON PARTNERS, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dan German

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Dan German

  
	
   

  	
   

  	
  Title:

  	
  Managing Member

  
	
   

  	
   

  	
   

  	
  Fort Mason Capital, LLC

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  UBS
  O’CONNOR LLC fbo O’Connor

  Pipes Corporate Strategies

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Illegible Signature

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  DYNAMIS
  ENERGY FUND, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John H. Bocock

  	
   

  
	
   

  	
   

  	
  Name:

  	
  John H. Bocock

  
	
   

  	
   

  	
  Title:

  	
  Managing Member

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  DYNAMIS
  ENERGY FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John H. Bocock

  	
   

  
	
   

  	
   

  	
  Name:

  	
  John H. Bocock

  
	
   

  	
   

  	
  Title:

  	
  Managing Member

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  KELLOGG
  CAPITAL GROUP LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Nicholas Cappalleri

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Nicholas Cappalleri

  
	
   

  	
   

  	
  Title:

  	
  Director – Finance and 

  
	
   

  	
   

  	
   

  	
  Operations

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  GLG
  PARTNERS, LP acting as

  investment manager for GLG North

  American Opportunity Fund

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Simon White

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Simon White

  
	
   

  	
   

  	
  Title:

  	
  Chief Operating Officer
  GLG

  
	
   

  	
   

  	
  Partners LP

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Victoria Parry

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Victoria Parry

  
	
   

  	
   

  	
  Title:

  	
  Senior Legal Counsel

  
	
   

  	
   

  	
   

  	
  GLG Partners LP

  
							

 

 

 

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

	
   

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  CAMCAP ENERGY OFFSHORE

  MASTER FUND, L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Roland A. von Metzsch

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Roland A. von Metzsch

  
	
   

  	
   

  	
  Title:

  	
  Managing Member,

  CamCap Energy Partners, LLC

  GP of CamCap Energy

  Offshore Master Fund, L.P.

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  TOURADJI DEEPROCK MASTER

  FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Thomas S. Dwan

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Thomas S. Dwan

  
	
   

  	
   

  	
  Title:

  	
  CFO

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  TOURADJI GLOBAL RESOURCES

  MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Thomas S. Dwan

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Thomas S. Dwan

  
	
   

  	
   

  	
  Title:

  	
  CFO

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  EUROPA INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Fred Knoll

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Fred Knoll

  
	
   

  	
   

  	
  Title:

  	
  Knoll Capital Management

  Investment Manager for

  Europa International, Inc.

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  KNOLL CAPITAL FUND II MASTER

  FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Fred Knoll

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Fred Knoll

  
	
   

  	
   

  	
  Title:

  	
  KOM Capital Management

  Investment Manager

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  ADVANTAGE ADVISORS CATALYST

  INT’L LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Todd McElroy

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Todd McElroy

  
	
   

  	
   

  	
  Title:

  	
  CFO

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  ADVANTAGE ADVISORS CATALYST

  PARTNERS LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Todd McElroy

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Todd McElroy

  
	
   

  	
   

  	
  Title:

  	
  CFO

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  RIDGECREST PARTNERS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Todd McElroy

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Todd McElroy

  
	
   

  	
   

  	
  Title:

  	
  CFO

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  RIDGECREST PARTNERS QP, L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Todd McElroy

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Todd McElroy

  
	
   

  	
   

  	
  Title:

  	
  CFO

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  SPENDRIFT INVESTORS (BERMUDA)

  L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Wellington Management Company,

  LLP as Investment Advisor

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gregory S. Konzal

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Gregory S. Konzal

  
	
   

  	
   

  	
  Title:

  	
  Vice President and Counsel

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  SPENDRIFT PARTNERS, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Wellington Management Company,

  LLP as Investment Advisor

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gregory S. Konzal

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Gregory S. Konzal

  
	
   

  	
   

  	
  Title:

  	
  Vice President and Counsel

  
						

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  BRIGHTSTREAM FUND, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Zusman

  	
   

  
	
   

  	
   

  	
  Name:

  	
  David Zusman

  
	
   

  	
   

  	
  Title:

  	
  Managing Partner

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  BRIGHTSTREAM MASTER FUND, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Zusman

  	
   

  
	
   

  	
   

  	
  Name:

  	
  David Zusman

  
	
   

  	
   

  	
  Title:

  	
  Managing Partner

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  HFR HE BRIGHTWATER MASTER

  TRUST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Zusman

  	
   

  
	
   

  	
   

  	
  Name:

  	
  David Zusman

  
	
   

  	
   

  	
  Title:

  	
  Manager

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  TRAPEZE CAPITAL CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Herbert Abramson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Herbert Abramson

  
	
   

  	
   

  	
  Title:

  	
  President

  
					

 

 

 

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

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  TRAPEZE ASSET MANAGEMENT, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Herbert Abramson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Herbert Abramson

  
	
   

  	
   

  	
  Title:

  	
  President

  
					

 

 

SCHEDULE OF BUYERS

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  	
  (7)

  	
   

  	
  (8)

  	
   

  	
  (9)

  	
   

  
	
  Buyer

  	
   

  	
  Address and Facsimile Number

  	
   

  	
  Aggregate

  Number of

  Preferred

  Shares

  	
   

  	
  Aggregate

  Number of

  Common

  Shares

  	
   

  	
  Aggregate

  Number of

  Warrant

  Shares

  	
   

  	
  Purchase Price

  	
   

  	
  Dividend

  Election

  (Cash or PIK)

  	
   

  	
  Maximum

  Ownership

  Percentage

  	
   

  	
  Legal

  Representative’s

  Address and

  Facsimile

  Number

  	
   

  
	
  Brightstream
  Fund, LLC

  	
   

  	
  c/o Brightstream Asset Management

  598 Madison Avenue, 5th Floor

  New York, NY 10022

  Attention: Donald Krueger

  Facsimile: 212-452-6160

  Telephone: 212-452-6100

  	
   

  	
  106

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  106,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Brightstream
  Master Fund, LP

  	
   

  	
  c/o Brightstream Asset Management

  598 Madison Avenue, 5th Floor

  New York, NY 10022

  Attention: Donald Krueger

  Facsimile: 212-452-6160

  Telephone: 212-452-6100

  	
   

  	
  1,120

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  1,120,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  HFR HE
  Brightwater Master Trust

  	
   

  	
  c/o Brightstream Asset Management

  598 Madison Avenue, 5th Floor

  New York, NY 10022

  Attention: Donald Krueger

  Facsimile: 212-452-6160

  Telephone: 212-452-6100

  	
   

  	
  287

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  287,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

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

  	
   

  	
  c/o D. E. Shaw & Co

  120 West 45th Street, 39th Floor

  New York, NY 10036

  Attention: Maureen Welby Knoblauch

  Facsimile: 212-845-1628

  Telephone: 212-478-0628

  	
   

  	
  10,005

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  10,005,000

  	
   

  	
  PIK

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Dynamis
  Energy Fund, LTD

  	
   

  	
  c/o Spectrum Global Fund

  Administration (Cayman)

  PO Box 10243 APO

  Grand Cayman, Cayman Islands

  Attention: John H. Bocock

  Facsimile: 434-220-0234

  Telephone: 434-220-4621

  	
   

  	
  180

  	
   

  	
  75,630

  	
   

  	
  18,907

  	
   

  	
  $

  	
  545,293

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Dynamis
  Energy Fund, LP

  	
   

  	
  310 Fourth Street, NE, Suite 101

  Charlottesville, VA 22902

  Attention: John H. Bocock

  Facsimile: 434-220-0234

  Telephone: 434-220-4621

  	
   

  	
  820

  	
   

  	
  344,538

  	
   

  	
  86,135

  	
   

  	
  $

  	
  2,484,119

  	
   

  	
  Cash

  	
   

  	
  4.99

  	
  %

  	
   

  	
   

  
	
  Fort
  Mason Master, LP

  	
   

  	
  c/o Fort Mason Capital, LLC

  4 Embarcadero Center, Suite 2050

  San Francisco, CA 94111

  Attention: KC Lynch and Marshall Jensen

  Facsimile: 415-288-8113

  Telephone: 415-288-8100

  	
   

  	
  3,756

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  3,756,000

  	
   

  	
  Cash

  	
   

  	
  4.99

  	
  %

  	
   

  	
   

  
	
  Fort Mason Partners, LP

  	
   

  	
  c/o Fort Mason Capital, LLC

  4 Embarcadero Center, Suite 2050

  San Francisco, CA 94111

  Attention: KC Lynch and Marshall Jensen

  Facsimile: 415-288-8113

  Telephone: 415-288-8100

  	
   

  	
  244

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  244,000

  	
   

  	
  Cash

  	
   

  	
  4.99

  	
  %

  	
   

  	
   

  

 

 

	
  GLG North American Opportunity
  Fund

  	
   

  	
  c/o GLG Partners LP

  Walker House, P.O. Box 908GT,

  Mary Street

  Georgetown, Grand Cayman,

  Cayman Islands

  Attention: Gitesh Parmar

  Facsimile: 44-207-016-7200

  Telephone: 44-207-016-7000

  	
   

  	
  5,175

  	
   

  	
  1,050,000

  	
   

  	
  262,500

  	
   

  	
  $

  	
  10,246,500

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Investcorp
  Interlachen Multi-Strategy Master Fund Limited

  	
   

  	
  c/o Interlachen Capital Group LP

  800 Nicollet Mall, Suite 2500

  Minneapolis, MN 55402

  Attention: Gregg Colburn and

  Legal Department

  Facsimile: 612-659-4457

  Telephone: 612-659-4407

  	
   

  	
  1,254

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  1,254,000

  	
   

  	
  PIK

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Kellogg
  Capital Group LLC

  	
   

  	
  55 Broadway, 4th Floor

  New York, NY 10006

  Attention: Nicholas Cappelleri

  Facsimile: 212-380-5665

  Telephone: 212-607-5061

  	
   

  	
  2,013

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  2,013,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  William
  Herbert Hunt Trust Estate

  	
   

  	
  1601 Elm Street, Suite 3400

  Dallas, TX 75201

  Attention: David S. Hunt

  Facsimile: 214-880-7101

  Telephone: 214-880-8484

  	
   

  	
  2,875

  	
   

  	
  500,000

  	
   

  	
  125,000

  	
   

  	
  $

  	
  5,290,000

  	
   

  	
  PIK

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

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

  	
   

  	
  c/o RG Capital Management, L.P.

  3 Bala Plaza - East, Suite 501

  Bala Cynwyd, PA 19004

  Attention: Gerald F. Stahlecker

  Facsimile: 610-617-0580

  Telephone: 610-617-5900

  	
   

  	
  2,013

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  2,013,000

  	
   

  	
  Cash

  	
   

  	
  4.99

  	
  %

  	
   

  	
   

  
	
  Truk
  Opportunity Fund, LLC

  	
   

  	
  c/o Atoll Asset Management, LLC

  1 East 52nd Street, 6th Floor

  New York, NY 10022

  Attention: Antonia Koleva

  Facsimile: 212-888-0334

  Telephone: 212-888-2224

  	
   

  	
  523

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  523,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Truk
  International Fund, LP

  	
   

  	
  c/o Atoll Asset Management, LLC

  1 East 52nd Street, 6th Floor

  New York, NY 10022

  Attention: Antonia Koleva

  Facsimile: 212-888-0334

  Telephone: 212-888-2224

  	
   

  	
  52

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  52,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Touradji
  DeepRock Master Fund, Ltd.

  	
   

  	
  c/o Spectrum Global Fund

  Administration (Cayman)

  PO Box 10243 APO, Anchorage

  Center, Second Floor

  George Town, Grand Cayman,

  Cayman Islands, BWI

  Attention: Thomas S. Dwan

  Facsimile: 212-984-8881

  Telephone: 212-984-8899

  	
   

  	
  1,000

  	
   

  	
  250,000

  	
   

  	
  62,500

  	
   

  	
  $

  	
  2,207,500

  	
   

  	
  Cash

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  

 

 

	
  Touradji Global Resources
  Master Fund, Ltd.

  	
   

  	
  c/o Spectrum
  Global Fund

  Administration (Cayman)

  PO Box 10243 APO, Anchorage

  Center, Second Floor

  George Town, Grand Cayman,

  Cayman Islands, BWI

  Attention: Thomas S. Dwan

  Facsimile: 212-984-8881

  Telephone: 212-984-8899

  	
   

  	
  0

  	
   

  	
  250,000

  	
   

  	
  62,500

  	
   

  	
  $

  	
  1,207,500

  	
   

  	
   

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  
	
  Trapeze Capital Corp.

  	
   

  	
  22 St. Clair
  Avenue East, 18th Floor

  Toronto, ON, M4T 253

  Attention: Randall Abramson

  Facsimile: 416-867-9771

  Telephone: 416-861-0774

  	
   

  	
  810

  	
   

  	
  412,500

  	
   

  	
  103,125

  	
   

  	
  $

  	
  2,802,375

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Trapeze Asset Management, Inc.

  	
   

  	
  22 St. Clair
  Avenue East, 18th Floor

  Toronto, ON, M4T 253

  Attention: Randall Abramson

  Facsimile: 416-867-9771

  Telephone: 416-861-0774

  	
   

  	
  2,692

  	
   

  	
  1,187,500

  	
   

  	
  296,875

  	
   

  	
  $

  	
  8,427,625

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  O’Connor PIPEs Corporate
  Strategies Master Limited

  	
   

  	
  c/o UBS O’Connor
  LLC

  1 North Wacker Drive, 32nd Floor

  Chicago, IL 60606

  Attention: Brian Herward

  Facsimile: 312-525-6271

  Telephone: 312-525-5868

  	
   

  	
  1,254

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  1,254,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Spindrift Partners, L.P.

  	
   

  	
  c/o Wellington
  Management

  Company, LLP

  75 State Street\

  Boston, MA 02109

  Attention: Madeline Rapp

  Facsimile: 617-204-7006

  Telephone: 617-790-7006

  	
   

  	
  5,837

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  5,837,000

  	
   

  	
  PIK

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  
	
  Spindrift Investors (Bermuda)
  L.P.

  	
   

  	
  c/o Wellington
  Management

  Company, LLP

  75 State Street\

  Boston, MA 02109

  Attention: Madeline Rapp

  Facsimile: 617-204-7006

  Telephone: 617-790-7006

  	
   

  	
  7,100

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  7,100,000

  	
   

  	
  PIK

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  
	
  CamCap Energy Offshore Master
  Fund, L.P.

  	
   

  	
  c/o BISYS Hedge
  Fund Services

  (Cayman) Ltd.

  P.O. Box 1748GT, Cayman

  Corporate Center, 27 Hospital Road

  George Town, Grand Cayman,

  Cayman Islands

  Attention: Roland von Metzsch

  Facsimile: 415-658-3020

  Telephone: 415-658-3010

  	
   

  	
  0

  	
   

  	
  215,000

  	
   

  	
  53,750

  	
   

  	
  $

  	
  1,038,450

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  ING VP Natural Resources Trust

  	
   

  	
  c/o ING
  Investment Management

  Company

  230 Park Avenue

  New York, NY 10169

  Attention: Maria Anderson

  Facsimile: 480-477-2706

  Telephone: 480-477-2169

  	
   

  	
  0

  	
   

  	
  222,047

  	
   

  	
  55,512

  	
   

  	
  $

  	
  1,072,487

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  ING Global Resources Portfolio

  	
   

  	
  c/o ING
  Investment Management

  Company

  230 Park Avenue

  New York, NY 10169

  Attention: Maria Anderson

  Facsimile: 480-477-2706

  Telephone: 480-477-2169

  	
   

  	
  0

  	
   

  	
  912,953

  	
   

  	
  228,238

  	
   

  	
  $

  	
  4,409,563

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Europa International Inc.

  	
   

  	
  c/o Knoll Capital
  Management

  666 Fifth Avenue, Suite 3702

  New York, NY 10103

  Attention: Fred Knoll

  Facsimile: 212-808-7475

  Telephone: 212-808-7474

  	
   

  	
  0

  	
   

  	
  325,000

  	
   

  	
  81,250

  	
   

  	
  $

  	
  1,569,750

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  

 

 

	
  Knoll Capital Fund II Master
  Fund Ltd.

  	
   

  	
  c/o KOM Capital
  Management

  666 Fifth Avenue, Suite 3702

  New York, NY 10103

  Attention: Fred Knoll

  Facsimile: 212-808-7475

  Telephone: 212-808-7474

  	
   

  	
  0

  	
   

  	
  325,000

  	
   

  	
  81,250

  	
   

  	
  $

  	
  1,569,750

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Ridgecrest Partners Ltd.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29th Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  13,000

  	
   

  	
  3,250

  	
   

  	
  $

  	
  62,790

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Ridgecrest Partners QP, L.P.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29th Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  50,000

  	
   

  	
  12,500

  	
   

  	
  $

  	
  241,500

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Advantage Advisors Catalyst
  International Ltd.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29th Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  18,500

  	
   

  	
  4,625

  	
   

  	
  $

  	
  89,355

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Advantage Advisors Catalyst
  Partners L.P.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29th Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  18,500

  	
   

  	
  4,625

  	
   

  	
  $

  	
  89,355

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  S.A.C. Capital Associates, LLC

  	
   

  	
  PRINCIPAL
  BUSINESS ADDRESS:

  c/o S.A.C. Capital Associates, LLC

  P.O. Box 58, Victoria House

  The Valley, Anguilla, BWI

  	
   

  	
  0

  	
   

  	
  414,079

  	
   

  	
  103,520

  	
   

  	
  $

  	
  2,000,002

  	
   

  	
   

  	
   

  	
  4.99

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
  INFORMATION FOR

  DISTRIBUTION OF SHARES

  AND CORRESPONDENCE: 

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  c/o S.A.C.
  Capital Advisors, LLC

  72 Cummings Point Road

  Stamford, CT 06902

  Attention: General Counsel

  Tel: (203) 890-2000

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBITS

	
  Exhibit A

  	
   

  	
  Form of Certificate of Designations

  
	
  Exhibit B

  	
   

  	
  Form of Warrant

  
	
  Exhibit C

  	
   

  	
  Form of Registration Rights Agreement

  
	
  Exhibit D

  	
   

  	
  Form of Irrevocable Transfer Agent Instructions

  
	
  Exhibit E

  	
   

  	
  Form of Secretary’s Certificate

  
	
  Exhibit F

  	
   

  	
  Form of Officer’s Certificate

  
	
  Exhibit G

  	
   

  	
  Form of Lock-Up Agreement

  

 

SCHEDULES

	
  Schedule 3(a)

  	
   

  	
  Subsidiaries

  
	
  Schedule 3(d)

  	
   

  	
  No Conflicts

  
	
  Schedule 3(e)

  	
   

  	
  Consents

  
	
  Schedule 3(f)

  	
   

  	
  Acknowledgment Regarding Buyer’s Purchase of
  Securities

  
	
  Schedule 3(l)

  	
   

  	
  Absence of Certain Changes

  
	
  Schedule 3(q)

  	
   

  	
  Transactions with Affiliates

  
	
  Schedule 3(r)

  	
   

  	
  Equity Capitalization

  
	
  Schedule 3(s)

  	
   

  	
  Indebtedness and Other Contracts

  
	
  Schedule 3(t)

  	
   

  	
  Absence of Litigation

  
	
  Schedule 3(w)

  	
   

  	
  Title

  
	
  Schedule 3(z)

  	
   

  	
  Subsidiary Rights

  
	
  Schedule 3(bb)

  	
   

  	
  Internal Accounting and Disclosure Controls

  

 

 

EXHIBIT
A

CERTIFICATE
OF DESIGNATIONS, PREFERENCES

AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK

OF

CANO PETROLEUM, INC.

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

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

(1)   Dividends.  The holders of the Preferred Shares (each, a “Holder” and collectively, the “Holders”) shall be entitled to receive
dividends (“Dividends”) payable in
cash on the Stated Value (as defined below) of such Preferred Share at the
Dividend Rate (as defined below), which shall be cumulative.  Dividends on the Preferred Shares shall
commence accruing on the Initial Issuance Date and shall be computed on the
basis of a 360-day year consisting of twelve 30-day months.  To the extent permitted by law, Dividends
shall be payable (a) in arrears on the last day of each Calendar Quarter (each,
an “Dividend Date”) with the first
Dividend Date being September 30, 2006, (b) on each Conversion Date thereafter
by inclusion in the applicable Conversion Amount (as defined below) and (c) on
the Maturity Date (as defined below) (each, a “Dividend Date”).  If a
Dividend Date is not a Business Day (as defined below), then the Dividend shall
be due and payable on the Business Day immediately following such Dividend
Date.  On each Dividend Date, if the
Company does not have current or accumulated “earnings and profits” within the
meaning of Sections 301 and 312 of the Internal Revenue Code of 1986, as
amended, through such Dividend Date, the Company shall not withhold any amount
of the applicable Dividend in respect of U.S. federal income tax.  Notwithstanding the foregoing, in the case of
any Electing Holder the Company shall not make pay any Dividends in cash on the
Dividend Date but instead such Dividends shall be included in the calculation
of such Holder’s Conversion Amount for purposes of any conversion or redemption
hereunder.

(2)   Conversion of Preferred
Shares.  Preferred Shares shall be
convertible into shares of the Company’s Common Stock, par value $0.0001 per
share (the “Common Stock”), on the
terms and conditions set forth in this Section 2.

(a)   Certain
Defined Terms.  For purposes of this
Certificate of Designations, the following terms shall have the following
meanings:

 

 

(i)            “Additional
Amount” means, on a per Preferred Share basis, the product of (x)
the result of the following formula: (Dividend Rate)(N/360) and (y) the Stated
Value.

(ii)           “Adjusted Price”
means, for any Dilutive Issuance, the product of (A) the
Conversion Price in effect immediately prior to such Dilutive Issuance and (B)
the quotient of (1) the sum of (x) the product of the Applicable Price and the
number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance and (y) the consideration, if any, received by the Company
upon such Dilutive Issuance, divided by (2) the product of (x) the Applicable
Price multiplied by (y) the number of shares of Common Stock Deemed Outstanding
immediately after such Dilutive Issuance.

(iii) “Allocation Percentage” means a fraction, the numerator of
which is the number of Preferred Shares issued to a Holder on the Initial
Issuance Date and the denominator of which is the aggregate amount of all the
Preferred Shares issued on the Initial Issuance Date.

(iv)          “AMEX”
means the American Stock Exchange.

(v)           “Approved
Stock Plan” means
any employee benefit plan currently existing or hereinafter created which has
been approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, consultant, officer or
director for services provided to the Company.

(vi)          “Asset Sale” means, in one transaction or a
series of related transactions, (i) the sale, lease, conveyance or other
disposition of any assets or rights other than in the ordinary course of
business consistent with past practice, or (ii) the sale of Equity Interests in
any of the Company’s Subsidiaries, which sale, lease conveyance or other
disposition of assets or rights or sale of Equity Interests generates proceeds
to the Company equal to or greater than $15,000,000; provided, however, that
neither (A) a sale, lease, conveyance or other disposition of the Rich Valley
Properties nor (B) any sale, lease, conveyance or other disposition of the
Barnett Shale Properties made solely for the purpose of contributing such
Barnett Shale Properties to a joint venture entity in which the Company, or one
of its wholly-owned Subsidiaries, owns any Equity Interests thereof, shall be
considered an Asset Sale for purposes of this Certificate of Designations.

(vii)         “Available Asset Sale Proceeds” means, for
any Asset Sales, the difference between (i) the cash proceeds generated in such
Asset Sale and (ii) the outstanding principal amount (including any interest
thereon) of the Senior Debt; provided, however, that in the event of any Asset
Sale relating to Barnett Shale Properties the Available Asset Sale

 2
 

 

 

Proceeds shall be equal to the difference between (A) the cash proceeds
generated in such Asset Sale and (B) $15,000,000.

(viii)        “Barnett
Shale Properties” means the stratigraphic equivalent of that certain
interval described as 100’ above and 100’ below the interval seen between 3,450’
and 3,650’ on the Welex Spectral Density – Dual Spaced Neutron Log dated July
29, 1986 for the Hogtown Moore Unit #13-2 Well located in the George E. Moore
Survey, Eastland County, Texas, as such stratigraphic equivalent underlies,
comprises a portion of or is attributable to (i) the Desdemona Field
Unit (being that certain unit covering 7,273 acres, more or less, situated in
Eastland, Erath and Comanche Counties, Texas, as more particularly described in
that certain Unit Agreement dated July 1, 1986, recorded in Volume 1089, pages
1-72 of the Deed Records of Eastland County, Texas, in Volume 51, pages 202-272
of the Oil & Gas Records of Erath County, Texas and in Volume 616, pages
43-115 of the Deed Records of Comanche County, Texas), as such may have been
amended, modified or altered, and/or (ii) the Hogtown-Moore Unit (being that
certain unit covering 2,675.5 acres, more or less, situated in Eastland and
Erath Counties, Texas, as more particularly described in that certain Unit
Agreement October 1, 1985 recorded in 
Volume 1000, page 226, et seq. of the Deed Records of Eastland County,
Texas and in Volume 47, page 237, et seq. of the Oil & Gas Records of Erath
County, Texas), as such may have been amended, modified or altered.

(ix)           “Bloomberg” means Bloomberg Financial Markets.

(x)            “Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.

(xi)           “Calendar Quarter” means each of the following periods:  the period beginning on and including January
1 and ending on and including March 31; the period beginning on and including
April 1 and ending on and including June 30; the period beginning on and
including July 1 and ending on and including September 30; and the period
beginning on and including October 1 and ending on and including December 31.

(xii)          “Capital Stock” means: (1)  in the case of a corporation, corporate
stock; (2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;  (3) in
the case of a partnership or limited liability company, partnership interests
(whether general or limited) or membership interests; and (4) any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, the issuing
Person.

 3
 

 

 

(xiii)         “Change of Control” means any Fundamental Transaction other
than (i) any reorganization, recapitalization or reclassification of the Common
Stock in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company.

(xiv)        “Change of Control Redemption Premium” means (i) for Change of
Control Notice delivered or required to be delivered in connection with a
Change of Control prior to the first (1st) anniversary of the Initial Issuance Date, 115%, (ii)
for Change of Control Notice delivered or required to be delivered in
connection with a Change of Control on or following the first (1st) anniversary of the Initial Issuance
Date but prior to the second (2nd)
anniversary of the Initial Issuance Date, 112%, and (iii) for any Change of
Control Notice delivered or required to be delivered in connection with a
Change of Control on or following the second (2nd) anniversary of the Initial Issuance
Date, 110%.

(xv)         “Closing
Sale Price” means,
for any security as of any date, the last closing trade price for such security
on the Principal Market, as reported by Bloomberg, or, if the Principal Market
begins to operate on an extended hours basis and does not designate the closing
trade price then the last trade price of such security prior to 4:00:00 p.m.,
New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security the last
trade price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last trade price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no last trade price is reported for such security
by Bloomberg, the average of the ask prices of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.).  If the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Sale Price of such security on such
date shall be the fair market value as mutually determined by the Company and
the Required Holders.  If the Company and
the Required Holders are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section
2(d)(iii).  All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination
or other similar transaction during the applicable calculation period.

 4
 

 

 

(xvi)        “Common Stock Deemed Outstanding” means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus
the number of shares of Common Stock deemed to be outstanding pursuant to
Sections 2(f)(i)(A) and 2(f)(i)(B) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any
shares of Common Stock owned or held by or for the account of the Company or
issuable upon conversion of the Preferred Shares.

(xvii)       “Conversion Amount” means the sum of (1) the Additional
Amount and (2) the Stated Value.

(xviii)      “Conversion Price” means $5.75, subject to adjustment as
provided herein.

(xix)         “Convertible Securities” means any stock or securities (other
than Options) directly or indirectly convertible into or exchangeable or
exercisable for Common Stock.

(xx)          “Default Conversion Price” means as of any date of
determination, the product of (A) 90% and (B) the lower of (1) the Conversion
Price and (2) $[   ](1), subject to adjustment as provided
herein.

(xxi)         “Dividend Rate” means (i) 7.875% per annum and (ii) for the
period from and after the occurrence of a Triggering Event through such time
that such Triggering Event is cured, fifteen percent (15%) per annum.

(xxii)        “Electing Holder” means any Holder of
Preferred Shares that has irrevocably elected, as such election is set forth in
Column (7) of the Schedule of Buyers to the Securities Purchase Agreement, to “PIK”
Dividends on each Dividend Date rather than receive cash on each such
date.  The election to receive “PIK”
Dividends shall be binding any subsequent assignee or transferee of such Holder’s
Preferred Shares.

(xxiii)       “Eligible Market” means the NYSE, The NASDAQ Global Select
Market, The NASDAQ Global Market or The NASDAQ Capital Market.

(xxiv)       “Equity Conditions” means: 
(i) on each day during the
period beginning six (6) months prior to the applicable date of determination
and ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”), either

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

 5
 

 

 

(x) the
Registration Statement (as defined in the Registration Rights Agreement) filed
pursuant to the Registration Rights Agreement shall be effective and available
for the resale of all of the Registrable Securities in accordance with the
terms of the Registration Rights Agreement and there shall not have been any
Grace Periods or (y) all shares of Common Stock issuable upon conversion of the
Preferred Shares shall be eligible for sale without restriction and without the
need for registration under any applicable federal or state securities laws;
(ii) on each day during the Equity Conditions Measuring Period, the Common
Stock is designated for quotation on a Principal Market and shall not have been
suspended from trading on such exchange or market (other than suspensions of
not more than three (3) days and occurring prior to the applicable date of determination due
to business announcements by the Company) nor shall proceedings for such
delisting or suspension by such exchange or market have been commenced,
threatened or pending either (A) in writing by such exchange or market, which
has not been satisfied in favor of the Company or (B) by falling below the
minimum listing maintenance requirements of such exchange or market; (iii) on
each day during the Equity Conditions Measuring Period, the Company shall have
delivered Common Stock upon conversion of the Preferred Shares to the Holders
on a timely basis as set forth in Section 2(d)(ii) hereof, respectively; (iv)
any applicable shares of Common Stock to be issued in connection with the event
requiring determination may be issued in full without violating Section 7
hereof or the rules or regulations of the applicable Principal Market and from
and after the Stockholder Meeting Deadline (as defined in the Securities
Purchase Agreement), the Company shall have obtained the Stockholder Approval
(as defined in the Securities Purchase Agreement); (v) during the Equity
Conditions Measuring Period, the Company shall not have failed to timely make
any payments within five (5) Business Days of when such payment is due pursuant
to any Transaction Document (as defined in the Securities Purchase Agreement);
(vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended Fundamental Transaction which has not
been abandoned, terminated or consummated or (B) a Triggering Event or an event
that with the passage of time or giving of notice would constitute a Triggering
Event; (vii) the Company shall have no knowledge of any fact that would cause
(x) the Registration Statements required pursuant to the Registration Rights
Agreement not to be effective and available for the resale of at least all of
the Registrable Securities in accordance with the terms of the Registration
Rights Agreement or (y) any shares of Common Stock issuable upon conversion of
the Preferred Shares not to be eligible for sale without restriction pursuant
to Rule 144(k) and any applicable state securities laws; and (viii) the Company
otherwise shall have been in material compliance with and shall not have
materially breached any provision, covenant, representation or warranty of any
Transaction Document.

 6
 

 

 

(xxv)        “Equity Interests” means Capital Stock and
all warrants, options or other rights to acquire Capital Stock.

(xxvi)       “Excluded
Securities” means
any Common Stock issued or issuable or deemed to be issued in accordance with
Section 2(f) hereof by the Company: (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the Preferred Shares; (iii) upon exercise of
the Warrants (as defined in the Securities Purchase Agreement), (iv) pursuant
to a bona fide firm commitment underwritten public offering with a nationally
recognized underwriter which generates gross proceeds to the Company in excess
of $50,000,000 (other than an “at-the-market offering” as defined in Rule
415(a)(4) under the 1933 Act and “equity lines”); (v) in connection with any
strategic acquisition or transaction whether through an acquisition of stock or
a merger of any business, assets or technologies the primary purpose of which
is not to raise equity capital; (vi) upon conversion, exercise or exchange of
any Options or Convertible Securities which are outstanding on the day
immediately preceding the Subscription Date, provided that such issuance of
Common Stock upon exercise of such Options or Convertible Securities is made
pursuant to the terms of such Options or Convertible Securities in effect on
the date immediately preceding the Subscription Date and such Options or
Convertible Securities are not amended, modified or changed on or after the
Subscription Date; and (vii) in connection with any stock split, stock
dividend, recapitalization or similar transaction by the Company for which adjustment
is made pursuant to Section 2(f)(ii).

(xxvii)      “Fundamental Transaction” means that the Company shall (or in
the case of clause (vi) any “person” or “group” (as these terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act)), directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or
not the Company is the surviving corporation) another Person, or (ii) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of
the properties or assets of the Company to another Person, or (iii) allow another
Person or Persons to make a purchase, tender or exchange offer that is accepted
by the holders of more than the 50% of the outstanding shares of Voting Stock (not including any shares of
Voting Stock held by the Person or Persons making or party to, or associated or
affiliated with the Person or Persons making or party to, such purchase, tender
or exchange offer), or (iv) consummate a stock purchase agreement or
other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby such other
Person acquires more than the 50% of either the outstanding shares of
Voting Stock (not including
any shares of Voting Stock held by the other Person or other Persons making or
party to, or associated or affiliated with the other Persons making or party
to, such stock purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its

 7
 

 

 

Common Stock, or (vi) is or
shall become the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 50% of the aggregate ordinary voting
power represented by issued and outstanding Common Stock.

(xxviii) “Indebtedness” shall have the meaning as set
forth in the Securities Purchase Agreement.

(xxix) “Initial Issuance Date”
means August   , 2006.

(xxx) “Liquidation Event”
means the voluntary or involuntary liquidation, dissolution or winding up of
the Company or such Subsidiaries the assets of which constitute all or
substantially all of the assets of the business of the Company and its
Subsidiaries taken as a whole, in a single transaction or series of
transactions.

(xxxi) “Market Price”
means, $4.79, as adjusted for any stock dividend, stock split, stock
combination, reclassification or similar transaction.

(xxxii) “Maturity
Date” means, with respect to a Preferred Share, August [  ],
2011, unless extended pursuant to Section 2(d)(vii)(B).

(xxxiii) “N” means (i) for any Non-Electing Holder, the number of days
from, but excluding, the last Dividend Date with respect to which dividends
have been paid by the Company on the applicable Preferred Share, or the Initial
Issuance Date if no Dividend Date has occurred, and (ii) for any Electing
Holder, the number of days from, but excluding, the last Conversion Date or
Redemption Date with respect to which dividends have been paid by the Company
on the applicable Preferred Share, or the Initial Issuance Date if no such
Conversion Date or Redemption Date has occurred, in each case, through and
including the Conversion Date or other date of determination for such Preferred
Share, as the case may be, for which such determination is being made.

(xxxiv) “Non-Electing
Holder” means any Holder of Preferred Shares that has irrevocably
elected, as such election is set forth in Column (7) of the Schedule of Buyers
to the Securities Purchase Agreement, to receive Dividends paid in cash on each
Dividend Date.  The election to receive
cash Dividends shall be binding on any subsequent assignee or transferee of
such Holder’s Preferred Shares.

(xxxv) “NYSE”
means The New York Stock Exchange, Inc.

(xxxvi) “Options” means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.

 8
 

 

 

(xxxvii)      “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or
equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such
Person or Parent Entity, the Person or Parent Entity with the largest public
market capitalization as of the date of consummation of the Fundamental
Transaction.

(xxxviii) “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.

(xxxix) “Principal Market”
means AMEX, or if the Common Stock is not traded on the Principal Market, an Eligible
Market.

(xl) “Redemption Date”
means any Triggering Event Redemption Date, any Asset Sale Redemption Date and
any Change of Control Redemption Date.

(xli) “Registration Rights
Agreement” means that certain registration rights agreement by and
among the Company and the initial Holders of the Preferred Shares dated as of
the Subscription Date, as such agreement may be amended from time to time as
provided in such agreement.

(xlii) “Required Holders”
means the Holders of Preferred Shares representing at least a majority of the
aggregate Preferred Shares then outstanding.

(xliii) “Rich Valley Properties”
means those certain oil, gas and mineral leases, overriding royalty interests,
mineral interests, agreements, all production attributable thereto, and all
wells, equipment, pipelines, gathering lines, facilities and appurtenances, any
of which of the foregoing are attributable to, used, obtained or intended for
use in connection with the properties described as follows:

(A)          Sections
16, 21, 22, 23, 26, 27, 28, 29, 34, and 35, Township 26 North, Range 5 West,
Grant County, Oklahoma;

(B)           Section
25, Township 26 North, Range 6 West, Grant County, Oklahoma;

(C)           Sections
8, 16, 19, 20, 21, 28, and 29, Township 25 North, Range 5 West, Grant County,
Oklahoma;

(D)          Section
22, Township 23 North, Range 6 West, Garfield County, Oklahoma;

 9
 

 

 

(E)           Sections
11 and 15, Township 20 North, Range 8 West, Garfield County, Oklahoma; and

(F)           Section
24, Township 20 North, Range 2 West, Noble County, Oklahoma.

(xliv) “SEC” means the
Securities and Exchange Commission.

(xlv) “Securities Purchase Agreement” means that certain securities
purchase agreement by and among the Company and the initial Holders, dated as
of the Subscription Date, as such agreement further may be amended from time to
time as provided in such agreement.

(xlvi) “Senior Debt” means
the principal of (and premium, if any), interest on, and all fees and other
amounts (including, without limitation, any out-of-pocket costs, enforcement
expenses (including out-of-pocket legal fees and disbursements), collateral
protection expenses and other reimbursement or indemnity obligations relating
thereto) whether now or hereafter outstanding and payable by Company and/or its
Subsidiaries under or in connection with the Credit Agreement dated as of
November 29, 2005, as amended by the Amendment No. 1 dated as of February 24,
2006, the Amendment No. 2, Assignment and Agreement dated as of April 28,
2006,  the Amendment No. 3 entered into
on May 12, 2006 but made effective as of March 31, 2006, and the Amendment No.
4 entered into on June 30, 2006  among
Cano Petroleum, Inc., the lenders party thereto from time to time, and Union
Bank of California, N.A., as administrative agent for such Lenders and as
issuing lender, as the same may be further amended, supplemented, restated,
refinanced, or otherwise modified from time to time.

(xlvii) “Series A Preferred Stock” shall mean the Series A Convertible
Preferred Stock of the Company, without par value per share.

(xlviii) “Series B Preferred Stock” shall mean the Series B Convertible
Preferred Stock of the Company, without par value per share.

(xlix) “Series C Preferred Stock” shall mean the Series C Convertible
Preferred Stock of the Company, without par value per share.

(l) “Stated Value”
means $1,000.

(li) “Subscription Date”
means August 25, 2006.

(lii) “Subsidiaries” shall have the meaning as set forth in the
Securities Purchase Agreement.

(liii) “Successor Entity”
means the
Person, which may be the Company, formed by, resulting from or surviving any
Fundamental

 10
 

 

 

Transaction or the Person with which such
Fundamental Transaction shall have been made, provided that if such Person is
not a publicly traded entity whose common stock or equivalent
equity security is quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.

(liv) “Tax” means any
tax, levy, impost, duty or other charge or withholding of a similar nature
(including any related penalty or interest).

(lv) “Tax Deduction”
means a deduction or withholding for or on account of Tax from a payment under
this Certificate of Designations.

(lvi) “Trading Day”
means any day on which the Common Stock are traded on the Principal Market, or,
if the Principal Market is not the principal trading market for the Common
Stock, then on the principal securities exchange or securities market on which
the shares of Common Stock are then traded; provided that “Trading Day” shall
not include any day on which the shares of Common Stock are scheduled to trade
on such exchange or market for less than 4.5 hours or any day that the shares
of Common Stock are suspended from trading during the final hour of trading on
such exchange or market (or if such exchange or market does not designate in
advance the closing time of trading on such exchange or market, then during the
hour ending at 4:00:00 p.m., New York Time).

(lvii) “Voting
Stock” of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might
have voting power by reason of the happening of any contingency).

(lviii) “Weighted Average Price”
means, for any security as of any date, the dollar volume-weighted average
price for such security on the Principal Market during the period beginning at
9:30:01 a.m., New York City Time, and ending at 4:00:00 p.m., New York City
Time, as reported by Bloomberg through its “Volume at Price” function or, if
the foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York City
Time, and ending at 4:00:00 p.m., New York City Time, as reported by Bloomberg,
or, if no dollar volume-weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as
reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be calculated
for such security on such

 11
 

 

 

date on any of
the foregoing bases, the Weighted Average Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
Required Holders.  If the Company and the
Required Holders are unable to agree upon the fair market value of the Common
Stock, then such dispute shall be resolved pursuant to Section 2(d)(iii) below
with the term “Weighted Average Price” being substituted for the term “Closing
Sale Price.” All such determinations shall be appropriately adjusted for any
stock dividend, stock split or other similar transaction during such period.

(b)   Holder’s
Conversion Right.  Subject to the
provisions of Section 7 and Section 10, at any time or times on or after the
Initial Issuance Date, any Holder shall be entitled to convert any whole number
of Preferred Shares, plus the amount of any accrued but unpaid Dividends per
Preferred Share then remaining, into fully paid and nonassessable shares of
Common Stock in accordance with Section 2(d) at the Conversion Rate (as defined
below).

(c)   Conversion.  The number of shares of Common Stock issuable
upon conversion of each Preferred Share pursuant to Section 2(b) shall be
determined according to the following formula (the “Conversion Rate”):

Conversion Amount 

Conversion Price

 

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

(d)   Mechanics
of Conversion.  The conversion of
Preferred Shares shall be conducted in the following manner:

(i)            Holder’s
Delivery Requirements.  To convert
Preferred Shares into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York City Time, on such date, a copy of a properly completed notice of
conversion executed by the registered Holder of the Preferred Shares subject to
such conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and the Company’s
designated transfer agent (the “Transfer Agent”)
and (B) if required by Section 2(d)(viii), surrender to a common carrier for
delivery to the Company as soon as practicable following such date the original
certificates representing the Preferred Shares being converted (or compliance
with the procedures set forth in Section 13) (the “Preferred
Stock Certificates”).

(ii)           Company’s
Response.  Upon receipt by the
Company of copy of a Conversion Notice, the Company shall (I) as soon as
practicable,

 12
 

 

 

but in any
event within two (2) Trading Days, send, via facsimile, a confirmation of
receipt of such Conversion Notice to such Holder and the Transfer Agent, which
confirmation shall constitute an instruction to the Transfer Agent to process
such Conversion Notice in accordance with the terms herein and (II) on or
before the third (3rd) Trading Day following the date of receipt by the
Company of such Conversion Notice (the “Share Delivery Date”),
(A) provided the Transfer Agent is participating in the DTC Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission
system, or (B) if the Transfer Agent is not participating in the DTC Fast
Automated Securities Transfer Program, issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name of
the Holder or its designee, for the number of shares of Common Stock to which
the Holder shall be entitled.  If the
number of Preferred Shares represented by the Preferred Stock Certificate(s)
submitted for conversion, as may be required pursuant to Section 2(d)(viii), is
greater than the number of Preferred Shares being converted, then the Company
shall, as soon as practicable and in no event later than three (3) Business
Days after receipt of the Preferred Stock Certificate(s) (the “Preferred Stock Delivery Date”) and at its own expense,
issue and deliver to the Holder a new Preferred Stock Certificate representing
the number of Preferred Shares not converted. 
The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of Preferred Shares shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on the
Conversion Date.

(iii)          Dispute
Resolution.  In the case of a dispute
as to the determination of the Closing Sale Price or the arithmetic calculation
of the Conversion Rate, the Company shall instruct the Transfer Agent to issue
to the Holder the number of shares of Common Stock that is not disputed and
shall transmit an explanation of the disputed determinations or arithmetic
calculations to the Holder via facsimile within two (2) Business Days of
receipt of such Holder’s Conversion Notice or other date of determination.  If such Holder and the Company are unable to
agree upon the determination of the Closing Sale Price or arithmetic
calculation of the Conversion Rate within two (2) Business Days of such
disputed determination or arithmetic calculation being transmitted to the
Holder, then the Company shall within two (2) Business Days submit via
facsimile (A) the disputed determination of the Closing Sale Price to an
independent, reputable investment bank selected by the Company and approved by
the Required Holders or (B) the disputed arithmetic calculation of the
Conversion Rate to the Company’s independent, outside accountant.  The Company shall cause, at the Company’s
expense, the investment bank or the accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the Holders of

 13
 

 

 

the results no
later than two (2) Business Days from the time it receives the disputed
determinations or calculations.  Such
investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent error.

(iv)          Record Holder.  The Person or Persons entitled to receive the
shares of Common Stock issuable upon a conversion of Preferred Shares shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.

(v)           Company’s Failure
to Timely Convert.

(A)  Cash
Damages.  If (x) (I) within three (3)
Trading Days after the Company’s receipt of the facsimile copy of a Conversion
Notice or (II) on any Company Delivery Date, the Company shall fail to credit a
Holder’s balance account with DTC or issue and deliver a certificate to such
Holder for the number of shares of Common Stock to which such Holder is
entitled upon such Holder’s conversion or the Company’s conversion, as applicable,
of Preferred Shares or (y) within three (3) Trading Days of the Company’s
receipt of a Preferred Stock Certificate the Company shall fail to issue and
deliver a new Preferred Stock Certificate representing the number of Preferred
Shares  to which such Holder is entitled
pursuant to Section 2(d)(ii), then due to the uncertainty and difficulty of
estimating a Holder’s damages for such delay and as a reasonable estimate of
such Holder’s actual loss due to the delay and not as a penalty, the Company shall
pay additional damages to such Holder for each day after the Share Delivery
Date or the Company Delivery Date, as applicable, that such conversion is not
timely effected and/or each day after the Preferred Stock Delivery Date that
such Preferred Stock Certificate is not delivered in an amount equal to one and
one half percent (1.5%) of the product of (I) the sum of the number of
shares of Common Stock not issued to the Holder on or prior to the Share
Delivery Date or Company Delivery Date, as applicable, and to which such Holder
is entitled as set forth in the applicable Conversion Notice or in any Company
Conversion Notice and, in the event the Company has failed to deliver a
Preferred Stock Certificate to the Holder on or prior to the Preferred Stock
Delivery Date, the number of shares of Common Stock issuable upon conversion of
the Preferred Shares represented by such Preferred Stock Certificate as of the
Preferred Stock Delivery Date and (II) the Closing Sale Price of the Common
Stock on the Share Delivery Date or Company Delivery Date, as applicable, in
the case of the failure to deliver Common Stock, or the Preferred Stock
Delivery Date, in the case of failure to deliver a Preferred Stock
Certificate.  If the Company fails to pay
the additional damages set forth in this Section 2(d)(v)(A)

 14
 

 

 

within five (5) Trading Days of the date incurred, then the Holder
entitled to such payments shall have the right at any time, so long as the
Company continues to fail to make such payments, to require the Company, upon
written notice, to immediately issue, in lieu of such cash damages, the number
of shares of Common Stock equal to the quotient of (X) the aggregate amount of
the damages payments described herein divided by (Y) the Conversion Price in
effect on such Conversion Date as specified by the Holder in the Conversion
Notice or in effect on the Company Delivery Date. In addition to the foregoing,
if (i) on the Share Delivery Date or (ii) on any Company Delivery Date, the
Company shall fail to issue and deliver a certificate to a Holder or credit
such Holder’s balance account with DTC for the number of shares of Common Stock
to which such Holder is entitled upon such Holder’s conversion or the Company’s
Conversion, as applicable, of Preferred Shares, and if on or after such Trading
Day the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the shares
of Common Stock issuable upon such conversion that the Holder anticipated receiving
from the Company (a “Buy-In”), then
the Company shall, within three (3) Trading Days after the Holder’s request and
in the Holder’s discretion, either (i) pay cash to the Holder in an amount
equal to the Holder’s total purchase price (including brokerage commissions and
out-of-pocket expenses, if any) for the shares of Common Stock so purchased
(the “Buy-In Price”), at which point the
Company’s obligation to deliver such certificate (and to issue such Common
Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the
Holder a certificate or certificates representing such Common Stock and pay
cash to the Holder in an amount equal to the excess (if any) of the Buy-In
Price over the product of (A) such number of shares of Common Stock, times (B)
the Closing Sale Price on the Conversion Date or the Company Delivery Date, as
applicable.

(B)   Void
Conversion Notice; Adjustment of Conversion Price.  If for any reason a Holder has not received
all of the shares of Common Stock to which such Holder is entitled prior to the
sixth (6th)
Trading Day after the Share Delivery Date or Company Delivery Date, as
applicable, with respect to a conversion of Preferred Shares, then the Holder,
upon written notice to the Company, with a copy to the Transfer Agent, may void
its Conversion Notice or any applicable Company Conversion Notice, with respect
to, and retain or have returned, as the case may be, any Preferred Shares that
have not been converted pursuant to such Holder’s Conversion Notice or Company
Conversion Notice; provided that the voiding of a Holder’s Conversion Notice or
Company Conversion Notice, as applicable, shall not effect the

 15
 

 

 

Company’s obligations to make any payments which have accrued prior to
the date of such notice pursuant to Section 2(d)(v)(A) or otherwise.  Thereafter, the Conversion Price of any
Preferred Shares returned or retained by the Holder for failure to timely
convert shall be adjusted to the lesser of (I) the Conversion Price  relating to the voided Conversion Notice or
voided Company Conversion Notice, as applicable, and (II) the lowest Weighted
Average Price of the Common Stock during the period beginning on the Conversion
Date or Company Delivery Date, as applicable, and ending on the date such
Holder voided the Conversion Notice or Company Conversion Notice, as
applicable, subject to further adjustment as provided in this Certificate of
Designations.

(C)   Conversion
Failure.  If for any reason a Holder
has not received all of the shares of Common Stock to which such Holder is
entitled prior to the tenth (10th) Trading Day after the Share Delivery
Date or the Company Delivery Date, as applicable, with respect to a conversion
of Preferred Shares (a “Conversion Failure”),
then the Holder, upon written notice to the Company, may require that the
Company redeem all Preferred Shares held by such Holder, including the
Preferred Shares previously submitted for conversion and with respect to which
the Company has not delivered shares of Common Stock, in accordance with Section
3.  Notwithstanding anything to the
contrary in this Certificate of Designations, a Holder’s exclusive remedies for
the Company’s failure to deliver shares of Common Stock on any Share Delivery
Date or any Company Delivery Date shall be as set forth in Section 2(d)(v) and
Section 3.

(vi)          Pro Rata Conversion; Disputes.  Subject
to Section 10, in the event the Company receives a Conversion Notice from more
than one Holder for the same Conversion Date and the Company can convert some,
but not all, of such Preferred Shares, the Company shall convert from each
Holder electing to have Preferred Shares converted at such time a pro rata
amount of such Holder’s Preferred Shares submitted for conversion based on the
number of Preferred Shares submitted for conversion on such date by such Holder
relative to the number of Preferred Shares submitted for conversion on such
date.  In the event of a dispute as to the number of shares of Common Stock issuable to a Holder in connection with a
conversion of Preferred Shares, the Company shall issue to such Holder the
number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section 2(d)(iii).

(vii)         Mandatory
Redemption at Maturity.

(A)  If
any Preferred Share remains outstanding on the Maturity Date, the Company shall
redeem such Preferred Share for

 16
 

 

 

an amount in cash per Preferred Share (the “Maturity Date Redemption Price”) equal to the Conversion
Amount by wire transfer of immediately available funds to an account designated
in writing by such Holder.

(B)   If
the Company fails to redeem all of the Preferred Shares outstanding on the
Maturity Date by payment of the Maturity Date Redemption Price for each such
Preferred Share, then in addition to any remedy such Holder may have under any
Transaction Document, (1) the applicable Maturity Date Redemption Price payable
in respect of such unredeemed Preferred Shares shall bear interest at the rate
of 1.5% per month, prorated for partial months, until paid in full, and (2) any
Holder shall have the option to require the Company to convert any or all of
such Holder’s Preferred Shares and for which the Maturity Date Redemption Price
has not been paid into (on a per Preferred Share basis) shares of Common Stock
equal to the number which results from dividing the Maturity Date Redemption
Price by the Default Conversion Price. 
If the Company has failed to pay the Maturity Date Redemption Price in a
timely manner as described above, then the Maturity Date shall be automatically
extended for any Preferred Shares until the date the Holders receive such
shares of Common Stock or Maturity Date Redemption Price and shall be further
extended for any Preferred Shares for as long as (x) the conversion of such
Preferred Shares would violate the provisions of Section 7 or (y) a Triggering
Event or an event that with the passage of time or giving of notice would
constitute a Triggering Event shall have occurred and be continuing.

(C)   Other
than as specifically permitted by this Certificate of Designations, the Company
may not redeem any of the outstanding Preferred Shares and any unpaid Dividends
thereon.

(viii)        Book-Entry.  Notwithstanding anything to the contrary set
forth herein, upon conversion of Preferred Shares in accordance with the terms
hereof, the Holder thereof shall not be required to physically surrender the
certificate representing the Preferred Shares to the Company unless (A) the
full or remaining number of Preferred Shares represented by the certificate are
being converted or (B) a Holder has provided the Company with prior written
notice (which notice may be included in a Conversion Notice) requesting
reissuance of Preferred Shares upon physical surrender of any Preferred
Shares.  The Holder and the Company shall
maintain records showing the number of Preferred Shares so converted and the
dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of the certificate representing the Preferred Shares upon each such
conversion.  In the event of any dispute
or

 17
 

 

 

discrepancy,
such records of the Company establishing the number of Preferred Shares to
which the record holder is entitled shall be controlling and determinative in
the absence of manifest error.  In
connection with any transfer of all or any portion of Preferred Shares held by
any Holder, such Holder may physically surrender the certificate representing
the Preferred Shares to the Company, whereupon the Company will forthwith issue
and deliver upon the order of such Holder a new certificate or certificates of
like tenor, registered as such Holder may request, representing in the
aggregate the remaining number of Preferred Shares represented by such
certificate.  A Holder and any assignee,
by acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares, the
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated on the face thereof.  Each certificate for Preferred Shares shall
bear the following legend:

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

(ix)           Conversion at
the Company’s Election.  On any date
(the “Conversion Election Date”)
after the eighteen (18) month anniversary of the Initial Issuance Date, so long
as (A) the Equity Conditions shall have been satisfied or waived in writing by
the applicable Holder from and including the date of the Company Conversion
Election Notice (as defined below) through and including the Company Election
Conversion Date (as defined below) and (B) on any twenty (20) out of thirty
(30) consecutive Trading Days immediately preceding the date of the Company
Conversion Election Notice, the Weighted Average Price of the Common Stock
exceeds 175% of the Conversion Price (as adjusted for any stock dividend, stock
split, stock combination or other similar transaction during such period), the
Company shall have the right, in its sole discretion, to require that some or
all of the outstanding Preferred Shares be converted (the “Company Conversion Election”) at the
applicable Conversion Rate; provided, however, that the Company
may not consummate more than one

 18

 

(1) Company Conversion in any thirty (30) Trading Day period. The
Company shall exercise its right to Company Conversion Election by providing
each Holder written notice (“Company
Conversion Notice”) by facsimile and overnight courier on the
Conversion Election Date. The date on which each of such Holders actually
receives the Company Conversion Election Notice is referred to herein as the “Company Conversion Election Notice Date.”  If the Company elects to require conversion
of some, but not all, of such Preferred Shares then outstanding, the Company
shall require conversion of an amount from each Holder equal to the product of
(I) the total number of Preferred Shares which the Company has elected to
convert multiplied by (II) such Holder’s Allocation Percentage (such amount
with respect to each Holder of such Preferred Shares being referred to herein
as its “Pro Rata Conversion Amount”). In the
event that any initial Holder of the Preferred Shares shall sell or otherwise
transfer any of such Holder’s Preferred Shares, the transferee shall be
allocated a pro rata portion of such Holder’s Allocation Percentage. The
Company Conversion Election Notice shall indicate (x) the aggregate number of
such Preferred Shares the Company has selected for conversion, (y) the date
selected by the Company for conversion (the “Company
Delivery Date”), which date shall be not less than twenty (20)
Trading Days or more than sixty (60) Trading Days after the Company Conversion
Election Notice Date, and (z) each Holder’s Pro Rata Conversion Amount. Subject
to the satisfaction of all the conditions of this Section 2(d)(ix), on the
Company Election Conversion Date each Holder of Preferred Shares selected for
conversion will be deemed to have submitted a Conversion Notice in accordance
with Section 2(d)(i) for a number of Preferred Shares equal to such Holder’s
Pro Rata Conversion Amount. Notwithstanding the above, any Holder may convert
such shares (including Preferred Shares selected for conversion hereunder which
shall reduce such Holder’s Pro Rata Conversion Amount) into Common Stock
pursuant to Section 2(b) on or prior to the date immediately preceding the
Company Election Conversion Date. If the Company fails to convert any
Conversion Amount on the applicable Company Election Conversion Date, then each
Holder shall be entitled to the remedies set forth in Section 2(d)(v).

(e)   Taxes.

(i) Any and
all payments made by the Company hereunder, including any amounts received on a
conversion or redemption of the Preferred Shares and any amounts on account of
dividends or deemed dividends, must be made by it without any Tax Deduction,
unless a Tax Deduction is required by law. If the Company is aware that it must
make a Tax Deduction (or that there is a change in the rate or the basis of a Tax
Deduction), it must notify the affected Holders promptly.

 19
 

 

 

(ii) If a Tax Deduction is required by law to
be made by the Company, subject to Section 2(e)(i) above, the amount of the
payment due from the Company will be increased to an amount which (after making
the Tax Deduction including a Tax Deduction applicable to additional sums
payable pursuant to this Section 2(e)) leaves an amount equal to the payment
which would have been due if no Tax Deduction had been required. If the Company
is required to make a Tax Deduction, it must make the minimum Tax Deduction
allowed by law and must make any payment required in connection with that Tax
Deduction within the time allowed by law.

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

(iii) In addition, the Company agrees to pay
in accordance with applicable law any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies that
arise from any payment made hereunder or in connection with the execution,
delivery, registration or performance of, or otherwise with respect to, the
Preferred Shares (“Other Taxes”). As
soon as practicable after making a payment of Other Taxes, the Company must
deliver to such Holder any official receipt or form, if any, provided by or
required by the taxing authority to whom the Tax Deduction was paid.

(iv) The obligations of the Company under
this Section 2(e) shall survive the Maturity Date of the Preferred Shares and
the payment for the Preferred Shares and all other amounts payable hereunder.

(f)    Adjustments
to Conversion Price. The Conversion Price will be subject to adjustment
from time to time as provided in this Section 2(f).

(i) Adjustment
of Conversion Price upon Issuance of Common Stock. If and whenever on or
after the Subscription Date and prior to the nine (9) month anniversary of the
Initial Issuance Date, the Company issues or sells, or in accordance with this
Section 2(f)(i) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding shares of Common Stock deemed to
have been issued or sold by the Company in connection with any Excluded
Security) for a consideration per share (the “New
Issuance Price”)
less than a price (the “Applicable Price”) equal to the Conversion Price in effect immediately prior to
such issue or sale (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the
Conversion Price then in effect shall be reduced to an amount equal to the quotient
of (A) the sum of (1) the Adjusted Price and (2) the New Issuance Price

 20
 

 

 

divided by (B) two (2). If and whenever after the nine (9) month
anniversary of the Initial Issuance Date, the Company issues or sells, or in
accordance with this Section 2(f)(i) is deemed to have issued or sold, any
shares of Common Stock (including the issuance or sale of shares of Common
Stock owned or held by or for the account of the Company, but excluding shares
of Common Stock deemed to have been issued or sold by the Company in connection
with any Excluded Security) in a Dilutive Issuance, then immediately after such
Dilutive Issuance, the Conversion Price then in effect shall be reduced to an
amount equal to the Adjusted Price. For purposes of determining the adjusted Conversion
Price under this Section 2(f)(i), the following shall be applicable:

(A)  Issuance
of Options. If the Company in any manner grants or sells any Options and
the lowest price per share for which one share of Common Stock is issuable upon
the exercise of any such Option or upon conversion or exchange or exercise of
any Convertible Securities issuable upon exercise of such Option is less than
the Applicable Price, then each such share of Common Stock underlying such
Option shall be deemed to be outstanding and to have been issued and sold by
the Company at the time of the granting or sale of such Option for such price
per share. For purposes of this Section 2(f)(i)(A), the “lowest price per share
for which one share of Common Stock is issuable upon the exercise of any such
Option or upon conversion or exchange or exercise of any Convertible Securities
issuable upon exercise of such Option” shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon granting or sale of the Option,
upon exercise of the Option and upon conversion or exchange or exercise of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such share of Common Stock or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such Common Stock upon
conversion or exchange or exercise of such Convertible Securities.

(B)   Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange or exercise thereof is less than the Applicable Price, then each such
share of Common Stock underlying such Convertible Securities shall be deemed to
be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per share. For
the purposes of this Section 2(f)(i)(B), the “lowest price per share for which
one share of Common Stock is issuable upon such conversion or exchange or

 21
 

 

 

exercise” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such share of Common Stock upon conversion or exchange or exercise of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the
Conversion Price had been or are to be made pursuant to other provisions of
this Section 2(f)(i), no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.

(C)   Change
in Option Price or Rate of Conversion. If the purchase price provided for
in any Options, the additional consideration, if any, payable upon the issue,
conversion,  exchange or exercise of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable or exercisable for Common Stock changes at any
time, the Conversion Price in effect at the time of such change shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold. For purposes of this Section
2(f)(i)(C), if the terms of any Option or Convertible Security that was
outstanding as of the Subscription Date are changed in the manner described in
the immediately preceding sentence, then such Option or Convertible Security
and the Common Stock deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such change. No
adjustment shall be made if such adjustment would result in an increase of the
Conversion Price then in effect.

(D)  Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $0.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be
deemed to be the net amount received by the Company therefor. If any Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by
the

 22
 

 

 

Company will be the fair value of such consideration, except where such
consideration consists of publicly traded securities, in which case the amount
of consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt of such securities. If any Common Stock,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be the fair
value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or publicly traded securities will be determined jointly by the Company
and the Required Holders. If such parties are unable to reach agreement within
ten (10) days after the occurrence of an event requiring valuation (the “Valuation
Event”), the fair
value of such consideration will be determined within ten (10) Business Days
after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Required Holders. The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the Company.

(E)   Record
Date. If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (I) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities or (II) to
subscribe for or purchase Common Stock, Options or Convertible Securities, then
such record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.

(ii) Adjustment
of Conversion Price upon Subdivision or Combination of Common Stock. If the
Company at any time after the Subscription Date subdivides (by any stock split,
stock dividend, recapitalization or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company at any time after the Subscription Date combines (by combination,
reverse stock split or otherwise) its outstanding shares of Common Stock into a
smaller number of shares and the Conversion Price in effect immediately prior
to such combination will be proportionately increased.

 23
 

 

 

(iii) Other Events. If any event
occurs of the type contemplated by the provisions of this Section 2(f) but not
expressly provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the Holders; provided that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 2(f).

(iv) Floor Price. Until such time as
the Company receives the Stockholder Approval, no adjustment pursuant to
Section 2(f) shall cause the Conversion Price to be less than the Market Price.

(g)   Notices.

(i) Immediately upon any adjustment of the
Conversion Price pursuant to Section 2(f), the Company will give written notice
thereof to each Holder, setting forth in reasonable detail, and certifying, the
calculation of such adjustment. In the case of a dispute as to the
determination of such adjustment, then such dispute shall be resolved in
accordance with the procedures set forth in Section 2(d)(iii).

(ii) The Company will give written notice to
each Holder at least ten (10) Business Days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend or
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining rights
to vote with respect to any Fundamental Transaction or Liquidation Event,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such Holder.

(iii) The Company will also give written
notice to each Holder at least ten (10) Business Days prior to the date on
which any Fundamental Transaction or Liquidation Event will take place,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such Holder.

(h)   Additional Preferred Shares; Variable Securities; Dilutive
Issuances. For so long as any Preferred Shares are outstanding, the Company
will not, without the prior written consent of the Required Holders, issue any
Preferred Shares and the Company shall not issue any other securities that
would cause a breach or default under this Certificate of Designations other
than those issued pursuant to the Securities Purchase Agreement. For so long as
any Preferred Shares remain outstanding, the Company shall not, in any manner,
issue or sell any rights, warrants or options to subscribe for or purchase
Common Stock or directly or indirectly convertible into or exchangeable or
exercisable for Common Stock at a conversion, exchange or exercise price which
varies or may vary after

 24
 

 

 

issuance with the market price of the Common Stock, including by way of
one or more reset(s) to any fixed price unless the conversion, exchange or exercise
price of any such security cannot be less than the then applicable Conversion
Price with respect to the Common Stock into which any Preferred Shares are
convertible. For so long as any Preferred Shares remain outstanding and the
Stockholder Approval has not yet been obtained, the Company shall not, in any
manner, enter into or affect any Dilutive Issuance.

(3)        Redemption at Option
of Holders.

(a)   Triggering
Event. A “Triggering Event”
shall be deemed to have occurred at such time as any of the following events:

(i) the suspension from trading or failure of
the Common Stock to be listed on a Principal Market for a period of ten (10)
consecutive Trading Days or for more than an aggregate of twenty (20) Trading
Days in any 365-day period;

(ii) the Company’s (A) failure to cure a
Conversion Failure by delivery of the required number of shares of Common Stock
within ten (10) Business Days after the applicable Conversion Date or (B)
notice, written or oral, to any Holder, including by way of public announcement,
or through any of its agents, at any time, of its intention not to comply, as
required, with a request for conversion of any Preferred Shares into shares of
Common Stock that is tendered in accordance with the provisions of this
Certificate of Designations;

(iii) the Company’s failure to pay to the
Holder any amounts when and as due pursuant to this Certificate of Designations
or any other Transaction Document (as defined in the Securities Purchase
Agreement), only if such failure continues for a period of at least five (5)
Business Days;

(iv) the entry by a court having jurisdiction in
the premises of (i) a decree or order for relief in respect of the Company or
any Subsidiary of a voluntary case or proceeding under any applicable Federal
or State bankruptcy, insolvency, reorganization or other similar law or (ii) a
decree or order adjudging the Company or any Subsidiary as bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Subsidiary under any applicable Federal or State law or (iii) appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Subsidiary or of any substantial part of
its property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order for relief or any such other decree or
order unstayed and in effect for a period of 60 consecutive days;

 25
 

 

 

(v) the commencement by the Company or any
Subsidiary of a voluntary case or proceeding under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent
by it to the entry of a decree or order for relief in respect of the Company or
any Subsidiary in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under any applicable Federal or State law, or the
consent by it to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due, or the taking of corporate action
by the Company or any Subsidiary in furtherance of any such action;

(vi) any event of default occurs with respect to
any Indebtedness, and any applicable grace periods in such Indebtedness with
respect to such event of default shall have expired; provided that if
such event of default is waived by the holders of such Indebtedness prior to
any Holder taking any action pursuant to this Certificate of Designations, no
Triggering Event under this clause (vi) shall be deemed to have occurred; or

(vii) the Company breaches any
representation, warranty, covenant or other term or condition of any
Transaction Document, except, in the case of a breach of a covenant which is
curable, only if such breach remains uncured for a period of at least seven (7)
Business Days.

(b)   Redemption
Option Upon Triggering Event. In addition to all other rights of the
Holders contained herein, after a Triggering Event, each Holder shall have the
right, at such Holder’s option, to require the Company to redeem all or a
portion of such Holder’s Preferred Shares at a price per Preferred Share equal
to the greater of (i) 125% of the Conversion Amount and (ii) the product of (A)
the Conversion Rate in effect at such time as such Holder delivers a Notice of
Redemption at Option of Holder (as defined below) and (B) the greater of the
Closing Sale Price of the Common Stock on the Trading Day immediately preceding
such Triggering Event, the Closing Sale Price of the Common Stock on the day
immediately following such Triggering Event and the Closing Sale Price of the
Common Stock on the date the Holder delivers the Notice of Redemption at Option
of Holder (the “Redemption Price”).

(c)   Mechanics of Redemption at Option of Buyer. Within one (1)
Business Day after the occurrence of a qualifying Triggering Event, the Company
shall deliver written notice thereof via facsimile and overnight courier (“Notice of

 26
 

 

 

Triggering Event”) to each Holder. At any time
after the earlier of a Holder’s receipt of a Notice of Triggering Event and
such Holder becoming aware of a Triggering Event, any Holder of Preferred
Shares then outstanding may require the Company to redeem up to all of such
Holder’s Preferred Shares by delivering written notice thereof via facsimile
and overnight courier (“Notice of Redemption at
Option of Holder”) to the Company, which Notice of Redemption at
Option of Holder shall indicate the number of Preferred Shares that such Holder
is electing to redeem.

(d)   Payment
of Redemption Price. Upon the Company’s receipt of a Notice(s) of
Redemption at Option of Buyer from any Holder, the Company shall within one (1)
Business Day of such receipt notify each other Holder by facsimile of the
Company’s receipt of such notice(s). The Company shall deliver on the fifth (5th) Business Day after the
Company’s receipt of the first Notice of Redemption at Option of Holder the
applicable Redemption Price (the “Triggering
Event Redemption Date”) to all Holders that deliver a Notice of
Redemption at Option of Holder prior to the fifth (5th) Business Day after the Company’s
receipt of the first Notice of Redemption at Option of Holder. To the extent redemptions required by this
Section 3 are deemed or determined by a court of competent jurisdiction to be
prepayments of the Preferred Shares by the Company, such redemptions shall be
deemed to be voluntary prepayments. If the Company is unable to redeem
all of the Preferred Shares submitted for redemption, the Company shall (i)
redeem a pro rata amount from each Holder based on the number of Preferred
Shares submitted for redemption by such Holder relative to the total number of
Preferred Shares submitted for redemption by all Holders and (ii) in addition
to any remedy such Holder may have under this Certificate of Designations and
the Securities Purchase Agreement, pay to each Holder interest at the rate of
one and one-half percent (1.5%) per month (prorated for partial months) in
respect of each unredeemed Preferred Share until paid in full. The Holders and
Company agree that in the event of the Company’s redemption of any Preferred
Shares under this Section 3, the Holders’ damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holders. Accordingly, any redemption premium due
under this Section 3 is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holders’ actual loss of its investment opportunity
and not as a penalty.

(e)   Void Redemption. In the event that the Company does not pay
the Redemption Price within the time period set forth in Section 3(d), at any
time thereafter and until the Company pays such unpaid applicable Redemption
Price in full, a Holder shall have the option to, in lieu of redemption,
require the Company to promptly return to such Holder any or all of the
Preferred Shares that were submitted for redemption by such Holder under this
Section 3 and for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the “Void Optional Redemption Notice”). Upon the Company’s
receipt of such Void Optional Redemption Notice, (i) the 

 27
 

 

 

Notice of Redemption at Option of Holder shall be null and void with
respect to those Preferred Shares subject to the Void Optional Redemption
Notice, (ii) the Company shall immediately return any Preferred Shares subject
to the Void Optional Redemption Notice, and (iii) the Conversion Price of such
returned Preferred Shares shall be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the Void Optional Redemption Notice is
delivered to the Company and (B) the lowest Weighted Average Price of the
Common Stock during the period beginning on the date on which the Notice of
Redemption at Option of Holder is delivered to the Company and ending on the
date on which the Void Optional Redemption Notice is delivered to the Company.

(f)    Disputes;
Miscellaneous. In the event of a dispute as to the determination of the
arithmetic calculation of the Redemption Price, such dispute shall be resolved
pursuant to Section 2(d)(iii) above with the term “Redemption Price” being
substituted for the term “Conversion Rate”. A Holder’s delivery of a Void
Optional Redemption Notice and exercise of its rights following such notice
shall not effect the Company’s obligations to make any payments which have
accrued prior to the date of such notice. In the event of a redemption pursuant
to this Section 3 of less than all of the Preferred Shares represented by a
particular Preferred Stock Certificate, the Company shall promptly cause to be
issued and delivered to the Holder of such Preferred Shares a Preferred Stock
Certificate representing the remaining Preferred Shares which have not been
redeemed, if necessary.

(4)        Other Rights of
Holders.

(a)   Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i)  the Successor Entity assumes in writing (with the
purchase of at least a majority of the outstanding shares of the Company’s
Common Stock automatically constituting an assumption in writing) all of the obligations of the
Company under this Certificate of Designations and the other Transaction
Documents in accordance with the provisions of this Section 4(a) pursuant to
written agreements in form and substance satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each Holder of Preferred Shares
in exchange for such Preferred Shares a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Certificate of Designations
including, without limitation, having a stated value and dividend rate equal to
the stated value and dividend rate of the Preferred Shares held by such Holder
and having similar ranking to the Preferred Shares, and satisfactory to the
Required Holders and
(ii) the Successor Entity (including its Parent Entity) is a
publicly traded corporation whose common stock is quoted on or listed for
trading on the Principal Market or an Eligible Market. Upon the occurrence of any Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the
date of such Fundamental Transaction, the provisions of this Certificate of
Designations referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every

 28
 

 

 

right and power of the
Company and shall assume all of the obligations of the Company under this
Certificate of Designations with the same effect as if such Successor Entity
had been named as the Company herein. Upon consummation of the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion of the Preferred Shares
at any time after the consummation of the Fundamental Transaction, in lieu of
the shares of Common Stock (or other securities, cash, assets or other
property) issuable upon the conversion of the Preferred Shares prior to such
Fundamental Transaction, such shares of publicly traded common stock (or their
equivalent) of the Successor Entity, as adjusted in accordance with the
provisions of this Certificate of Designations. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion of the
Preferred Shares.

(b)   Purchase
Rights. If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
“Purchase Rights”), then the Holders will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
Holder could have acquired if such Holder had held the number of shares of
Common Stock acquirable upon complete conversion of the Preferred Shares
(without taking into account any limitations or restrictions on the
convertibility of the Preferred Shares) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase
Rights.

(c)   Asset
Sales.

(i) Promptly after
the occurrence of an Asset Sale, the Company shall deliver written notice
thereof via facsimile and overnight courier (an “Asset Sale Notice”) to each of the Holders. At any time after
the receipt of the Asset Sale Notice, a Holder may require the Company to
redeem, with the Available Asset Sale Proceeds all or any portion of the
Preferred Shares held by such Holder by delivering written notice thereof (the “Asset  Sale
Redemption Notice”) to the Company, which Asset Sale Redemption
Notice shall indicate the number of such Preferred Shares such Holder is
electing to redeem; provided that if the aggregate number amount of Preferred
Shares to be redeemed from such Holder and the other Holders with the cash
proceeds of an Asset Sale exceed the Available Asset Sale Proceeds for such
Asset Sale, the Company shall redeem the Preferred Shares presented for
redemption on a pro rata basis with such proceeds. Each Preferred Share subject
to redemption by the Company pursuant to this Section 8(e) shall be redeemed by
the Company at a price equal to at a price per Preferred Share equal to the
greater of (i) the Conversion Amount and (ii) the product of (A) the Conversion
Rate in effect at such time as such Holder delivers an Asset Sale Redemption 

 29
 

 

 

Notice and (B) the greater of the Closing Sale Price of the Common
Stock on the Trading Day following such Asset Sale and the Closing Sale Price
of the Common Stock on the date the Holder delivers the Asset Sale Redemption
Notice (the “Asset Sale Redemption Price”).
The Company shall deliver on the fifth (5th) Business Day (the “Asset Sale Redemption Date”) after the
Company’s receipt of the first Asset Sale Redemption Notice the applicable
Asset Sale Redemption Price to all Holders that deliver a Asset Sale Redemption
Notice prior to such fifth (5th)
Business Day after the Company’s receipt of the first Asset Sale Redemption
Notice.

(ii) For so long as any Preferred Shares are
outstanding, the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, consummate any Asset Sale unless the
Company (or the applicable Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the fair market
value of the assets or Equity Interests issued or sold or otherwise disposed
of.

(5)        Reservation of
Shares.

(a)   The
Company shall have sufficient authorized and unissued shares of Common Stock
for each of the Preferred Shares equal to 130% of the number of shares of
Common Stock necessary to effect
the conversion at the Conversion Rate with respect to the Conversion Amount of
each such Preferred Share as of the Initial Issuance Date. The Company
shall, so long as any of the Preferred Shares are outstanding, take all action
necessary to reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversions of the
Preferred Shares, such number of shares of Common Stock as shall from time to
time be necessary to effect the conversion of all of the Preferred Shares then
outstanding; provided that at no time shall the number of shares of Common
Stock so reserved shall at no time be less than 130% of the number of shares of
Common Stock for which the Preferred Shares are at any time convertible
(without regard to any limitations on conversions); provided that at no time
shall the number of shares of Common Stock so reserved be less than the number
of shares required to be reserved by reason of the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve Amount”).
The initial number of shares of Common Stock reserved for conversions of the
Preferred Shares and each increase in the number of shares so reserved shall be
allocated pro rata among the Holders based on the number of Preferred Shares
held by each Holder at the time of issuance of the Preferred Shares or increase
in the number of reserved shares, as the case may be (the “Authorized
Share Allocation”). In the event a Holder shall sell or otherwise
transfer any of such Holder’s Preferred Shares, each transferee shall be
allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Preferred Shares (other than pursuant to
a transfer of Preferred Shares in accordance with the immediately preceding
sentence) shall be allocated to the remaining Holders of Preferred Shares, pro
rata based on the number of Preferred Shares then held by such Holders.

 30
 

 

 

(b)   Insufficient Authorized Shares. If at any time while any of
the Preferred Shares remain outstanding the Company does not have a sufficient
number of authorized and unreserved shares of Common Stock to satisfy its
obligation to reserve for issuance upon conversion of the Preferred Shares at
least a number of shares of Common Stock equal to the Required Reserve Amount
(an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow
the Company to reserve the Required Reserve Amount for the Preferred Shares
then outstanding. Without limiting the generality of the foregoing sentence, as
soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than ninety (90) days after the occurrence of
such Authorized Share Failure, the Company shall hold a meeting of its
stockholders for the approval of an increase in the number of authorized shares
of Common Stock. In connection with such meeting, the Company shall provide
each stockholder with a proxy statement and shall use its best efforts to
solicit its stockholders’ approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

 

(6)        Voting Rights. Subject
to Sections 7 and 10, each Holder shall be entitled to the whole number of
votes equal to the lesser of (i) the number of shares of Common Stock into which
such Holder’s Preferred Shares would be convertible based on the Conversion
Price on the record date for the vote or consent of stockholders, and shall
otherwise have voting rights and powers equal to the voting rights and powers
of the Common Stock and (ii) the number of shares of Common Stock into which
such Holder’s Preferred Shares would be convertible if the Conversion Price on
the record date for the vote or consent of stockholders is deemed to be the
Market Price. Each Holder shall be entitled to receive the same prior notice of
any stockholders’ meeting as is provided to the holders of Common Stock in
accordance with the bylaws of the Company, as well as prior notice of all
stockholder actions to be taken by legally available means in lieu of a meeting,
and shall vote as a class with the holders of Common Stock as if they were a
single class of securities upon any matter submitted to a vote of stockholders,
except those matters required by law or by the terms hereof to be submitted to
a class vote of the Holders of Preferred Shares, in which case the Holders of
Preferred Shares only shall vote as a separate class.

(7)        Limitation on
Beneficial Ownership. The Company shall not effect any conversion of
Preferred Shares, and no Holder shall have the right to convert any Preferred
Shares, to the extent that after giving effect to such conversion, the
beneficial owner of such shares (together with such Person’s affiliates) would
have acquired, through conversion of Preferred Shares or otherwise, beneficial ownership
of a number of shares of Common Stock that exceeds the percentage set forth
opposite each Holder’s name in column (8) of the Schedule of Buyers to the
Securities Purchase Agreement (“Maximum
Percentage”) of the number of shares of Common Stock outstanding
immediately after giving effect to such conversion. The Company shall not give
effect to any voting rights of the Preferred Shares, and any Holder shall not
have the right to exercise voting rights with respect to any Preferred Shares
pursuant hereto, to the extent that giving effect to such voting rights would
result in such Holder (together with its affiliates) being deemed to
beneficially own in excess of the Maximum Percentage of the number of shares of
Common Stock outstanding immediately after giving effect to such exercise,
assuming such exercise as being equivalent to conversion. For purposes of the
foregoing, the

 31
 

 

 

number of shares
of Common Stock beneficially owned by a Person and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of the Preferred
Shares with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable
upon (A) conversion of the remaining, nonconverted Preferred Shares
beneficially owned by such Person or any of its affiliates and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any notes or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained in
this Section beneficially owned by such Person or any of its affiliates. Except
as set forth in the preceding sentence, for purposes of this Section 7,
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended. For purposes of this Section
7, in determining the number of outstanding shares of Common Stock, a Holder
may rely on the number of outstanding shares of Common Stock as reflected in
(1) the Company’s most recent Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB or
Form 8-K, as the case may be, (2) a more recent public announcement by the
Company, or (3) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason at any
time, upon the written request of any Holder, the Company shall within one (1)
Business Day following the receipt of such notice, confirm orally and in
writing to any such Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including the Preferred Shares, by such Holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the Holder may
from time to time increase or decrease the Maximum Percentage to any other
percentage not in excess of 9.99% specified in such notice; provided that (i)
any such increase will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply
only to the Holder providing such written notice and not to any other Holder. Notwithstanding
the foregoing, if a Holder has elected “no limit” in column (8) of the Schedule
of Buyers to the Securities Purchase Agreement, the limitations set forth in
this Section 7 shall not be applicable to such Holder.

(8)        Change of Control
Redemption Right; Liquidation, Dissolution, Winding-Up.

(a)   Change of Control. No sooner than fifteen (15) days nor later
than ten (10) days prior to the consummation of a Change of Control, but not
prior to the public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile and overnight courier to the
Holders (a “Change
of Control Notice”). At any time during the period (the “Change of Control Period”) beginning after a Holder’s receipt of a
Change of Control Notice and ending on the date that is twenty (20) Trading
Days after the consummation of such Change of Control, such Eligible Holder may
require the Company to redeem all or any portion of such Holder’s Preferred
Shares by delivering written notice thereof (“Change of Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing
to redeem. Any Preferred Shares subject to redemption pursuant to this Section
8 shall be redeemed by the Company in cash at a price equal to the greater of
(i) the product of (A) the

 32
 

 

 

Change of Control Redemption Premium and (B) the Conversion Amount
being redeemed and (ii) (1) the product of (A) the Conversion Amount being
redeemed multiplied by (B) the quotient determined by dividing (I) the
aggregate cash consideration and the aggregate cash value of any non-cash
consideration per share of Common Stock to be paid to the holders of the share
of Common Stock upon consummation of the Change of Control (any such
non-cash consideration consisting of marketable securities to be valued at the
higher of (x) the Closing Sale Price of such securities as of the Trading Day
immediately prior to the consummation of such Change of Control, (y) the
Closing Sale Price as of the Trading Day immediately following the public
announcement of such proposed Change of Control and (z) the Closing Sale Price
as of the Trading Day immediately prior to the public announcement of such
proposed Change of Control) by
(II) the Conversion Price (the “Change
of Control Redemption Price”).
The Company shall make payment of the Change of Control Redemption Price
concurrently with the consummation of such Change of Control if such a Change
of Control Redemption Notice is received prior to the consummation of such
Change of Control and within five (5) Trading Days after the Company’s receipt
of such notice otherwise (the “Change of
Control Redemption Date”). To the extent redemptions required by
this Section 8(a) are deemed or determined by a court of competent jurisdiction
to be prepayments of the Preferred Shares by the Company, such redemptions
shall be deemed to be voluntary prepayments. Notwithstanding anything to the
contrary in this Section 8(a), until the Change of Control Redemption Price is
paid in full, the Conversion Amount submitted for redemption under this Section
8 may be converted, in whole or in part, by the Holder into shares of Common Stock, or in the event the Conversion Date is
after the consummation of the Change of Control, shares or equity interests of
the Successor Entity substantially equivalent to the Company’s Common Stock pursuant to Section 2(c)(i). The parties
hereto agree that in the event of the Company’s redemption of any portion of
the Preferred Shares under this Section 8(a), the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to
predict future interest rates and the uncertainty of the availability of a
suitable substitute investment opportunity for the Holder. Accordingly, any
redemption premium due under this Section 8(a) is intended by the parties to
be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of
its investment opportunity and not as a penalty. In the event that the Company
does not pay the Change of Control Redemption Price on the Change of Control
Redemption Date, then the Holder shall have the option to, in lieu of
redemption, require the Company to promptly return to such Holder any or all of
the Preferred Shares that were submitted for redemption by such Holder under
this Section 8(a) and for which the applicable Change of Control Redemption
Price (together with any interest thereon) has not been paid, by sending written
notice thereof to the Company via facsimile (the “Void Change
of Control Redemption Notice”). Upon the Company’s receipt of such
Void Change of Control Redemption Notice, (i) the Change of Control Redemption
Notice shall be null and void with respect to those Preferred Shares subject to
the Void Change of Control Redemption Notice, (ii) the Company shall
immediately

 33
 

 

 

return any Preferred Shares subject to the
Void Change of Control Redemption Notice, and (iii) the Conversion Price of
such returned Preferred Shares shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Void Change of Control
Redemption Notice is delivered to the Company and (B) the lowest Weighted
Average Price of the Common Stock during the period beginning on the date on
which the Change of Control Redemption Notice is delivered to the Company and
ending on the date on which the Void Change of Control Redemption Notice is
delivered to the Company.

 

(b)   Liquidation. In the event of a Liquidation Event, the
Holders shall be entitled to receive in cash out of the assets of the Company,
whether from capital or from earnings available for distribution to its
stockholders (the “Liquidation Funds”),
before any amount shall be paid to the holders of any of the Capital Stock of
the Company of any class junior in rank to the Preferred Shares in respect of
the preferences as to distributions and payments on the liquidation,
dissolution and winding up of the Company, an amount per Preferred Share equal to
the Conversion Amount; provided that, if the Liquidation Funds are insufficient
to pay the full amount due to the Holders and holders of shares of other
classes or series of preferred stock of the Company that are of equal rank with
the Preferred Shares as to payments of Liquidation Funds (the “Pari Passu Shares”), if any, then each Holder and each
holder of any such Pari Passu Shares shall receive a percentage of the
Liquidation Funds equal to the full amount of Liquidation Funds payable to such
Holder as a liquidation preference, in accordance with their respective
Certificate of Designations, Preferences and Rights, as a percentage of the
full amount of Liquidation Funds payable to all holders of Preferred Shares and
Pari Passu Shares. To the extent necessary, the Company shall cause such
actions to be taken by any of its Subsidiaries so as to enable, to the maximum
extent permitted by law, the proceeds of a Liquidation Event to be distributed
to the Holders in accordance with this Section. All the preferential amounts to
be paid to the Holders under this Section shall be paid or set apart for
payment before the payment or setting apart for payment of any amount for, or
the distribution of any Liquidation Funds of the Company to the holders of
shares of other classes or series of preferred stock of the Company junior in
rank to the Preferred Shares in connection with a Liquidation Event as to which
this Section applies. The purchase or redemption by the Company of stock of any
class, in any manner permitted by law, shall not, for the purposes hereof, be
regarded as a Liquidation Event. Notwithstanding anything to the contrary in
this Section 8, but subject to Section 7, until the Liquidation Funds are
distributed to the Holders, the Preferred Shares may be converted, in whole or
in part, by any Holder into Common Stock pursuant to Section 2(b).

 

(9)        Ranking; Issuances
of Other Securities.

(a)   Preferred Rank. All shares of Common Stock, Series A
Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be of junior rank to all
Preferred Shares with respect to the preferences as to dividends, distributions
and payments upon the liquidation, dissolution and winding up of the 

 34
 

 

 

Company. The rights of the shares of Common
Stock shall be subject to the preferences and relative rights of the Preferred
Shares. Without the prior express written consent of the Required Holders, the
Company shall not hereafter authorize or issue additional or other Capital
Stock that is of senior or pari-passu rank to the Preferred Shares in respect
of the preferences as to distributions and payments upon a Liquidation Event. The
Company shall be permitted to issue preferred stock that is junior in rank to
the Preferred Shares in respect of the preferences as to dividends and other
distributions, amortization and redemption payments and payments upon the
liquidation, dissolution and winding up of the Company, provided that the
maturity date (or any other date requiring redemption or repayment (whether
through a scheduled amortization, redemption or otherwise) of such preferred
stock) of any such junior preferred stock is not on or before the ninety-first
(91st) day
following the Maturity Date. In the event of the merger or consolidation of the
Company with or into another corporation, the Preferred Shares shall maintain
their relative powers, designations and preferences provided for herein (except
that the Preferred Shares may not be pari
passu with, or junior to, any Capital Stock of the successor entity)
and no merger shall result inconsistent 
therewith.

 

(b)   Issuances of Equity-Linked Securities. For so long as any
Preferred Shares are outstanding, the Company will not, directly or indirectly,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition of) any
Indebtedness of it or its Subsidiaries that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of Common
Stock, Options, Convertible Securities or other Capital Stock of the Company.

 

(10)      Limitation on Number of Conversion
Shares. Notwithstanding anything to the contrary contained herein, the
Company shall not issue any shares of Common Stock upon conversion of the
Preferred Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
conversion of the Preferred Shares without breaching the Company’s obligations
under the rules or regulations of the Principal Market, or the market or
exchange where the Common Stock is then traded (the “Exchange Cap”), except that such limitation shall not apply in
the event that the Company (a) obtains the Stockholder Approval as required by
the applicable rules of the Principal Market (and any successor rule or
regulation) for issuances of Common Stock in excess of such amount, or (b)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
Required Holders. Until such approval or written opinion is obtained, no
purchaser of Preferred Shares pursuant to the Securities Purchase Agreement
(the “Purchasers”) shall be
issued, in the aggregate, upon conversion of Preferred Shares, shares of Common
Stock in an amount greater than the product of (i) the Exchange Cap amount
multiplied by (ii) a fraction, the numerator of which is the number of
Preferred Shares issued to such Purchaser pursuant to the Securities Purchase
Agreement on the Initial Issuance Date and the denominator of which is the
aggregate amount of all of the Preferred Shares issued to the Purchasers on the
Initial Issuance Date pursuant to the Securities Purchase Agreement (the “Exchange Cap Allocation”). In the event
that any Purchaser shall sell or otherwise transfer any of such Purchaser’s
Preferred Shares, the transferee 

 35
 

 

 

shall be allocated
a pro rata portion of such Purchaser’s Exchange Cap Allocation. In the event
that any Holder shall convert all of such Holder’s Preferred Shares into a
number of shares of Common Stock which, in the aggregate, is less than such
Holder’s Exchange Cap Allocation, then the difference between such Holder’s
Exchange Cap Allocation and the number of shares of Common Stock actually
issued to such Holder shall be allocated to the respective Exchange Cap
Allocations of the remaining Holders on a pro rata basis in proportion to the
number of Preferred Shares then held by each such Holder.

(11)      Participation. Subject
to the rights of the holders, if any, of the Pari Passu Shares, the Holders
shall, as holders of Preferred Stock, be entitled to such dividends paid and
distributions made to the holders of Common Stock to the same extent as if such
Holders had converted the Preferred Shares into Common Stock (without regard to
any limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock. Following the occurrence of a Liquidation
Event and the payment in full to a Holder of its applicable liquidation
preference, such Holder shall cease to have any rights hereunder to participate
in any future dividends or distributions made to the holders of Common Stock.

(12)      Vote to Change the
Terms of or Issue Preferred Shares. Except where the
vote or written consent of the holders of a greater number of shares is
required by law or by another provision of the Certificate of Incorporation,
the affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the Required Holders, voting together as a single class, shall be required before the Company
may: (a) amend or repeal any provision of, or add any provision to, the
Certificate of Incorporation or bylaws, or file any articles of amendment,
certificate of designations, preferences, limitations and relative rights of
any series of preferred stock (including
any amendment to the Certificates of Designations for the Series
A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock), if such action would
adversely alter or change the preferences, rights, privileges or powers of, or
restrictions provided for the benefit of the Preferred Shares, regardless of
whether any such action shall be by means of amendment to the Certificate of
Incorporation or by merger, consolidation or otherwise; (b) increase or
decrease (other than by conversion) the authorized number of shares of
Preferred Shares; (c) create or authorize (by reclassification or otherwise)
any new class or series of shares that has a preference over or is on a parity
with the Preferred Shares with respect to dividends or the distribution of
assets on the liquidation, dissolution or winding up of the Company; (d)
purchase, repurchase or redeem any shares of Common Stock (other than pursuant
to equity incentive agreements with employees giving the Company the right to
repurchase shares upon the termination of services at cost); (e) pay dividends
or make any other distribution on the Common Stock; or (f) whether or not
prohibited by the terms of the Preferred Shares, circumvent a right of the
Preferred Shares.

(13)      Lost or Stolen Certificates. Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of any Preferred Stock Certificates
representing the Preferred Shares, and, in the case of loss, theft or
destruction, of an indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Company shall execute and deliver
new preferred stock certificate(s) of like

 36
 

 

 

tenor and date; provided,
however, the Company shall not be obligated to re-issue preferred stock
certificates if the Holder contemporaneously requests the Company to convert
such Preferred Shares into Common Stock.

(14)      Remedies,
Characterizations, Other Obligations, Breaches and Injunctive Relief. Except
as otherwise specifically set forth herein, the remedies provided in this
Certificate of Designations shall be cumulative and in addition to all other
remedies available under this Certificate of Designations, at law or in equity
(including a decree of specific performance and/or other injunctive relief). Except
as otherwise specifically set forth herein, no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy. Except
as otherwise specifically set forth herein, nothing herein shall limit a Holder’s
right to pursue actual damages for any failure by the Company to comply with
the terms of this Certificate of Designations. The Company covenants to each
Holder that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein
with respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the Holder thereof and shall not, except
as expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof). The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holders and that
the remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, except as
otherwise specifically set forth herein, the Holders shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required. Notwithstanding anything to the contrary contained
herein, no Holder shall be entitled to consequential, indirect or incidental
damages hereunder. However, the foregoing shall not in any way limit a Holder
from being reimbursed for its costs, fees or expenses, including, without
limitation, reasonable attorneys’ fees and disbursements in connection with any
of its rights and remedies hereunder.

(15)      Construction. This
Certificate of Designations shall be deemed to be jointly drafted by the
Company and all Buyers (as defined in the Securities Purchase Agreement) and
shall not be construed against any person as the drafter hereof.

(16)      Failure or Indulgence
Not Waiver. No failure or delay on the part of a Holder in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.

(17)      Notice. Whenever
notice or other communication is required to be given under this Certificate of
Designations, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement (provided
that if the Preferred Shares are not held by a Buyer then substituting the
words “holder of Securities” for the word “Buyer”).

(18)      Transfer of Preferred Shares. A
Holder may assign some or all of the Preferred Shares and the accompanying
rights hereunder held by such Holder without the 

 37
 

 

 

consent of the
Company; provided that such assignment is in compliance with applicable
securities laws.

(19)      Preferred Share
Register. The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to the
Holders), a register for the Preferred Shares, in which the Company shall
record the name and address of the persons in whose name the Preferred Shares
have been issued, as well as the name and address of each transferee. The
Company may treat the person in whose name any Preferred Share is registered on
the register as the owner and holder thereof for all purposes, notwithstanding
any notice to the contrary, but in all events recognizing any properly made
transfers.

(20)      Stockholder Matters.
Any stockholder action, approval or consent required, desired or otherwise
sought by the Company pursuant to the rules and regulations of the Principal
Market, the DGCL, this Certificate of Designations or otherwise with respect to
the issuance of the Preferred Shares or the Common Stock issuable upon
conversion thereof may be effected by written consent of the Company’s
stockholders or at a duly called meeting of the Company’s stockholders, all in
accordance with the applicable rules and regulations of the Principal Market
and the DGCL. This provision is intended to comply with the applicable sections
of the DGCL permitting stockholder action, approval and consent affected by
written consent in lieu of a meeting.

(21)     Disclosure.
Upon receipt or delivery by the Company of any notice in accordance with the
terms of this Certificate of Designations, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K
or otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its Subsidiaries,
the Company so shall indicate to the Holders contemporaneously with delivery of
such notice, and in the absence of any such indication, the Holders shall be
allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.

(22)      SUBORDINATION.

(a)           NOTWITHSTANDING ANYTHING TO THE
CONTRARY CONTAINED IN THIS CERTIFICATE OF DESIGNATION, THE SECURITIES PURCHASE
AGREEMENT OR ANY OTHER AGREEMENT, DOCUMENT, CERTIFICATE, OR INSTRUMENT GIVEN IN
CONNECTION WITH, RELATED TO OR AFFECTING THE PREFERRED SHARES, the Company’s
obligation to make, and the Holders right to receive, any dividend or
distribution (whether in cash, securities or other property) or any direct or
indirect payment of any kind or character (whether in cash, securities or other
property) in consideration for or otherwise in connection the Preferred Shares,
including, without limitation, any amortization, retirement, purchase, redemption
or other acquisition of any Preferred Share, or any options, warrants or rights
to purchase or acquire any Preferred Shares or Common Stock of the Company
(collectively, the “Restricted Payments”)
are strictly junior and fully subordinated to the right 

 38
 

 

 

of payment held by
the holders of the Senior Debt (the “Senior Debt Holders”).
If a default (however defined) under any document, instrument, or other
agreement in any way related to the Senior Debt, whether such document,
instrument, or other agreement exists on the Initial Issuance Date or is
entered into after the Initial Issuance Date, exists at the time a Restricted
Payment is to be made or would exist as a result of such Restricted Payment
being made, (i) the Company shall not make, and no Holder is entitled to
receive, any Restricted Payment unless and until the “Payment in Full of the
Senior Debt” (as defined below); and (ii) no Holder shall be entitled to ask,
demand, sue for, take or receive from the Company or any of its Subsidiaries, directly
or indirectly, in cash or other property, or by set-off or in any other manner
(including without limitation from or by way of collateral) payment of any
Restricted Payment unless and until the Payment in Full of the Senior Debt.

(b)           The
subordination of the rights of the Holders to the Senior Debt Holders shall be
effective both before and after the commencement of any Insolvency Proceeding
(as defined below). All references in this clause 22 to the Company or any of
its Subsidiaries shall include such entity as a debtor-in-possession and any
receiver or trustee for such entity in any Insolvency Proceeding.

(c)           As
between the Holders and the Senior Debt Holders and without releasing or
affecting any of its senior rights as to the Holders, any Senior Debt Holder
may, one or more times, in its sole discretion, without notice to or the
consent of any Holder, take any action with respect to the Company, any of its
Subsidiaries or any of the Senior Debt, including, without limitation, one or more
of the following actions: (i) extend credit to the Company or any of its
Subsidiaries in such amounts as such Senior Debt Holder may determine or
withhold credit from the Company or any of its Subsidiaries;  (ii) release, renew or modify the obligations
of the Company or any of its Subsidiaries or any other person or entity
obligated on any of the Senior Debt; (c) release, exchange, modify, or
surrender in whole or in part such Senior Debt Holder’s rights with respect to
any security for any of the Senior Debt; (d) modify or alter the term, interest
rate or due date of any payment of any of the Senior Debt; (e) grant any
postponements, compromises, indulgences, waivers, surrenders or discharges or
modify the terms of its agreements with the Company or any of its Subsidiaries;
(f) change its manner of doing business with the Company or any of its
Subsidiaries or any other person or entity; (g) obtain additional security for
the Senior Debt; or (h) impute payments or proceeds of any security furnished
for any of the Senior Debt, in whole or in part, to any of the Senior Debt, or
retain the payments or proceeds as security for the Senior Debt without
applying same toward payment of the Senior Debt. Each Holder
waives and releases all claims and defenses arising from any such actions by
any holder of Senior Debt, including, without limitation, claims and defenses
relating to the inability to collect any Restricted Payment. No Senior
Debt Holder will be liable for any action or failure to act under or in
connection with any of the documents or instruments evidencing or securing the
Senior Debt, it being understood that the decision of whether and when to act
and the manner of proceeding under such instruments and documents are within
the sole discretion of such Senior Debt Holders, and shall not be affected in
any manner by the existence of the Company’s obligations hereunder.

(d)           For purposes hereof, “Payment in Full of the Senior Debt” means the satisfaction
of all of the following: (i) the passage of 90 days after the indefeasible and
final payment in full in cash of the Senior Debt, (ii) the termination of all
hedging transactions with 

 39
 

 

 

any Senior Debt
Holder, (iii) the termination or expiration of all commitments of each Senior
Debt Holder to advance funds or issue letters of credit, and (iv) the
termination or expiration and return of all letters of credit issued by any
Senior Debt Holder. For
purposes hereof, “Insolvency Proceeding”
means any distribution of all or any of the assets of any entity to creditors
of such entity upon the dissolution, winding up, liquidation, arrangement,
reorganization, adjustment, protection, relief, or composition of such entity
or its debts, whether in any bankruptcy, insolvency, arrangement,
reorganization, receivership, relief or similar proceedings or upon an
assignment for the benefit of creditors or any other marshalling of the assets
and liabilities of such entity or otherwise.

*  *  * 
*  *

 40

 

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

	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

EXHIBIT I

CANO PETROLEUM, INC.
CONVERSION NOTICE

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

	
  Date of Conversion:

  	
   

  
	
  Number of Preferred
  Shares to be converted:

  	
   

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

  	
   

  
	
  Tax ID Number (If
  applicable):

  	
   

  
				

 

Please confirm the
following information:

	
  Conversion Price:

  	
   

  
	
  Number of shares of
  Common Stock to be issued:

  	
   

  
			

 

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

	
  Issue to:

  	
   

  
	
   

  	
   

  
	
  Address: 

  	
   

  
	
  Telephone Number: 

  	
   

  
	
  Facsimile Number:

  	
   

  
	
  Authorization:

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
  Dated:

  	
   

  
	
  Account Number (if
  electronic book entry transfer):

  	
   

  
	
  Transaction Code Number (if
  electronic book entry transfer):

  	
   

  
												

 

 

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

 43

 

ACKNOWLEDGMENT

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

	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

Exhibit B

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

CANO PETROELUM, INC.

WARRANT TO PURCHASE
COMMON STOCK

	
  No. W-   

  	
  August     , 2006

  

 

Void
After February    , 2008

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

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

 

 

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

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

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

2.             EXERCISE OF WARRANT.

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

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

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

(c)           this Warrant.

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

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

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

 2
 

 

 

X =       Y (B-A)

B

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

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

A =         the Exercise Price.

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

“Current Market Price”
means on any particular date:

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

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

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

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

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

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

 3
 

 

 

3.             COVENANTS OF THE COMPANY.

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

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

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

4.             REPRESENTATIONS
OF HOLDER.

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

4.2          Securities Are Not Registered.

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

 4
 

 

 

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

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

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

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

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

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

 5
 

 

 

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

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

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

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

 6
 

 

 

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

8.             LIMITATION
ON BENEFICIAL OWNERSHIP.  The
Company shall not effect any exercise of the Warrant, and the older shall not
have the right to exercise any of the Warrant, to the extent that after giving
effect to such exercise, the beneficial owner of such shares (together with
such person’s affiliates) would have acquired, through exercise of the Warrant
or otherwise, beneficial ownership of a number of shares of common stock that
exceeds the percentage, if any, set forth opposite the Holder’s name in column
(8) of the schedule of buyers to the securities purchase agreement (“maximum percentage”) of the number of
shares of common stock outstanding immediately after giving effect to such
conversion.  For purposes of this Section
8, beneficial ownership shall be calculated in accordance with section 13(d) of
the Securities Exchange Act of 1934, as amended.  For purposes of this Section 8, in
determining the number of outstanding shares of common stock, the Holder may
rely on the number of outstanding shares of common stock as reflected in (1) the
Company’s most recent Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB or Form
8-K, as the case may be, (2) a more recent public announcement by the Company,
or (3) any other notice by the Company or the transfer agent setting forth the
number of shares of Common Stock outstanding. 
for any reason at any time, upon the written request of the Holder, the
Company shall within one (1) business day following the receipt of such notice,
confirm orally and in writing to the Holder the number of shares of Common
Stock then outstanding.  In any case, the
number of outstanding shares of 

Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including the Warrant, by the Holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  By written
notice to the Company, the Holder may from time to time increase or decrease
the maximum percentage to any other percentage specified in such notice;
provided that (i) any such increase will not be effective until the sixty-first
(61st) day after
such notice is delivered to the Company, and (ii) any such increase or decrease
will apply only to the Holder providing such written notice.  Notwithstanding the foregoing, if the Holder
has elected “no limit” in column (8) of the Schedule of Buyers to the
Securities Purchase Agreement, the limitations set forth in this Section 8
shall not be applicable to Holder.

 7
 

 

 

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

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

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

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

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

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

 8
 

 

 

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

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

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

[Signature Page Follows]

 9
 

 

 

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

	
  

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
  801 Cherry St., Suite 3200

  
	
   

  	
   

  	
  Fort Worth,
  Texas 76102

  
	
   

  	
   

  	
  Attention:
  Morris B. Smith and

  James K. Teringo, Jr.

  
	
   

  	
   

  	
  Facsimile: (817)
  334-0222

  
							

 

 10
 

 

 

NOTICE OF EXERCISE

TO:  CANO PETROLEUM, INC.

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

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

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

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

	
   

  	
   

  	
   

  
	
  

  	
  (Name)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Address)

  	
   

  

 

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

 

 

	
  

  	
   

  	
   

  	
   

  
	
  (Date)

  	
  (Signature)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Print name)

  

 

 11

EXHIBIT
C

REGISTRATION RIGHTS
AGREEMENT

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

WHEREAS:

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

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

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

1.     Definitions.

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

a.     “Business Day” means any day other than Saturday, Sunday or
any other day on which commercial banks in the City of New York are authorized
or required by law to remain closed.

b.     “Closing Date” shall have the meaning set forth in the
Securities Purchase Agreement.

c.     “Effective Date” means the date that the Registration
Statement has been declared effective by the SEC.

 

 

d.     “Effectiveness Deadline” means the date which is (i) in the
event that the Registration Statement is not subject to any review by the SEC,
ninety (90) days after the Closing Date or (ii) in the event that the
Registration Statement is subject to any review by the SEC, one hundred twenty
(120) days after the Closing Date.

e.     “Filing Deadline” means the date that is forty five (45) days
after the Closing Date.

f.      “Investor” means a Buyer or any transferee or assignee
thereof to whom a Buyer assigns its rights under this Agreement and who agrees
to become bound by the provisions of this Agreement in accordance with Section
9 and any transferee or assignee thereof to whom a transferee or assignee
assigns its rights under this Agreement and who agrees to become bound by the
provisions of this Agreement in accordance with Section 9.

g.     “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.

h.     “register,” “registered,”
and “registration” refer to a registration
effected by preparing and filing one or more Registration Statements (as
defined below) in compliance with the 1933 Act and pursuant to Rule 415, and
the declaration or ordering of effectiveness of such Registration Statement(s)
by the SEC.

i.      “Registrable Securities” means (i) the Common Shares, (ii)
the Conversion Shares issued or issuable upon conversion of the Preferred
Shares, (iii) the Warrant Shares issued or issuable upon exercise of the
Warrants and (iv) any capital stock of the Company issued or issuable with
respect to the Warrants, the Warrant Shares, the Common Shares or the Conversion
Shares as a result of any stock split, stock dividend, recapitalization,
exchange or similar event or otherwise, without regard to any limitations on
conversions of the Preferred Shares or exercises of the Warrants.

j.      “Registration Statement” means a registration statement or
registration statements of the Company filed under the 1933 Act covering the
Registrable Securities.

k.     “Required Holders” means the holders of at least a majority
of the Registrable Securities.

l.      “Required Registration Amount” means the sum of (i) 100% of the number of Common Shares issued and(ii) 130% of the maximum number of Conversion
Shares issued and issuable pursuant to the Certificate of Designations and
(iii) 100% of the maximum number of Warrant Shares issued and issuable pursuant
to the Warrants, as of the trading day immediately preceding the applicable
date of determination, all subject to adjustment as provided in Section 2(e)
(without regard to any limitations on conversion of the Preferred Shares or
exercise of the Warrants).

m.    “Rule 415” means Rule 415 under the 1933 Act or any successor
rule providing for offering securities on a continuous or delayed basis.

 2
 

 

 

n.     “SEC” means the United States Securities and Exchange
Commission.

2.     Registration.

a.     Mandatory
Registration.  The Company shall
prepare, and, as soon as practicable, but in no event later than the Filing
Deadline, file with the SEC the Registration Statement on Form S-1 covering the
resale of all of the Registrable Securities. 
The Registration Statement prepared pursuant hereto shall register for
resale at least the number of shares of Common Stock equal to the Required
Registration Amount determined as of the date the Registration Statement is
initially filed with the SEC.  The
Registration Statement shall contain (except if otherwise directed by the
Required Holders) the “Selling Stockholders” and “Plan of
Distribution” sections in substantially the form attached hereto as Exhibit
B.  The Company shall use its best
efforts to have the Registration Statement declared effective by the SEC as
soon as practicable, but in no event later than the Effectiveness
Deadline.  By 9:30 am on the second
Business Day following the Effective Date, the Company shall file with the SEC
in accordance with Rule 424 under the 1933 Act the final prospectus to be used
in connection with sales pursuant to such Registration Statement.

b.     Allocation
of Registrable Securities.  The
initial number of Registrable Securities included in any Registration Statement
and any increase in the number of Registrable Securities included therein shall
be allocated pro rata among the Investors based on the number of Registrable
Securities held by each Investor at the time the Registration Statement
covering such initial number of Registrable Securities or increase thereof is
declared effective by the SEC.  In the
event that an Investor sells or otherwise transfers any of such Investor’s
Registrable Securities, each transferee shall be allocated a pro rata portion
of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. 
Any shares of Common Stock included in a Registration Statement and
which remain allocated to any Person which ceases to hold any Registrable
Securities covered by such Registration Statement shall be allocated to the
remaining Investors, pro rata based on the number of Registrable Securities
then held by such Investors which are covered by such Registration
Statement.  Except for Scott White and
the Estate of Miles O’Loughlin, who have the right to include up to 1,791,320
shares of Common Stock in the Registration Statement, in no event shall the
Company include any securities other than Registrable Securities on any
Registration Statement without the prior written consent of the Required
Holders.

c.     Legal
Counsel.  Subject to Section 5
hereof, the Required Holders shall have the right to select one legal counsel
to review and oversee any registration pursuant to this Section 2 (“Legal Counsel”), which shall be Schulte Roth & Zabel LLP
or such other counsel as thereafter designated by the Required Holders.  The Company and Legal Counsel shall
reasonably cooperate with each other in performing the Company’s obligations
under this Agreement.

d.     Ineligibility
for Form S-3.  In the event that Form
S-3 is not available for the registration of the resale of Registrable
Securities hereunder, the Company shall (i) register the resale of the
Registrable Securities on another appropriate form reasonably acceptable to the
Required Holders and (ii) undertake to register the Registrable Securities on
Form S-3 as soon as such form is available, provided that the Company shall
maintain the

 3
 

 

effectiveness of the Registration Statement then in effect until such
time as a Registration Statement on Form S-3 covering the Registrable
Securities has been declared effective by the SEC.

e.     Sufficient
Number of Shares Registered.  In the
event the number of shares available under a Registration Statement filed
pursuant to Section 2(a) is insufficient to cover all of the Registrable
Securities required to be covered by such Registration Statement or an Investor’s
allocated portion of the Registrable Securities pursuant to Section 2(b), the
Company shall amend the applicable Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as
to cover at least the Required Registration Amount as of the trading day
immediately preceding the date of the filing of such amendment or new
Registration Statement, in each case, as soon as practicable, but in any event
not later than fifteen (15) days after the necessity therefor arises.  The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof.  For purposes of the foregoing provision, the
number of shares available under a Registration Statement shall be deemed “insufficient
to cover all of the Registrable Securities” if at any time the number of shares
of Common Stock available for resale under the Registration Statement is less
than the product determined by multiplying (i) the Required Registration Amount
as of such time by (ii) 0.90.  The
calculation set forth in the foregoing sentence shall be made without regard to
any limitations on the conversion of the Preferred Shares or the exercise of
the Warrants and such calculation shall assume that the Preferred Shares are
then convertible into shares of Common Stock at the then prevailing Conversion
Rate (as defined in the Certificate of Designations) and that the Warrants are
then exercisable for shares of Common Stock at the then prevailing Exercise
Price (as defined in the Warrants).

f.      Effect
of Failure to File and Obtain and Maintain Effectiveness of Registration
Statement.  If (i) a Registration
Statement covering all of the Registrable Securities required to be covered
thereby and required to be filed by the Company pursuant to this Agreement is
(A) not filed with the SEC on or before the respective Filing Deadline (a “Filing
Failure”) or (B) not declared effective by the SEC on or before the respective
Effectiveness Deadline (an “Effectiveness Failure”) or (ii) on any day after
the Effective Date sales of all of the Registrable Securities required to be
included on such Registration Statement cannot be made (other than during an
Allowable Grace Period (as defined in Section 3(r)) pursuant to such
Registration Statement (including, without limitation, because of a failure to
keep such Registration Statement effective, to disclose such information as is
necessary for sales to be made pursuant to such Registration Statement, to
register a sufficient number of shares of Common Stock or to maintain the
listing of the Common Stock) (a “Maintenance Failure”) then, as partial relief
for the damages to any holder by reason of any such delay in or reduction of
its ability to sell the underlying shares of Common Stock and not as a penalty
(which remedy shall not be exclusive of any other remedies available at law or
in equity), the Company shall pay to each holder of Registrable Securities
relating to such Registration Statement an amount in cash equal to one and
one-half percent (1.5%) of the aggregate Purchase Price (as such term is
defined in the Securities Purchase Agreement) of such Investor’s Registrable
Securities included in such Registration Statement on each of the following
dates:  (i) the day of a Filing Failure;
(ii) the day of an Effectiveness Failure; (iii) the initial day of a
Maintenance Failure; (iv) on every thirtieth day after the day of a Filing
Failure and thereafter (pro rated for periods totaling less than thirty

 4
 

 

 

days) until such Filing Failure is cured; (v) on every thirtieth day
after the day of an Effectiveness Failure and thereafter (pro rated for periods
totaling less than thirty days) until such Effectiveness Failure is cured; and
(vi) on every thirtieth day after the initial day of a Maintenance Failure and
thereafter (pro rated for periods totaling less than thirty days) until such Maintenance
Failure is cured.  The payments to which
a holder shall be entitled pursuant to this Section 2(f) are referred to herein
as “Registration Delay Payments.” 
Registration Delay Payments shall be paid on the earlier of (I) the
dates set forth above and (II) the third Business Day after the event or
failure giving rise to the Registration Delay Payments is cured.  In the event the Company fails to make
Registration Delay Payments in a timely manner, such Registration Delay
Payments shall bear interest at the rate of one and one-half percent (1.5%) per
month (prorated for partial months) until paid in full.  Notwithstanding anything herein or in the
Securities Purchase Agreement to the contrary (i) no Registration Delay
Payments shall be due and payable with respect to the Warrants or the Warrant
Shares and (ii) in no event shall the aggregate amount of Registration Delay
Payments (other than Registration Delay Payments payable pursuant to events
that are within the control of the Company) exceed, in the aggregate, 10% of
the aggregate Purchase Price.

3.     Related Obligations.

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

a.     The
Company shall promptly prepare and file with the SEC a Registration Statement
with respect to the Registrable Securities and use its reasonable best efforts
to cause such Registration Statement relating to the Registrable Securities to
become effective as soon as practicable after such filing (but in no event
later than the Effectiveness Deadline). 
The Company shall keep each Registration Statement effective pursuant to
Rule 415 at all times until the earlier of (i) the date as of which the
Investors may sell all of the Registrable Securities covered by such
Registration Statement without restriction pursuant to Rule 144(k) (or any
successor thereto) promulgated under the 1933 Act or (ii) the date on which the
Investors shall have sold all of the Registrable Securities covered by such
Registration Statement (the “Registration
Period”).  The Company shall
ensure that each Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein, or necessary to make the statements therein (in the case
of prospectuses, in the light of the circumstances in which they were made) not
misleading.  The term “reasonable best
efforts” shall mean, among other things, that the Company shall submit to the
SEC, within three (3) Business Days after the later of the date that (i) the
Company learns that no review of a particular Registration Statement will be
made by the staff of the SEC or that the staff has no further comments on a
particular Registration Statement, as the case may be, and (ii) the approval of
Legal Counsel pursuant to Section 3(c) (which approval is immediately sought
and shall not be unreasonably withheld or delayed), a request for acceleration
of effectiveness of such Registration Statement to a time and date not later
than 48 hours after the submission of such request.

 5
 

 

 

b.     The
Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
prospectus used in connection with such Registration Statement, which
prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act,
as may be necessary to keep such Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by such Registration Statement until such
time as all of such Registrable Securities shall have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in such Registration Statement.  In the case of amendments and supplements to
a Registration Statement which are required to be filed pursuant to this
Agreement (including pursuant to this Section 3(b)) by reason of the Company
filing a report on Form 10-Q, Form 10-K or any analogous report under the
Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company shall have incorporated such report
by reference into such Registration Statement, if applicable, or shall file
such amendments or supplements with the SEC within one (1) Business Day after
the day on which the 1934 Act report is filed which created the requirement for
the Company to amend or supplement such Registration Statement.

c.     The
Company shall (A) permit Legal Counsel to review and comment upon (i) a
Registration Statement at least five (5) Business Days prior to its filing with
the SEC and (ii) all amendments and supplements to all Registration Statements
(except for Annual Reports on Form 10-K or Form 10-KSB, Quarterly Reports on
Form 10-Q or Form 10-QSB, Current Reports on Form 8-K, and any similar or
successor reports) within a reasonable number of days prior to their filing
with the SEC, and (B) not file any Registration Statement or amendment or
supplement thereto in a form to which Legal Counsel reasonably objects.  The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement or any amendment
or supplement thereto without the prior approval of Legal Counsel, which
consent shall not be unreasonably withheld or delayed.  The Company shall furnish to Legal Counsel,
without charge, (i) copies of any correspondence from the SEC or the staff of
the SEC to the Company or its representatives relating to any Registration
Statement, (ii) promptly after the same is prepared and filed with the SEC, one
copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference, if requested by an Investor, and all exhibits and (iii) upon the
effectiveness of any Registration Statement, one copy of the prospectus
included in such Registration Statement and all amendments and supplements
thereto.  The Company shall reasonably
cooperate with Legal Counsel in performing the Company’s obligations pursuant
to this Section 3.

d.     The
Company shall furnish to each Investor whose Registrable Securities are included
in any Registration Statement, without charge, (i) promptly after the same is
prepared and filed with the SEC, at least one copy of such Registration
Statement and any amendment(s) thereto, including financial statements and
schedules, all documents incorporated therein by reference, and, if requested
by an Investor, all exhibits and each preliminary prospectus, (ii) upon the
effectiveness of any Registration Statement, ten (10) copies of the prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such Investor may reasonably
request) and (iii) such other documents, including copies of any preliminary or
final prospectus, as such Investor may

 6
 

 

 

reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.

e.     The
Company shall use its best efforts to (i) register and qualify, unless an
exemption from registration and qualification applies, the resale by Investors
of the Registrable Securities covered by a Registration Statement under such
other securities or “blue sky” laws of all applicable jurisdictions in the
United States, (ii) prepare and file in those jurisdictions, such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during
the Registration Period, and (iv) take all other actions reasonably necessary
or advisable to qualify the Registrable Securities for sale in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (x) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction.  The Company shall promptly
notify Legal Counsel and each Investor who holds Registrable Securities of the
receipt by the Company of any notification with respect to the suspension of
the registration or qualification of any of the Registrable Securities for sale
under the securities or “blue sky” laws of any jurisdiction in the United
States or its receipt of actual notice of the initiation or threatening of any
proceeding for such purpose.

f.      The
Company shall notify Legal Counsel and each Investor in writing of the
happening of any event, as promptly as practicable after becoming aware of such
event, as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact
or omission to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading (provided that in no event shall such notice
contain any material, nonpublic information), and, subject to Section 3(r),
promptly prepare a supplement or amendment to such Registration Statement to
correct such untrue statement or omission, and deliver ten (10) copies of such
supplement or amendment to Legal Counsel and each Investor (or such other
number of copies as Legal Counsel or such Investor may reasonably
request).  The Company shall also
promptly notify Legal Counsel and each Investor in writing (i) when a
prospectus or any prospectus supplement or post-effective amendment has been
filed, and when a Registration Statement or any post-effective amendment has
become effective (notification of such effectiveness shall be delivered to
Legal Counsel and each Investor by facsimile or e-mail on the same day of such
effectiveness and by overnight mail), (ii) of any request by the SEC for
amendments or supplements to a Registration Statement or related prospectus or
related information, and (iii) of the Company’s reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.

g.     The
Company shall use its best efforts to prevent the issuance of any stop order or
other suspension of effectiveness of a Registration Statement, or the
suspension of the qualification of any of the Registrable Securities for sale
in any jurisdiction and, if such an order or suspension is issued, to obtain
the withdrawal of such order or suspension at the earliest possible moment and
to notify Legal Counsel and each Investor who holds Registrable Securities 

 7
 

 

 

being sold of the issuance of such order and the resolution thereof or
its receipt of actual notice of the initiation or threat of any proceeding for
such purpose.

h.     If
any Investor is deemed to be, alleged to be or reasonably believes it may be
deemed or alleged to be, an underwriter or is required under applicable
securities laws to be described in the Registration Statement as an
underwriter, at the reasonable request of such Investor, the Company shall
furnish to such Investor, on the date of the effectiveness of the Registration
Statement and thereafter from time to time on such dates as an Investor may
reasonably request (i) a letter, dated such date, from the Company’s
independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the Investors, and (ii) an
opinion, dated as of such date, of counsel representing the Company for purposes
of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering, addressed to the Investors.

i.      Upon
the written request of any Investor in connection with such Investor’s due
diligence requirements, if any, the Company shall make available for inspection
by (i) any Investor, (ii) Legal Counsel and (iii) one firm of accountants or
other agents retained by the Investors (collectively, the “Inspectors”), all pertinent financial and other records, and
pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each
Inspector, and cause the Company’s officers, directors and employees, counsel
and the Company’s independent certified public accountants to supply all
information which may be necessary and any Inspector may reasonably request;
provided, however, that each Inspector shall agree to hold in strict confidence
and shall not make any disclosure (except to an Investor) or use of any Record
or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise required
under the 1933 Act, (b) the release of such Records is ordered pursuant to a
final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
Agreement.  Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.  Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investors’ ability to sell Registrable Securities in a manner
which is otherwise consistent with applicable laws and regulations.

j.      The
Company shall hold in confidence and not make any disclosure of information
concerning an Investor provided to the Company unless (i) disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement.  The Company agrees that it
shall, upon learning that

 8
 

 

 

disclosure of such information concerning an Investor is sought in or
by a court or governmental body of competent jurisdiction or through other
means, give prompt written notice to such Investor and allow such Investor, at
the Investor’s expense, to undertake appropriate action to prevent disclosure
of, or to obtain a protective order for, such information.

k.     The
Company shall use its best efforts either to (i) cause all of the Registrable
Securities covered by a Registration Statement to be listed on each securities
exchange on which securities of the same class or series issued by the Company
are then listed, if any, if the listing of such Registrable Securities is then
permitted under the rules of such exchange or (ii) secure the inclusion for
quotation of all of the Registrable Securities on The NASDAQ Global Market or
The NASDAQ Global Select Market, or (iii) if, despite the Company’s best
efforts, the Company is unsuccessful in satisfying the preceding clauses (i) or
(ii), to secure the inclusion for quotation on The NASDAQ Capital Market for
such Registrable Securities and, without limiting the generality of the
foregoing, to use its best efforts to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. (“NASD”) as
such with respect to such Registrable Securities.  The Company shall pay all fees and expenses
in connection with satisfying its obligation under this Section 3(k).

l.      The
Company shall cooperate with the Investors who hold Registrable Securities
being offered and, to the extent applicable, facilitate the timely preparation
and delivery of certificates (not bearing any restrictive legend) representing
the Registrable Securities to be offered pursuant to a Registration Statement
and enable such certificates to be in such denominations or amounts, as the
case may be, as the Investors may reasonably request and registered in such
names as the Investors may request.

m.      If
requested by an Investor, the Company shall as soon as practicable but in no
event later than five (5) days after the receipt of notice from such Investor,
(i) incorporate in a prospectus supplement or post-effective amendment such
information as an Investor reasonably requests to be included therein relating
to the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering;
(ii) make all required filings of such prospectus supplement or post-effective
amendment after being notified of the matters to be incorporated in such
prospectus supplement or post-effective amendment; and (iii) supplement or make
amendments to any Registration Statement if reasonably requested by an Investor
holding any Registrable Securities.

n.     The
Company shall use its best efforts to cause the Registrable Securities covered
by the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to consummate the
disposition of such Registrable Securities.

o.     The
Company shall make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with, and in the
manner provided by, the provisions of Rule 158 under the 1933 Act) covering a
twelve-month period beginning not later than the first

 9
 

 

 

day of the Company’s fiscal quarter next following the effective date
of the Registration Statement.

p.     The
Company shall otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC in connection with any registration hereunder.

q.     Within
two (2) Business Days after a Registration Statement which covers Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and
shall cause legal counsel for the Company to deliver, to the transfer agent for
such Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) confirmation that such
Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit A.

r.      Notwithstanding
anything to the contrary herein, at any time after the Effective Date, the
Company may delay the disclosure of material, non-public information concerning
the Company the disclosure of which at the time is not, in the good faith
opinion of the Board of Directors of the Company and its counsel, in the best
interest of the Company and, in the opinion of counsel to the Company,
otherwise required (a “Grace Period”);
provided, that the Company shall promptly (i) notify the Investors in writing
of the existence of material, non-public information giving rise to a Grace
Period (provided that in each notice the Company will not disclose the content
of such material, non-public information to the Investors) and the date on
which the Grace Period will begin, and (ii) notify the Investors in writing of
the date on which the Grace Period ends; and, provided further, that no Grace
Period shall exceed twelve (12) consecutive days and during any three hundred
sixty five (365) day period such Grace Periods shall not exceed an aggregate of
twenty-five (25) days and the first day of any Grace Period must be at least
five (5) trading days after the last day of any prior Grace Period (each, an “Allowable Grace Period”). 
For purposes of determining the length of a Grace Period above, the
Grace Period shall begin on and include the date the Investors receive the
notice referred to in clause (i) and shall end on and include the later of the
date the Investors receive the notice referred to in clause (ii) and the date
referred to in such notice.  The
provisions of Section 3(g) hereof shall not be applicable during the period of
any Allowable Grace Period.  Upon
expiration of the Grace Period, the Company shall again be bound by the first
sentence of Section 3(g) with respect to the information giving rise thereto
unless such material, non-public information is no longer applicable.  Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of an Investor in accordance with the terms of the
Securities Purchase Agreement in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale, and delivered a copy of the prospectus included as part of the applicable
Registration Statement (unless an exemption from such delivery requirement
exists), prior to the Investor’s receipt of the notice of a Grace Period and
for which the Investor has not yet settled.

4.     Obligations of the Investors.

a.     At
least ten (10) Business Days prior to the first anticipated filing date of a
Registration Statement, the Company shall notify each Investor in writing of
the information the Company requires from each such Investor if such Investor
elects to have any of such Investor’s Registrable Securities included in such
Registration Statement.  It shall be a
condition

 10
 

 

 

precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Investor that such Investor shall furnish to the
Company such information regarding itself, the Registrable Securities held by
it and the intended method of disposition of the Registrable Securities held by
it, as shall be reasonably required to effect and maintain the effectiveness of
the registration of such Registrable Securities and shall execute such
documents in connection with such registration as the Company may reasonably
request.

b.     Each
Investor, by such Investor’s acceptance of the Registrable Securities, agrees
to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless such Investor has notified the Company in writing of such
Investor’s election to exclude all of such Investor’s Registrable Securities
from such Registration Statement.

c.     Each
Investor agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(g) or the first sentence
of 3(f), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to any Registration Statement(s) covering such Registrable
Securities until such Investor’s receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(g) or the first sentence of 3(f)
or receipt of notice that no supplement or amendment is required.  Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of an Investor in accordance with the terms of the
Securities Purchase Agreement in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale prior to the Investor’s receipt of a notice from the Company of the
happening of any event of the kind described in Section 3(g) or the first
sentence of 3(f) and for which the Investor has not yet settled.

d.     Each
Investor covenants and agrees that it will comply with the prospectus delivery
requirements of the 1933 Act as applicable to it or an exemption therefrom in
connection with sales of Registrable Securities pursuant to the Registration
Statement.

5.     Expenses of Registration.

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

6.     Indemnification.

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

a.     To
the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend each Investor, the directors, officers,
members,

 11
 

 

 

partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the 1934
Act (each, an “Indemnified Person”),
against any losses, claims, damages, liabilities, judgments, fines, penalties,
charges, costs, reasonable attorneys’ fees, amounts paid in settlement or
expenses, joint or several, other than consequential, indirect or incidental
damages (collectively, “Claims”)
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto (“Indemnified Damages”),
to which any of them may become subject insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon:  (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
“blue sky” laws of any jurisdiction in which Registrable Securities are offered
(“Blue Sky Filing”), or the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary
to make the statements made therein, in light of the circumstances under which
the statements therein were made, not misleading, (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement or (iv) any violation of this
Agreement (the matters in the foregoing clauses (i) through (iv) being,
collectively, “Violations”).  Subject to Section 6(c), the Company shall
reimburse the Indemnified Persons, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred
by them in connection with investigating or defending any such Claim.  Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section
6(a):  (i) shall not apply to a Claim by
an Indemnified Person arising out of or based upon a Violation which occurs in reliance
upon and in conformity with information furnished in writing to the Company by
such Indemnified Person for such Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section 3(d) and (ii) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld or delayed.  Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer
of the Registrable Securities by the Investors pursuant to Section 9.

b.     In
connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement and each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act (each,
an “Indemnified Party”),
against any Claim or Indemnified Damages to which any of them may

 12
 

 

 

become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such Violation
occurs in reliance upon and in conformity with written information furnished to
the Company by such Investor expressly for use in connection with such
Registration Statement; and, subject to Section 6(c), such Investor will
reimburse any legal or other expenses reasonably incurred by an Indemnified
Party in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) and the
agreement with respect to contribution contained in Section 7 shall not apply
to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld or delayed; provided, further, however, that the Investor
shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement.  Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf
of such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.

c.     Promptly
after receipt by an Indemnified Person or Indemnified Party under this Section
6 of notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving a Claim, such Indemnified Person
or Indemnified Party shall, if a Claim in respect thereof is to be made against
any indemnifying party under this Section 6, deliver to the indemnifying party
a written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses of
not more than one counsel for such Indemnified Person or Indemnified Party to
be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding.  In the case
of an Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding at least a majority in interest of the Registrable Securities included in the
Registration Statement to which the Claim relates.  The Indemnified Party or Indemnified Person
shall cooperate reasonably with the indemnifying party in connection with any
negotiation or defense of any such action or Claim by the indemnifying party
and shall furnish to the indemnifying party all information reasonably
available to the Indemnified Party or Indemnified Person which relates to such
action or Claim.  The indemnifying party
shall keep the Indemnified Party or Indemnified Person fully apprised at all
times as to the status of the defense or any settlement negotiations with
respect thereto.  No indemnifying party
shall be liable for any settlement of any action, claim or proceeding effected
without its prior written consent, provided, however, that the indemnifying
party shall not unreasonably withhold, delay or condition its consent.  No indemnifying party shall, without the
prior written consent of the Indemnified Party or Indemnified Person, consent
to entry of any judgment or enter into any settlement or other compromise which
does not include as an unconditional term thereof the giving by the claimant

 13
 

 

 

or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such Claim or litigation, and such
settlement shall not include any admission as to fault on the part of the
Indemnified Party or the Indemnified Person. 
Following indemnification as provided for hereunder, the indemnifying
party shall be subrogated to all rights of the Indemnified Party or Indemnified
Person with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made. 
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.

d.     The
indemnification required by this Section 6 shall be made by periodic payments
of the amount thereof during the course of the investigation or defense, as and
when bills are received or Indemnified Damages are incurred.

e.     The
indemnity agreements contained herein shall be in addition to  (i) any cause of action or similar right of
the Indemnified Party or Indemnified Person against the indemnifying party or
others, and (ii) any liabilities the indemnifying party may be subject to
pursuant to the law.

7.     Contribution.

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

8.     Reports Under the 1934 Act.

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

a.     make
and keep public information available, as those terms are understood and
defined in Rule 144;

b.     file
with the SEC in a timely manner all reports and other documents required of the
Company under the 1933 Act and the 1934 Act so long as the Company remains
subject to such requirements (it being understood that nothing herein shall
limit the Company’s obligations under Section 4(c) of the Securities Purchase
Agreement) and the filing of such reports and other documents is required for
the applicable provisions of Rule 144; and

 14
 

 

 

c.     furnish
to each Investor so long as such Investor owns Registrable Securities, promptly
upon request, (i) a written statement by the Company, if true, that it has
complied with the reporting requirements of Rule 144, the 1933 Act and the 1934
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company, and (iii) such
other information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.

9.     Assignment of Registration Rights.

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

10.   Amendment of Registration Rights.

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

11.   Miscellaneous.

a.     A
Person is deemed to be a holder of Registrable Securities whenever such Person
owns or is deemed to own of record such Registrable Securities.  If the Company receives conflicting instructions,
notices or elections from two or more Persons with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the such record owner of such Registrable
Securities.

b.     Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed
to have been delivered:  (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one Business Day
after deposit with a nationally

 15
 

 

 

recognized overnight delivery service, in each case properly addressed
to the party to receive the same.  The
addresses and facsimile numbers for such communications shall be:

If to the Company:

Cano Petroleum, Inc.

801 Cherry Street

Suite 3200

Fort Worth,   Texas 76102

Telephone:    (817) 698-0900

Facsimile:      (817) 334-0222

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

With a copy to:

W. Bruce Newsome

Haynes and Boone, LLP

901 Main St., Suite 3100

Dallas, TX 75202

Telephone:    (214) 651-5119

Facsimile:      (214) 200-0636

If to Legal Counsel:

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York  10022

Telephone:    (212) 756-2000

Facsimile:      (212) 593-5955

Attention:     Eleazer N. Klein, Esq.

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

c.     Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.

 16
 

 

 

d.     All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New York or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address for
such notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

e.     This
Agreement, the other Transaction Documents (as defined in the Securities
Purchase Agreement) and the instruments referenced herein and therein
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof.  There
are no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. 
This Agreement, the other Transaction Documents and the instruments
referenced herein and therein supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.

f.      Subject
to the requirements of Section 9, this Agreement shall inure to the benefit of
and be binding upon the permitted successors and assigns of each of the parties
hereto.

g.     The
headings in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.

h.     This
Agreement may be executed in identical counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
agreement.  This Agreement, once executed
by a party, may be delivered to the other party hereto by facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.

 17
 

 

 

i.      Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as any other party may reasonably request
in order to carry out the intent and accomplish the purposes of this Agreement
and the consummation of the transactions contemplated hereby.

j.      All
consents and other determinations required to be made by the Investors pursuant
to this Agreement shall be made, unless otherwise specified in this Agreement,
by the Required Holders.

k.     The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent and no rules of strict construction will
be applied against any party.

l.      This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

m.    Notwithstanding
anything to the contrary contained herein, no Buyer or holder of Registrable
Securities shall be entitled to consequential, indirect or incidental damages
hereunder.  However, the foregoing shall
not in any way limit a Buyer or holder of Registrable Securities from being
reimbursed for its costs, fees or expenses, including, without limitation,
reasonable attorneys’ fees and disbursements in connection with any of its
rights and remedies hereunder.

n.     The
obligations of each Investor hereunder are several and not joint with the
obligations of any other Investor, and no provision of this Agreement is
intended to confer any obligations on any Investor vis-à-vis any other
Investor.  Nothing contained herein, and
no action taken by any Investor pursuant hereto, shall be deemed to constitute
the Investors as a partnership, an association, a joint venture or any other
kind of entity, or create a presumption that the Investors are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated herein.

* * * * * *

 18

 

 

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

	
  

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
  Title:

  

 

 1
 

 

 

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

 

	
  

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
  Title:

  

 

 2
 

 

 

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

 

	
  

  	
  [OTHER BUYERS]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
  Title:

  

 

 3
 

 

 

SCHEDULE OF BUYERS

 

	
  Buyer

  	
   

  	
  Buyer Address

  and Facsimile Number

  	
   

  	
  Buyer’s Representative’s Address

  and Facsimile Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  [Buyer]

  	
   

  	
   

  	
   

  	
   

  
	
  [Other
  Buyers]

  	
   

  	
   

  	
   

  	
   

  

 

 

 4

 

EXHIBIT A

FORM OF NOTICE OF
EFFECTIVENESS

OF REGISTRATION STATEMENT

[Transfer Agent]

[Address]

Attention:

Re:          Cano Petroleum, Inc.

Ladies and Gentlemen:

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

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

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

 1
 

 

 

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

	
  

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  [ISSUER’S COUNSEL]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  

 

CC:          [LIST
NAMES OF HOLDERS]

 2

 

 

EXHIBIT B

SELLING STOCKHOLDERS

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

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

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

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

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

 1
 

 

 

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

 2

 

 

	
  

  

  
Name of Selling Stockholder

  	
   

  	
   

  	
   

  	
  

  Number of Ordinary Shares

  Owned Prior to Offering

  	
   

  	
  Maximum Number of

  Ordinary Shares to be Sold

  Pursuant to this Prospectus

  	
   

  	
  

  Number of Ordinary

  Shares Owned After

  Offering

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  [Buyer] (1)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  [Other Buyers]

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

(1)

 

 1

PLAN OF DISTRIBUTION

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

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

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

·                  in
the over-the-counter market;

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

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

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

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

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

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

·                  privately
negotiated transactions;

·                  short
sales;

·                  sales
pursuant to Rule 144;

 

 

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

·                  a
combination of any such methods of sale; and

·                  any
other method permitted pursuant to applicable law.

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

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

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

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

 2
 

 

 

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

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

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

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

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

 3

EXHIBIT D

 

TRANSFER
AGENT INSTRUCTIONS

 

CANO
PETROLEUM, INC.

 

August     , 2006

 

Interwest Transfer
Company

1981 East 4800 South, Suite 100

Salt Lake City, UT 84117

Attention:  Lorraine Smith

 

Ladies and Gentlemen:

 

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

 

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

 

(i)            to issue shares of Common Stock upon
transfer or resale of the Common Shares;

 

(ii)           to issue shares of Common Stock upon
conversion of the Preferred Shares (the “Conversion
Shares”) to or upon the order of a Holder from time to time upon
delivery to you of a properly completed and duly executed Conversion Notice, in
the form attached hereto as Exhibit I, which has been acknowledged by
the Company as indicated by the signature of a duly authorized officer of the
Company thereon; and

 

(iii)          to issue shares of Common Stock upon
exercise of the Warrants (the “Warrant Shares”)
to or upon the order of a Holder from time to time upon delivery to you of a
properly completed and duly executed Exercise Notice, in the form attached
hereto as Exhibit II, which has been acknowledged by the Company as
indicated by the signature of a duly authorized officer of the Company thereon.

 

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

 

 

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

 

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

 

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

 

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

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  

 

 

	
  

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  James K. Teringo, Jr.

  
	
   

  	
   

  	
  Title:

  	
  Senior Vice President and

  General Counsel

  
					

 

 

THE FOREGOING INSTRUCTIONS ARE

ACKNOWLEDGED AND AGREED TO

 

this         day of
August, 2006

 

INTERWEST TRANSFER COMPANY

 

 

	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  

 

Enclosures

 

	
  cc:

  	
  [Lead Investor]

  
	
   

  	
  [Other Buyers]

  
	
   

  	
  Eleazer N. Klein, Esq.

  
	
   

  	
   

  

 

 

EXHIBIT I

CANO PETROLEUM, INC. CONVERSION NOTICE

 

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

 

	
  Date of Conversion:

  	
   

  
	
   

  	
   

  
	
  Number of Preferred Shares to be converted:

  	
   

  
	
   

  	
   

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

  	
   

  
	
   

  	
   

  
	
  Tax ID Number (If applicable):

  	
   

  
	
   

  	
   

  
	
  Please confirm
  the following information:

  	
   

  
	
   

  	
   

  
	
  Conversion Price: 

  	
   

  
	
   

  	
   

  
	
  Number of shares of Common Stock to be issued:

  	
   

  

 

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

 

	
  Issue to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Address: 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Telephone Number: 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Facsimile Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Authorization:

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

	
  By:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  

 

	
  Account Number (if
  electronic book entry transfer):

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Transaction Code Number (if electronic book entry
  transfer):

  	
   

  	
   

  

 

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

 

 

ACKNOWLEDGMENT

 

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

 

	
  

  	
  CANO PETROLEUM,
  INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
					

 

 

EXHIBIT II

 

NOTICE
OF EXERCISE

 

TO:  CANO PETROLEUM, INC.

 

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

 

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

 

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

 

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

 

	
  

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Name)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Address)

  	
   

  

 

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

 

 

 

	
   

  	
   

  	
   

  

 

 

 

	
  (Date)

  	
   

  	
  (Signature) 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Print name)

  

 

 

EXHIBIT III

 

FORM OF NOTICE OF
EFFECTIVENESS

OF REGISTRATION STATEMENT

 

[Transfer Agent]

[Address]

Attention:

 

Re:          Cano Petroleum, Inc.

 

Ladies and Gentlemen:

 

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

 

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

 

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

 

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

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  [ISSUER’S COUNSEL]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  

 

CC:          [LIST
NAMES OF HOLDERS]

 

 

EXHIBIT E

CANO PETROLEUM,
INC.

SECRETARY’S
CERTIFICATE

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

1.                                       Attached
hereto as Exhibit A is a true, correct and complete copy of the
resolutions duly adopted by the Board of Directors of the Company by unanimous
written consent dated August 24, 2006 (“Board
Resolutions”) and a true, correct and complete copy of the resolutions of the
Negotiation Committee (as defined in the Board Resolutions) duly adopted by the
Negotiation Committee pursuant to a unanimous written consent of the
Negotiation Committee dated August      ,
2006.  Such resolutions have not in any
way been amended, modified, revoked or rescinded, have been in full force and
effect since their adoption to and including the date hereof and are now in
full force and effect.

2.                                       Attached
hereto as Exhibit B is a true, correct and complete copy of the
Certificate of Incorporation of the Company, together with any and all
amendments thereto currently in effect, and no action has been taken to further
amend, modify or repeal such Certificate of Incorporation, the same being in
full force and effect in the attached form as of the date hereof.

3.                                       Attached
hereto as Exhibit C is a true, correct and complete copy of the Bylaws
of the Company and any and all amendments thereto currently in effect, and no
action has been taken to further amend, modify or repeal such Bylaws, the same
being in full force and effect in the attached form as of the date hereof.

 

 

4.                                       Each
person listed below has been duly elected or appointed to the position(s)
indicated opposite his name and is duly authorized to sign the Securities
Purchase Agreement and each of the Transaction Documents on behalf of the
Company, and the signature appearing opposite such person’s name below is such
person’s genuine signature.

	
  Name

  	
   

  	
   

  	
   

  	
  Position

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  S. Jeffrey
  Johnson

  	
   

  	
  Chief Executive Officer

  	
   

  	
   

  

 

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

 

	
  

  	
   

  	
   

  
	
   

  	
  James K.
  Teringo, Jr.

  
	
   

  	
  Secretary

  

 

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

 

	
  

  	
   

  	
   

  
	
   

  	
  S. Jeffrey
  Johnson

  
	
   

  	
  Chief Executive
  Officer and 

  
	
   

  	
  Chairman

  

 

 

 

EXHIBIT A

Resolutions

 

 

EXHIBIT B

Certificate of
Incorporation

 

 

EXHIBIT C

Bylaws

 

EXHIBIT F

 

CANO PETROLEUM, INC.

OFFICER'S CERTIFICATE

 

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

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

 

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

 

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

 

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

 

 

	
  

  	
   

  	
   

  
	
   

  	
  S. Jeffery Johnson

  
	
   

  	
  Chief Executive Officer

  

 

 

Exhibit G

Cano Petroleum, Inc.

Lock-Up Letter Agreement

[          
    ], 2006

[Buyers]

Ladies and Gentlemen:

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

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

 

 

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

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

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

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

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

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

 

 

	
  

  	
  Yours very
  truly,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  

 

 

 

Schedule
3 (a)

Subsidiaries

Pantwist, LLC

Ladder Companies, Inc.

Square One Energy, Inc.

Tri-Flow, Inc.

W.O. Energy of Nevada, Inc.

WO Energy, Inc.

W.O. Operating Company, Ltd.

W.O. Production Company, Ltd.

 

 

Schedule
3(d)

Conflicts

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

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

American Stock Exchange

 

 

Schedule 3(e)

Consents

See Schedule 3(d)

 

 

Schedule 3(f)

Exception to Buyer Ownership Limitation

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

 

 

Schedule
3(l)

Certain Changes

$57.5
million purchase of W.O. Energy of Nevada (11/05)

$23.4 million purchase of oil and gas interests by Pantwist (4/06)

$0.7 million purchase of Davenport net revenue interest (12/05 – 01/06)

 

 

Schedule 3(q)

Stock Options and Restricted Stock

	
  Options:

  	
   

  	
   

  	
   

  
	
  Gerald Haddock

  	
   

  	
  50,000

  	
   

  
	
  James Teringo

  	
   

  	
  50,000

  	
   

  
	
  Director Stock
  Option Plan

  	
   

  	
  100,000

  	
   

  
	
  Outside
  Directors under 2005 Long-Term Incentive Plan

  	
   

  	
  155,000

  	
   

  
	
  Employees under
  2005 Long-Term Incentive Plan

  	
   

  	
  182,185

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Awards of Restricted
  Shares:

  	
   

  	
   

  	
   

  
	
  John Lacik

  	
   

  	
  30,000

  	
   

  
	
  Patrick McKinney

  	
   

  	
  30,000

  	
   

  
	
  Morris B. “Sam”
  Smith

  	
   

  	
  65,000

  	
   

  
	
  James K.
  Teringo, Jr.

  	
   

  	
  20,000

  	
   

  

 

 

 

Schedule
3(r)

Equity Capitalization

(i)                                    Liens
on Company Stock

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

(ii)                                Options

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

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

(iii)                            Credit
Facilities

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

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

(iv)                               Financing
Statements

·                                          Those
filed in connection with (iii) above

(v)                                   Obligations
to Register Securities

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

(vi)                               None

(vii)                           None

(viii)                       None

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

	
  Officers:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  S. Jeffrey
  Johnson

  	
   

  	
  3,908,850

  	
   

  
	
  Michael J.
  Ricketts

  	
   

  	
  464,850

  	
   

  
	
  Morris B. “Sam”
  Smith

  	
   

  	
  90,000

  	
   

  
	
  James K Teringo,
  Jr.

  	
   

  	
  70,000

  	
   

  
	
  John Lacik

  	
   

  	
  30,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Directors:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gerald Haddock

  	
   

  	
  193,000

  	
   

  
	
  S. Jeffrey
  Johnson

  	
   

  	
  3,908,850

  	
   

  
	
  Randall Boyd

  	
   

  	
  262,210

  	
   

  
	
  Dennis
  McCuistion

  	
   

  	
  15,000

  	
   

  
	
  Patrick Tolbert

  	
   

  	
  15,000

  	
   

  
	
  Don Dent

  	
   

  	
  150,000

  	
   

  
	
  James Underwood

  	
   

  	
  50,000

  	
   

  

 

 

 

Schedule
3(s)

Indebtedness and Other Contracts

Indebtedness:

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

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

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

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

(iii)                            None

(iv)                               None

Material Terms of Indebtedness:

Credit Agreement with Union Bank of California

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

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

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

 

 

Schedule
3(t)

Litigation

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

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

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

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

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

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

 

 

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

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

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

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

The suit has not been
served on the defendants.

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

 

 

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

 

 

Schedule
3(w)

Exceptions to Title

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

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

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

 

 

Schedule
3(z)

Exceptions to Right to
Vote or Dividends

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

 

 

Schedule
3(bb)

Reported Material Weaknesses

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

No prior notices or
correspondence have been received.Exhibit 10.1

 

SECOND AMENDED AND
RESTATED CREDIT AGREEMENT

dated as of

August 30, 2006

among

ARCH CAPITAL GROUP LTD.,

ARCH CAPITAL GROUP (U.S.) INC.,

Various Designated Subsidiary Borrowers,

The Lenders Party Hereto,

BARCLAYS BANK PLC,

THE BANK OF NEW YORK,

WACHOVIA BANK, N.A.,

CALYON, NEW YORK BRANCH

CITIBANK, N.A.,

ING BANK N.V., LONDON BRANCH

and

LLOYDS TSB BANK PLC,

as Documentation Agents,

BANK OF AMERICA, N.A.,

as Syndication Agent

and

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

_______________________

J.P. MORGAN SECURITIES INC.,

and

BANC OF AMERICA SECURITIES LLC,

as Joint Bookrunners and Joint Lead Arrangers

 

 

$1,300,000,000

 

 

Table of Contents

 

	
  

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  ARTICLE I
  Definitions

  	
   

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 1.01. Defined Terms

  	
   

  	
  1

  
	
  Section 1.02. Classification of Loans and Borrowings

  	
   

  	
  32

  
	
  Section 1.03. Terms Generally

  	
   

  	
  32

  
	
  Section 1.04. Accounting Terms; GAAP

  	
   

  	
  33

  
	
   

  	
   

  	
   

  
	
  ARTICLE II The
  Credits

  	
   

  	
  33

  
	
   

  	
   

  	
   

  
	
  Section 2.01. Tranche 2 and Tranche 3 Commitments

  	
   

  	
  33

  
	
  Section 2.02. Loans and Borrowings

  	
   

  	
  35

  
	
  Section 2.03. Requests for Borrowings

  	
   

  	
  35

  
	
  Section 2.04. Funding of Borrowings

  	
   

  	
  36

  
	
  Section 2.05. Interest Elections

  	
   

  	
  37

  
	
  Section 2.06. Termination and Reduction of Tranche 1
  Commitments

  	
   

  	
  38

  
	
  Section 2.07. Termination and Reduction of Tranche 2
  Commitments

  	
   

  	
  39

  
	
  Section 2.08. Termination and Reduction of Tranche 3
  Commitments

  	
   

  	
  40

  
	
  Section 2.09. Repayment of Loans; Evidence of
  Debt

  	
   

  	
  40

  
	
  Section 2.10. Prepayments; Additional Collateral

  	
   

  	
  41

  
	
  Section 2.11. Fees

  	
   

  	
  45

  
	
  Section 2.12. Interest

  	
   

  	
  47

  
	
  Section 2.13. Alternate Rate of Interest

  	
   

  	
  48

  
	
  Section 2.14. Increased Costs

  	
   

  	
  49

  
	
  Section 2.15. Break Funding Payments

  	
   

  	
  50

  
	
  Section 2.16. Taxes

  	
   

  	
  50

  
	
  Section 2.17. Payments Generally; Pro Rata
  Treatment; Sharing of Set-offs

  	
   

  	
  52

  
	
  Section 2.18. Mitigation Obligations; Replacement of
  Lenders

  	
   

  	
  53

  
	
  Section 2.19. Additional Tranche 1 Commitments

  	
   

  	
  54

  
	
  Section 2.20. Additional Designated Subsidiary
  Borrowers

  	
   

  	
  56

  
	
  Section 2.21. Removal of Designated Subsidiary
  Borrowers

  	
   

  	
  56

  
	
   

  	
   

  	
   

  
	
  ARTICLE IIIA
  Tranche 1 Letters of Credit

  	
   

  	
  57

  
	
   

  	
   

  	
   

  
	
  Section 3A.01. Tranche 1 Letters of Credit

  	
   

  	
  57

  
	
  Section 3A.02. Tranche 1 Letter of Credit Requests

  	
   

  	
  59

  
	
  Section 3A.03. Agreement to Repay Tranche 1 Letter
  of Credit Drawings

  	
   

  	
  60

  
	
  Section 3A.04. Increased Costs

  	
   

  	
  60

  
	
  Section 3A.05. Tranche 1 Letter of Credit Expiration
  Extensions

  	
   

  	
  61

  
	
  Section 3A.06. Changes to Stated Amount

  	
   

  	
  61

  
	
  Section 3A.07. Representations and Warranties of
  Tranche 1 Lenders

  	
   

  	
  62

  
	
  Section 3A.08. Fronted Tranche 1 Letters of Credit

  	
   

  	
  62

  
	
  Section 3A.09. Agreement to Repay Fronted Tranche 1 Letter
  of Credit Drawings; Fronting Fee

  	
   

  	
  64

  
	
  Section 3A.10. Defined Terms

  	
   

  	
  65

  
	
  Section 3A.11. Existing Tranche 1 Fronted Letters of
  Credit.

  	
   

  	
  65

  
	
  Section 3A.12. Existing Tranche 1 Several Letters of
  Credit

  	
   

  	
  65

  

 i
 

 

 

	
  ARTICLE IIIB Tranche 2
  Letters of Credit

  	
   

  	
  68

  
	
   

  	
   

  	
   

  
	
  Section 3B.01. Tranche 2 Letters of Credit

  	
   

  	
  68

  
	
  Section 3B.02. Tranche 2 Letter of Credit Requests

  	
   

  	
  70

  
	
  Section 3B.03. Agreement to Repay Tranche 2 Letter
  of Credit Drawings

  	
   

  	
  71

  
	
  Section 3B.04. Increased Costs

  	
   

  	
  72

  
	
  Section 3B.05. Tranche 2 Letter of Credit Expiration
  Extensions

  	
   

  	
  72

  
	
  Section 3B.06. Changes to Stated Amount

  	
   

  	
  72

  
	
  Section 3B.07. Representations and Warranties of
  Tranche 2 Lenders

  	
   

  	
  73

  
	
  Section 3B.08. Fronted Tranche 2 Letters of Credit

  	
   

  	
  73

  
	
  Section 3B.09. Agreement to Repay Fronted Tranche 2
  Letter of Credit Drawings; Fronting Fee

  	
   

  	
  76

  
	
  Section 3B.10. Defined Terms

  	
   

  	
  76

  
	
  Section 3B.11. No Existing Tranche 2 Letters of
  Credit

  	
   

  	
  76

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV
  Representations and Warranties

  	
   

  	
  77

  
	
   

  	
   

  	
   

  
	
  Section 4.01. Corporate Status

  	
   

  	
  77

  
	
  Section 4.02. Corporate Power and Authority

  	
   

  	
  77

  
	
  Section 4.03. No Contravention of Laws, Agreements
  or Organizational Documents

  	
   

  	
  77

  
	
  Section 4.04. Litigation and Contingent Liabilities

  	
   

  	
  77

  
	
  Section 4.05. Use of Proceeds; Margin Regulations

  	
   

  	
  78

  
	
  Section 4.06. Approvals

  	
   

  	
  78

  
	
  Section 4.07. Investment Company Act

  	
   

  	
  78

  
	
  Section 4.08. True and Complete Disclosure

  	
   

  	
  78

  
	
  Section 4.09. Financial Condition; Financial
  Statements

  	
   

  	
  78

  
	
  Section 4.10. Tax Returns and Payments

  	
   

  	
  79

  
	
  Section 4.11. Compliance with ERISA

  	
   

  	
  80

  
	
  Section 4.12. Subsidiaries

  	
   

  	
  80

  
	
  Section 4.13. Indebtedness

  	
   

  	
  81

  
	
  Section 4.14. Compliance with Statutes, etc.

  	
   

  	
  81

  
	
  Section 4.15. Insurance Licenses

  	
   

  	
  81

  
	
  Section 4.16. Insurance Business

  	
   

  	
  81

  
	
  Section 4.17. Security Documents

  	
   

  	
  82

  
	
  Section 4.18. No Section 32 Direction

  	
   

  	
  82

  
	
   

  	
   

  	
   

  
	
  ARTICLE V
  Conditions

  	
   

  	
  82

  
	
   

  	
   

  	
   

  
	
  Section 5.01. Restatement Effective Date

  	
   

  	
  82

  
	
  Section 5.02. Each Credit Event

  	
   

  	
  85

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI
  Affirmative Covenants

  	
   

  	
  86

  
	
   

  	
   

  	
   

  
	
  Section 6.01. Information Covenants

  	
   

  	
  86

  
	
  Section 6.02. Books, Records and Inspections

  	
   

  	
  90

  
	
  Section 6.03. Insurance

  	
   

  	
  90

  
	
  Section 6.04. Payment of Taxes

  	
   

  	
  90

  

 

 ii
 

 

 

	
  Section 6.05. Maintenance of
  Existence

  	
   

  	
  90

  
	
  Section 6.06. Compliance with Statutes, etc.

  	
   

  	
  91

  
	
  Section 6.07. ERISA

  	
   

  	
  91

  
	
  Section 6.08. Maintenance of Property

  	
   

  	
  92

  
	
  Section 6.09. Maintenance of Licenses and Permits

  	
   

  	
  92

  
	
  Section 6.10. Financial Strength Ratings

  	
   

  	
  92

  
	
  Section 6.11. End of Fiscal Years; Fiscal Quarters

  	
   

  	
  92

  
	
  Section 6.12. Borrowing Base Requirement

  	
   

  	
  92

  
	
  Section 6.13.
  Further Assurances

  	
   

  	
  92

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII
  Negative Covenants

  	
   

  	
  93

  
	
   

  	
   

  	
   

  
	
  Section 7.01. Changes in Business and Investments

  	
   

  	
  93

  
	
  Section 7.02. Consolidations, Mergers, Sales of
  Assets and Acquisitions

  	
   

  	
  93

  
	
  Section 7.03. Liens

  	
   

  	
  95

  
	
  Section 7.04. Indebtedness

  	
   

  	
  97

  
	
  Section 7.05. Issuance of Stock

  	
   

  	
  97

  
	
  Section 7.06. Dissolution

  	
   

  	
  98

  
	
  Section 7.07. Restricted Payments

  	
   

  	
  98

  
	
  Section 7.08. Transactions with Affiliates

  	
   

  	
  98

  
	
  Section 7.09. Maximum Parent Borrower Leverage Ratio

  	
   

  	
  98

  
	
  Section 7.10. Minimum Consolidated Tangible Net
  Worth

  	
   

  	
  98

  
	
  Section 7.11. Limitation on Certain Restrictions on
  Subsidiaries

  	
   

  	
  99

  
	
  Section 7.12. Private Act

  	
   

  	
  100

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII
  Events of Default

  	
   

  	
  100

  
	
   

  	
   

  	
   

  
	
  Section 8.01. Payments

  	
   

  	
  100

  
	
  Section 8.02. Representations, etc.

  	
   

  	
  100

  
	
  Section 8.03. Covenants

  	
   

  	
  100

  
	
  Section 8.04. Default under other Agreements

  	
   

  	
  100

  
	
  Section 8.05. Bankruptcy, etc.

  	
   

  	
  101

  
	
  Section 8.06. ERISA

  	
   

  	
  102

  
	
  Section 8.07. Judgments

  	
   

  	
  102

  
	
  Section 8.08. Insurance Licenses

  	
   

  	
  102

  
	
  Section 8.09. Guaranties

  	
   

  	
  102

  
	
  Section 8.10. Security Documents

  	
   

  	
  102

  
	
  Section 8.11. Change of Control

  	
   

  	
  103

  
	
  Section 8.12. Section 32 Direction

  	
   

  	
  103

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX The
  Administrative Agent

  	
   

  	
  103

  
	
   

  	
   

  	
   

  
	
  Section 9.01. Appointment

  	
   

  	
  103

  
	
  Section 9.02. Administrative Agent in its Individual
  Capacity

  	
   

  	
  104

  
	
  Section 9.03. Exculpatory Provisions

  	
   

  	
  104

  
	
  Section 9.04. Reliance

  	
   

  	
  104

  

 

 iii
 

 

 

	
  Section 9.05. Delegation of
  Duties

  	
   

  	
  105

  
	
  Section 9.06. Resignation

  	
   

  	
  105

  
	
  Section 9.07. Non-Reliance

  	
   

  	
  106

  
	
  Section 9.08. Documentation Agents

  	
   

  	
  106

  
	
   

  	
   

  	
   

  
	
  ARTICLE X
  Miscellaneous

  	
   

  	
  106

  
	
   

  	
   

  	
   

  
	
  Section 10.01. Notices

  	
   

  	
  106

  
	
  Section 10.02. Waivers; Amendments

  	
   

  	
  107

  
	
  Section 10.03. Expenses; Indemnity; Damage Waiver

  	
   

  	
  108

  
	
  Section 10.04. Successors and Assigns

  	
   

  	
  109

  
	
  Section 10.05. Survival

  	
   

  	
  113

  
	
  Section 10.06. Counterparts; Integration;
  Effectiveness

  	
   

  	
  114

  
	
  Section 10.07. Severability

  	
   

  	
  114

  
	
  Section 10.08. Right of Setoff

  	
   

  	
  114

  
	
  Section 10.09. Governing Law; Jurisdiction; Consent
  to Service of Process

  	
   

  	
  114

  
	
  Section 10.10. WAIVER OF JURY TRIAL

  	
   

  	
  115

  
	
  Section 10.11. Headings

  	
   

  	
  115

  
	
  Section 10.12. Confidentiality

  	
   

  	
  115

  
	
  Section 10.13. Interest Rate Limitation

  	
   

  	
  116

  
	
  Section 10.14. Judgment Currency

  	
   

  	
  117

  
	
  Section 10.15. Calculations

  	
   

  	
  117

  
	
  Section 10.16. USA Patriot Act

  	
   

  	
  118

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI
  Intermediate Holdings Guaranty

  	
   

  	
  118

  
	
   

  	
   

  	
   

  
	
  Section 11.01. The Guaranty

  	
   

  	
  118

  
	
  Section 11.02. Bankruptcy

  	
   

  	
  119

  
	
  Section 11.03. Nature of Liability

  	
   

  	
  119

  
	
  Section 11.04. Independent Obligation

  	
   

  	
  119

  
	
  Section 11.05. Authorization

  	
   

  	
  120

  
	
  Section 11.06. Reliance

  	
   

  	
  121

  
	
  Section 11.07. Subordination

  	
   

  	
  121

  
	
  Section 11.08. Waiver

  	
   

  	
  121

  
	
   

  	
   

  	
   

  
	
  ARTICLE XII
  Parent Borrower Guaranty

  	
   

  	
  122

  
	
   

  	
   

  	
   

  
	
  Section 12.01. The Guaranty

  	
   

  	
  122

  
	
  Section 12.02. Bankruptcy

  	
   

  	
  122

  
	
  Section 12.03. Nature of Liability

  	
   

  	
  123

  
	
  Section 12.04. Independent Obligation

  	
   

  	
  123

  
	
  Section 12.05. Authorization

  	
   

  	
  123

  
	
  Section 12.06. Reliance

  	
   

  	
  124

  
	
  Section 12.07. Subordination

  	
   

  	
  124

  
	
  Section 12.08. Waiver

  	
   

  	
  124

  
	
  Section 12.09. Payments

  	
   

  	
  125

  

 

 iv
 

 

 

	
  SCHEDULES:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedule 1.01

  	
  —

  	
  Liability Percentages

  
	
  Schedule 2.01

  	
  —

  	
  Commitments

  
	
  Schedule 3A.11

  	
  —

  	
  Existing Tranche 1 Fronted Letters of Credit

  
	
  Schedule 3A.12

  	
  —

  	
  Existing Tranche 1 Several Letters of Credit

  
	
  Schedule 4.09(c)

  	
  —

  	
  Financial Condition; Financial Statements

  
	
  Schedule 4.12

  	
  —

  	
  Subsidiaries

  
	
  Schedule 4.13

  	
  —

  	
  Indebteness

  
	
  Schedule 4.15

  	
  —

  	
  Insurance Licenses

  
	
  Schedule 7.02(b)

  	
  —

  	
  Consolidations, Mergers, Sales of Assets and
  Acquisitions

  
	
  Schedule 7.03

  	
  —

  	
  Liens

  
	
  Schedule 7.04(c)

  	
  —

  	
  Indebtedness

  
	
  Schedule 7.05

  	
  —

  	
  Issuance of Stock

  
	
   

  	
   

  	
   

  
	
  EXHIBITS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit A

  	
  —

  	
  Form of Borrowing Request

  
	
  Exhibit B-1

  	
  —

  	
  Form of Tranche 2 Note

  
	
  Exhibit B-2

  	
  —

  	
  Form of Tranche 3 Note

  
	
  Exhibit C-1

  	
  —

  	
  Form of Tranche 1 Letter of Credit Request

  
	
  Exhibit C-2

  	
  —

  	
  Form of Tranche 2 Letter of Credit Request

  
	
  Exhibit D

  	
  —

  	
  Form of Officers’ Certificate

  
	
  Exhibit E

  	
  —

  	
  Form of Account Control Agreement

  
	
  Exhibit F

  	
  —

  	
  Form of Security Agreement

  
	
  Exhibit G-1

  	
  —

  	
  Form of Opinion of Borrower’s Special U.S.Counsel

  
	
  Exhibit G-2

  	
  —

  	
  Form of Opinion of Borrower’s Special Bermuda
  Counsel

  
	
  Exhibit G-3

  	
  —

  	
  Form of Opinion of Missouri Counsel

  
	
  Exhibit G-4

  	
  —

  	
  Form of Opinion of Nebraska Counsel

  
	
  Exhibit G-5

  	
  —

  	
  Form of Opinion of Wisconsin Counsel

  
	
  Exhibit G-6

  	
  —

  	
  Form of Opinion of English & Welsh Counsel

  
	
  Exhibit H

  	
  —

  	
  Form of Assignment and Assumption

  
	
  Exhibit I

  	
  —

  	
  Form of Additional Tranche 1 Commitment Agreement

  
	
  Exhibit J

  	
  —

  	
  Form of Borrowing Base Certificate

  
	
  Exhibit K

  	
  —

  	
  Form of DSB Assumption Agreement

  
	
  Exhibit L

  	
  —

  	
  Form of Non-Continuing Lender Agreement

  
	
  Exhibit M

  	
   

  	
  Form of Committed Letter of Credit

  

 v

 

 

SECOND AMENDED
AND RESTATED CREDIT AGREEMENT dated as of August 30, 2006, among ARCH CAPITAL
GROUP LTD., ARCH CAPITAL GROUP (U.S.) INC., various DESIGNATED SUBSIDIARY
BORROWERS party hereto, the LENDERS party hereto, JPMORGAN CHASE BANK, N.A., as
Administrative Agent, THE BANK OF NEW YORK, as Collateral Agent, BANK OF AMERICA, N.A.,
as Syndication Agent, and BARCLAYS BANK
PLC, THE BANK OF NEW YORK, WACHOVIA BANK, N.A., CALYON, NEW YORK BRANCH,
CITIBANK, N.A., ING BANK N.V., LONDON BRANCH and LLOYDS TSB BANK PLC, as
Documentation Agents.

WHEREAS,
the Parent Borrower, certain of the Designated Subsidiary Borrowers, the
Existing Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent, are
parties to an Amended and Restated Credit Agreement, dated as of November 29,
2005 (as the same has been amended, modified or supplemented to, but not
including, the Restatement Effective Date, the “Existing Credit Agreement”);
and

WHEREAS,
subject to and on the terms and conditions set forth herein, (i) the parties
hereto wish to amend and restate the Existing Credit Agreement in its entirety
in the form of this Agreement, and (ii) the Lenders are willing to make
available to the Parent Borrower and the Designated Subsidiary Borrowers the
credit facilities provided herein;

NOW,
THEREFORE, the Parent Borrower, the Designated Subsidiary Borrowers, the
Lenders and the Administrative Agent agree that, on the Restatement Effective
Date, the Existing Credit Agreement shall be and is hereby amended and restated
in its entirety as follows:

ARTICLE I

Definitions

Section 1.01.  Defined Terms.  As used in this Agreement, the following
terms have the meanings specified below:

“ABR”,
when used in reference to any Loan or Borrowing, refers to whether such Loan,
or the Loans comprising such Borrowing, are bearing interest at a rate
determined by reference to the Alternate Base Rate.

“Account
Control Agreement” means the Third Amended and Restated Account Control
Agreement, substantially in the form of Exhibit E, dated as of the date of this
Agreement, among The Bank of New York, as Custodian, the Grantors (as defined
in the Security Agreement) from time to time party thereto and the Collateral
Agent, as amended, restated, modified and supplemented and as in effect from
time to time.

“Acquired Indebtedness”
means Indebtedness of the Parent Borrower or a Subsidiary of the Parent
Borrower acquired pursuant to an acquisition not prohibited under this
Agreement (or Indebtedness assumed at the time of such acquisition of an asset
securing such Indebtedness), provided that such Indebtedness was not
incurred in connection with, or in anticipation or contemplation of, such
acquisition.

 

 

“Additional
Tranche 1 Commitment” means, for each Additional Tranche 1 Lender, any
commitment provided by such Additional Tranche 1 Lender pursuant to Section 2.19,
in such amount as agreed to by such Additional Tranche 1 Lender in the
respective Additional Tranche 1 Commitment Agreement; provided that on
the Additional Tranche 1 Commitment Date upon which an Additional Tranche
1 Commitment of any Additional Tranche 1 Lender becomes effective, such
Additional Tranche 1 Commitment of such Additional Tranche 1 Lender shall
(x) in the case of an existing Tranche 1 Lender be added to (and thereafter
become a part of) the existing Tranche 1 Commitment of such existing Tranche 1
Lender for all purposes of this Agreement as contemplated by Section 2.19 and
(y) in the case of a new Tranche 1 Lender, be converted to a Tranche 1
Commitment and become a Tranche 1 Commitment for all purposes of this Agreement
as contemplated by Section 2.19.

“Additional
Tranche 1 Commitment Agreement” means an Additional Tranche 1 Commitment
Agreement substantially in the form of Exhibit I (appropriately completed).

“Additional
Tranche 1 Commitment Date” means each date upon which an Additional Tranche
1 Commitment under an Additional Tranche 1 Commitment Agreement becomes
effective as provided in Section 2.19.

“Additional
Tranche 1 Lender” has the meaning provided in Section 2.19.

“Adjusted
LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest
Period, an interest rate per annum (rounded upwards, if necessary, to the next
1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied
by (b) the Statutory Reserve Rate.

“Administrative
Agent” means JPMorgan Chase Bank, N.A., in its capacity as administrative
agent for the Lenders hereunder.

“Administrative
Questionnaire” means an Administrative Questionnaire in a form supplied by
the Administrative Agent.

“Advance
Rate” means, for any category of Cash or obligation or investment specified
below in the column entitled “Cash and Eligible Securities” (other than Cash,
the “Eligible Securities”), the percentage set forth opposite such
category of Cash or Eligible Securities below in the column entitled “Advance
Rate” and, in each case, subject to the original term to maturity criteria set
forth therein:

 2
 

 

 

	
   Cash and Eligible Securities:

   	
    

   	
   Advance Rate:

   
	
   

  Cash:

   

  U.S. Dollars.

  	
   

  	
   

   

  100%

  
	
  

  Time Deposits, CDs, Money Market Deposits and Money Market Mutual Funds:

  Time deposits, certificates of deposit and money
  market deposits of any commercial bank incorporated in the United States with
  a rating of at least (i) AA- from Standard & Poor’s Ratings Services
  (“S&P”) and (ii) Aa3 from Moody’s Investors Service, Inc. (“Moody’s”) and
  maturing within two years from the date of determination.  Money market mutual funds with institutions
  not affiliated with the Lenders with same-day liquidity and with a rating of
  (i) AAA from S&P or (ii) Aaa from Moody’s or (iii) “1” by the NAIC
  Securities Valuation Office.

  	
   

  	
   

   

  90%

  
	
  

  U.S. Government Securities:

  Securities issued or directly and fully guaranteed
  or insured by the United States or any agency or instrumentality thereof
  (provided that the full faith and credit of the United States is pledged in support
  thereof).

  	
   

  	
  With maturities of (x) two years or less from the
  date of determination, 95%, (y) more than two years to ten years from the
  date of determination, 90% and (z) more than ten years from the date of
  determination, 85%

  
	
  

  Investment Grade Municipal Bonds Level I:

  Municipal bonds rated (i) AAA from S&P and (ii)
  Aaa from Moody’s and maturing within ten years from the date of
  determination.

  	
   

  	
   

   

  90%

  
	
  

  Investment Grade Municipal Bonds Level II:

  Municipal bonds rated at least (i) BBB+ from S&P
  and (ii) Baa1 from Moody’s and maturing within ten years from the date of
  determination or at least (i) BBB+ from S&P or (ii) Baa1 from Moody’s if
  such bond is rated by either S&P or Moody’s, but not both.

  	
   

  	
   

   

  85%

  
	
  

  Investment Grade Nonconvertible Corporate Bonds Level I:

  Nonconvertible corporate bonds rated at least (i)
  AA- from S&P and (ii) Aa3 from Moody’s, and which are traded
  publicly.   

  	
   

  	
   

  With maturities of (x) two years or less from the
  date of determination, 90% and (y) more than two years to ten years from
  the date of determination, 85%

  
	
  

  Investment Grade Nonconvertible Corporate Bonds Level II:

  Nonconvertible corporate bonds rated at least (i)
  BBB+ from S&P and (ii) Baa1 from Moody’s which are traded publicly, or
  rated at least Baa1 from Moody’s, or at least BBB+ from S&P, if such bond
  is rated by either S&P or Moody’s, but not both.

  	
   

  	
   

   

  80%

  

 

 3
 

 

 

	
   Cash and Eligible Securities:

   	
    

   	
   Advance Rate:

   
	
   

  Commercial Paper:

  Commercial paper issued by any entity organized in
  the United States rated at least (i) A-1 or the equivalent thereof by S&P
  and (ii) P-1 or the equivalent thereof by Moody’s and maturing not more than
  one year after the date of determination.

  	
   

  	
   

   

  90%

  
	
  

  Agency Securities:

  (i) Single-class mortgage participation
  certificates in book-entry form backed by single-family residential mortgage
  loans, the full and timely payment of interest at the appli­cable certificate
  rate and the ultimate collection of principal of which are guaranteed by the
  Federal Home Loan Mortgage Corporation (excluding REMIC or other multi-class
  pass-through certificates, collateralized mortgage obligations, pass-through
  certificates backed by adjustable rate mortgages, securities paying interest
  or prin­cipal only and similar derivative securities); (ii) single-class
  mortgage pass-through certificates in book-entry form backed by single-family
  residential mortgage loans, the full and timely payment of interest at the
  applicable certificate rate and ultimate collection of principal of which are
  guaranteed by the Federal National Mortgage Association (excluding REMIC or
  other multi-class pass-through certificates, pass-through certificates backed
  by adjustable rate mortgages, collateral­ized mort­gage obli­ga­tions,
  securities paying interest or principal only and similar derivative securi­ties);
  and (iii) single-class fully modified pass-through certificates in
  book-entry form backed by single-family residential mortgage loans, the full
  and timely payment of prin­cipal and interest of which is guaranteed by the
  Government National Mortgage Association (excluding REMIC or other
  multi-class pass-through certificates, collateralized mortgage obligations,
  pass-through certificates backed by adjustable rate mortgages, securities
  paying interest or principal only and similar derivatives securities).

  	
   

  	
   

   

  With maturities from the date of determination of
  (x) two years or less from the date of determination, 95%, (y) more than two
  years and less than ten years from the date of determination, 90% and (z)
  more than ten years from the date of determination, 85%

  
	
  

  Asset-Backed Securities:

  Asset-backed securities rated (i) AAA by S&P and
  (ii) Aaa by Moody’s,

  provided that (x) such securities are backed by
  credit card receivables, automobile loans or utility charges (as in Rate
  Reduction Bonds) and have a remaining maturity of 10 years or less and (y)
  asset-backed securities will not constitute Eligible Securities if they are
  certificated securities that cannot be paid or delivered by book entry (and
  all asset-backed securities issued by an issuer incorporated in the United
  States of America must be capable of settlement through DTC).

  	
   

  	
  

  85%

  
	
  

  Supranational Securities

   

  Securities issued or backed by the International
  Bank for Reconstruction & Development, European Bank for Reconstruction
  & Development, Inter American Development Bank, International Monetary
  Fund, European Investment Bank, Asian Development Bank, African Development
  Bank and Nordic Development Bank as long as the credit ratings are AAA by
  S&P and Aaa by Moody’s.

  	
   

  	
  With maturities of (x) two years or less from the
  date of determination, 95%, (y) more than two years to ten years from the
  date of determination, 90% and (z) more than ten years from the date of
  determination, 85%

  

 

 4
 

 

 

	
   Cash and Eligible Securities:

   	
    

   	
   Advance Rate:

   
	
  

  G7 Government Securities

   

  Securities issued or backed by Canada, the Federal
  Republic of Germany, Republic of France, Republic of Italy, United Kingdom,
  Austria, Spain, Belgium, Japan and the Netherlands.  In addition, the credit ratings must be at
  or above AA- by S&P and Aa3 by Moody’s.

   

  	
   

  	
  

  With maturities of (x) two years or less from the date of determination, 95%,
  (y) more than two years to ten years from the date of determination, 90% and
  (z) more than ten years from the date of determination, 85%

  
	
  

  Other Securities:

   

  All other cash, investments, obligations or
  securities

  	
   

  	
   

  0%

  

 

Notwithstanding the foregoing, (A) the value of
Eligible Securities at any time shall be determined based on the Borrowing Base
Report (as defined in the Security Agreement) then most recently delivered by
the Custodian to the Collateral Agent, (B) if any single corporate issuer (or
any Affiliate thereof) represents more than 10% of the aggregate value of all
Cash and Eligible Securities of the aggregate amount of all Borrowing Bases,
the excess over 10% shall be excluded (with such exclusion being allocated in
equal parts to each Borrowing Base at such time), (C) no more than 10% of all
corporate bonds constituting Eligible Securities under Investment Grade
Nonconvertible Corporate Bonds Level II shall at any time be rated lower than A
from S&P or lower than A2 from Moody’s and (D) the weighted average rating
of all corporate bonds constituting Eligible Securities under both Investment
Grade Nonconvertible Corporate Bonds Level I and Investment Grade
Nonconvertible Corporate Bonds Level II shall at all times be rated at least
(x) AA from S&P and (y) Aa2 from Moody’s.

“AESIC”
means Arch Excess & Surplus Insurance Company, a corporation organized
under the laws of Nebraska.

“Affected
Loans” has the meaning provided in Section 2.10(m).

“Affiliate”
means, with respect to a specified Person, another Person that directly, or
indirectly through one or more intermediaries, Controls or is Controlled by or
is under common Control with the Person specified.

“Agents”
means the Administrative Agent, the Collateral Agent, the Custodian and the
Syndication Agent.

“Agreement”
means this Credit Agreement, as modified, supplemented, amended, restated
(including any amendment and restatement hereof), extended or renewed from time
to time.

“AIC”
means Arch Insurance Company, a corporation organized under the laws of
Missouri.

 5
 

 

 

“Alternate
Base Rate” means, for any day, a rate per annum equal to the greater of
(a) the Prime Rate in effect on such day and (b) the Federal Funds
Effective Rate in effect on such day plus 1⁄2 of 1%.  Any change in the Alternate Base Rate due to
a change in the Prime Rate or the Federal Funds Effective Rate shall be
effective from and including the effective date of such change in the Prime
Rate or the Federal Funds Effective Rate, respectively.

“Alternate
Currency” means each of Euros and Pounds Sterling and, in the case of
Letters of Credit only, Canadian Dollars.

“Alternate
Currency Letter of Credit” means any Letter of Credit to the extent denominated
in an Alternate Currency.

“Alternate
Currency Letter of Credit Outstandings” means Letter of Credit Outstandings
in respect of an Alternate Currency Letter of Credit.

“Alternate
Currency Letter of Credit Sublimit” means $200,000,000.

“Alternate
Currency Loan” means a Tranche 2 Loan that is denominated in an Alternate
Currency.

“Alternate
Currency Loan Sublimit” means $200,000,000.

“Alternative
Re Holdings” means Alternative Re Holdings Limited, a company organized
under the laws of Bermuda.

“Applicable
Grace Period” means two Business Days.

“Applicable
Insurance Regulatory Authority” means, when used with respect to any
Regulated Insurance Company, (x) the insurance department or similar
administrative authority or agency located in each state or jurisdiction
(foreign or domestic) in which such Regulated Insurance Company is domiciled or
(y) to the extent asserting regulatory jurisdiction over such Regulated
Insurance Company, the insurance department, authority or agency in each state
or jurisdiction (foreign or domestic) in which such Regulated Insurance Company
is licensed, and shall include any Federal or national insurance regulatory
department, authority or agency that may be created and that asserts regulatory
jurisdiction over such Regulated Insurance Company.

“Applicable
Percentage” means, with respect to any Lender, the percentage of the total
Commitments represented by the sum of such Lender’s Commitments.  If the Commitments have terminated or
expired, the Applicable Percentages shall be determined based upon the
Commitments most recently in effect, giving effect to any assignments.

“Applicable Rate” means, for any day:

(a)           with respect to any Tranche 1 Letter
of Credit Fee and any Tranche 1 Facility Fee, for any Margin Adjustment Period,
from and after any Start Date to and including the corresponding End Date, the
respective percentage per annum set forth below opposite the respective Level (i.e.,
Level 1, Level 2 or Level 3, as the case may be) indicated to have been

 6
 

 

achieved on the applicable Test Date for such Start Date (as shown in
the respective officer’s certificate delivered pursuant to Section 6.01(c)):

 

	
  

  	
   

  	
  Level 1:

  	
   

  	
  Level 2:

  	
   

  	
  Level 3:

  	
   

  
	
  Parent Borrower

  Leverage

  Ratio

  	
   

  	
  less than or

  equal to

  0.20:1.00

  	
   

  	
  greater than

  0.20:1.00 and less

  than or equal to

  0.25:1.00

  	
   

  	
  greater than

  0.25:1.00

  	
   

  
	
  Letter of Credit
  Fee

  	
   

  	
  0.165

  	
  %

  	
  0.195

  	
  %

  	
  0.250

  	
  %

  
	
  Facility Fee

  	
   

  	
  0.060

  	
  %

  	
  0.080

  	
  %

  	
  0.100

  	
  %

  

 

(b)           with respect to any Tranche 2 Letter
of Credit Fee, interest on any Tranche 2 Loan or Tranche 3 Loan, any Tranche 2
Facility Fee or Tranche 3 Facility Fee, or any Tranche 2 Utilization Fee
or Tranche 3 Utilization Fee, for any Margin Adjustment Period, from and
after any Start Date to and including the corresponding End Date, the respective
percentage per annum set forth below opposite the respective Level (i.e., Level
1, Level 2 or Level 3, as the case may be) indicated to have been achieved on
the applicable Test Date for such Start Date (as shown in the respective
officer’s certificate delivered pursuant to Section 6.01(c)):

	
  

  	
   

  	
  Level 1:

  	
   

  	
  Level 2:

  	
   

  	
  Level 3:

  	
   

  
	
  Parent Borrower

  Leverage

  Ratio

  	
   

  	
  less than or

  equal to

  0.20:1.00

  	
   

  	
  greater than

  0.20:1.00 and less

  than or equal to

  0.25:1.00

  	
   

  	
  greater than

  0.25:1.00

  	
   

  
	
  Letter of Credit
  Fee and Applicable Rate for LIBOR Loans

  	
   

  	
  0.275

  	
  %

  	
  0.325

  	
  %

  	
  0.375

  	
  %

  
	
  Applicable Rate
  for ABR Loans

  	
   

  	
  0.00

  	
  %

  	
  0.00

  	
  %

  	
  0.00

  	
  %

  
	
  Facility Fee

  	
   

  	
  0.075

  	
  %

  	
  0.100

  	
  %

  	
  0.125

  	
  %

  
	
  Utilization Fee

  	
   

  	
  0.100

  	
  %

  	
  0.100

  	
  %

  	
  0.100

  	
  %

  

 

Notwithstanding the foregoing, (i) if the Parent Borrower
fails to deliver the financial statements required to be delivered pursuant to
Section 6.01(a) or (b) (accompanied by the officer’s certificate required to be
delivered pursuant to Section 6.01(c) showing the applicable Parent Borrower
Leverage Ratio on the relevant Test Date) on or prior to the respective date
required by such Sections, then Level 3 pricing shall apply until such
time, if any, as the financial statements required as set forth above and the
accompanying officer’s certificate have been delivered showing the pricing for
the respective Margin Adjustment Period is at a level below Level 3 (it being
understood that, in the case of any late delivery of the financial statements
and officer’s certificate as so required, any reduction in the Applicable Rate
shall apply only from and after the date of the delivery of the complying
financial statements and officer’s certificate);

 7
 

 

(ii) except when clause (iii) below is
applicable, Level 1 pricing shall apply for the period from the Restatement Effective
Date to the date of the delivery of the Parent Borrower’s consolidated
financial statements (and related officer’s certificate) in respect of its
fiscal quarter ending December 31, 2005; and (iii) Level 3 pricing shall apply
at all times when any Event of Default is in existence.

“Approved
Fund” has the meaning assigned to such term in Section 10.04(b).

“ARC”
means Arch Reinsurance Company, a corporation organized under the laws of
Nebraska.

“Arch Europe” means Arch Insurance Company
(Europe) Limited, a private company limited by shares incorporated under the
laws of England and Wales.

“Arch
Shareholder Group” means Warburg Pincus (Bermuda) Private Equity VIII,
L.P., Warburg Pincus (Bermuda) International Partners, L.P., Warburg Pincus
Netherlands International Partners I, C.V., HFCP IV (Bermuda), L.P., H&F
International Partners IV-A (Bermuda), L.P., H&F International Partners
IV-B (Bermuda), L.P. and H&F Executive Fund IV (Bermuda), L.P.

“ARL”
means Arch Reinsurance Ltd., a corporation organized under the laws of Bermuda.

“ASIC”
means Arch Specialty Insurance Company, a corporation organized under the laws
of Wisconsin.

“Assignment
and Assumption” means an assignment and assumption entered into by a Lender
and an assignee (with the consent of any party whose consent is required by
Section 10.04), and accepted by the Administrative Agent, in the form of
Exhibit H or any other form approved by the Administrative Agent.

“Associated
Cost Rate” means, with respect to any Interest Period for Pounds Sterling Loans
or Euro Loans, the amount (expressed as a percentage rate per annum, rounded up
to the nearest four decimal places, as determined by the Administrative Agent
on the first day of such Interest Period) required to compensate the Lenders
lending from facility offices in the United Kingdom for the portion of the cost
of each such Lender of complying with the cash ratio and special deposit
requirements of the Bank of England and/or capital adequacy requirements and
banking supervision or other fees imposed by the United Kingdom Financial
Services Authority, which, in the reasonable determination of such Lender, is
attributable to such Loans made by such Lender from its facility office in the
United Kingdom and outstanding during such Interest Period.

“Authorized
Officer” means, as to any Person, the chief executive officer, the chief
financial officer, the controller, the president, any vice president, the
secretary or any other officer of such Person duly authorized by such Person to
act on behalf of such Person hereunder and under the other Credit Documents.

“Bankruptcy
Code” has the meaning provided in Section 8.05.

 8
 

 

“Bermuda
Companies Law” means the Companies Act 1981 of Bermuda and other relevant
Bermuda law.

“Board”
means the Board of Governors of the Federal Reserve System of the United States
of America.

“Borrower”
means each of the Parent Borrower and each Designated Subsidiary Borrower.

“Borrowing”
means Loans of the same Tranche and Type made, converted or continued on the
same date and, in the case of LIBOR Loans, as to which a single Interest Period
is in effect.

“Borrowing
Base” means, at any time, and in respect of each Designated Subsidiary
Borrower, the aggregate amount of Cash and Eligible Securities held in the
Collateral Accounts applicable to such Designated Subsidiary Borrower under the
Security Agreement at such time multiplied in each case by the respective
Advance Rates for Cash and such Eligible Securities; provided that all
Cash and Eligible Securities in respect of any Borrowing Base shall only be
included in such Borrowing Base to the extent same are subject to a first
priority perfected security interest in favor of the Collateral Agent pursuant
to the Security Documents.

“Borrowing
Base Certificate” means a Borrowing Base Certificate substantially in the
form of Exhibit J.

“Borrowing
Request” means a request by any Tranche 2/3 Borrower for a Borrowing in
accordance with Section 2.03.

“Business
Day” means (i) for all purposes other than as covered by clauses (ii) and
(iii) below, any day excluding Saturday, Sunday and any day which shall be in
the City of New York a legal holiday or a day on which banking institutions are
authorized by law or other governmental actions to close and (ii) with respect
to all notices and determinations in connection with, and payments of principal
and interest on, LIBOR Loans, any day which is a Business Day described in
clause (i) and which is also a day for trading by and between banks in the
London interbank market and, with respect to any notices or determinations in
respect of Euros, which is customarily a “Business Day” for such notices or
determinations.

“Canadian
Dollars” means freely transferable lawful money of Canada.

“Capital
Lease Obligations” of any Person means the obligations of such Person to
pay rent or other amounts under any lease of (or other arrangement conveying
the right to use) real or personal property, or a combination thereof, which
obligations are required to be classified and accounted for as capital leases
on a balance sheet of such Person under GAAP, and the amount of such
obligations shall be the capitalized amount thereof determined in accordance
with GAAP.

“Cash
Equivalents” means, as to any Person, (i) securities issued or directly and
fully guaranteed or insured by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having

 9
 

 

maturities of not more than one year from the date of
acquisition, (ii) time deposits and certificates of deposit of any commercial
bank having, or which is the principal banking subsidiary of a bank holding
company organized under the laws of the United States, any State thereof, the
District of Columbia or any foreign jurisdiction having, capital, surplus and
undivided profits aggregating in excess of $200,000,000, with maturities of not
more than one year from the date of acquisition by such Person, (iii)
commercial paper rated at least A-1 or the equivalent thereof by S&P or at
least P-1 or the equivalent thereof by Moody’s and in each case maturing
not more than one year after the date of acquisition by such Person, and (iv)
investments in money market funds substantially all of whose assets are
comprised of securities of the types described in clauses (i) through (iii)
above.

“Change
in Control” means (a) any Person or group of Persons (as used in Sections
13 and 14 of the Securities Exchange Act of 1934 and the rules and regulations
thereunder), other than one or more Permitted Holders, shall have become the
beneficial owner (as defined in rules promulgated by the SEC) of more than 35%
of the voting securities of the Parent Borrower, (b) the occupation of a
majority of the seats (other than vacant seats) of the board of directors of
the Parent Borrower by Persons who are neither (i) nominated by the board of
directors of the Parent Borrower nor (ii) appointed by directors so nominated
or (c) the Parent Borrower shall cease to own, directly or indirectly, 100% of
the Equity Interests of any Designated Subsidiary Borrower or Intermediate
Holdings.

“Change
in Law” means (a) the adoption of any law, rule or regulation after the
date of this Agreement, (b) any change in any law, rule or regulation or in the
interpretation or application thereof by any Governmental Authority after the
date of this Agreement or (c) compliance by any Lender (or, for purposes
of Section 2.14(b), by any lending office of such Lender or by such Lender’s
holding company, if any) with any request, guideline or directive (whether or
not having the force of law) of any Governmental Authority made or issued after
the date of this Agreement.

“Charges”
has the meaning provided in Section 10.13.

“Code”
means the Internal Revenue Code of 1986, as amended from time to time.

“Collateral
Account” has the meaning provided in the Security Agreement.

“Collateral
Agent” has the meaning provided in the Security Agreement.

“Commitment”
means each Tranche 1 Commitment, each Tranche 2 Commitment and each Tranche 3
Commitment.

“Commitment
Expiration Date” means August 30, 2011.

“Consolidated
Indebtedness” means, as of any date of determination, (i) all Indebtedness
of the Parent Borrower and its Subsidiaries which at such time would appear on
the liability side of a balance sheet of such Persons prepared on a
consolidated basis in accordance with GAAP plus (ii) any Indebtedness
for borrowed money of any other Person (other than the Parent Borrower or any
of its Subsidiaries) as to which the Parent Borrower and/or any of its
Subsidiaries has created a Guarantee (but only to the extent of such
Guarantee).  For the

 10
 

 

avoidance of doubt, “Consolidated
Indebtedness” shall not include any Guarantees of any Person under or in
connection with letters of credit or similar facilities so long as no
unreimbursed drawings or payments have been made in respect thereof.

“Consolidated
Net Income” means, for any Person, for any period, net income (or loss)
after income taxes of the such Person and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.

“Consolidated
Net Worth” means, for any Person, as of any date of determination, the Net
Worth of such Person and its Subsidiaries determined on a consolidated basis in
accordance with GAAP after appropriate deduction for any minority interests in
Subsidiaries.

“Consolidated
Tangible Net Worth” means, for any Person, as of the date of any
determination, Consolidated Net Worth of such Person and its Subsidiaries on
such date less the amount of all intangible items included therein, including,
without limitation, goodwill, franchises, licenses, patents, trademarks, trade
names, copyrights, service marks, brand names and write-ups of assets.

“Consolidated
Total Capital” means, as of any date of determination, the sum of (i)
Consolidated Indebtedness and (ii) Consolidated Net Worth of the Parent
Borrower at such time.

“Control”
means the possession, directly or indirectly, of the power (i) to vote 10% or
more of the securities having ordinary voting power for the election of
directors of such corporation or (ii) to direct or cause the direction of the
management or policies of a Person, whether through the ability to exercise
voting power, by contract or otherwise.  “Controlling”
and “Controlled” have meanings correlative thereto.

“Credit
Documents” means this Agreement, each Note, each Assignment and Assumption,
each Security Document and all other documents, instruments and agreements
entered into in connection herewith or therewith.

“Credit
Event” means the making of any Loan or the issuance of any Letter of Credit
(or any increase of the Stated Amount thereof).

“Credit
Party” means each Borrower and Intermediate Holdings.

“Credit
Protection Agreement” means any OTC arrangement designed to transfer credit
risk from one party to another, including credit default swaps (including,
without limitation, single name, basket and first-to-default swaps), total
return swaps and credit-linked notes.

“Custodian”
has the meaning provided in the Security Agreement and in the Account Control
Agreement.

“Default”
means any event or condition which constitutes an Event of Default or which
upon notice, lapse of time or both would, unless cured or waived, become an
Event of Default.

 11
 

 

“Designated
Subsidiary Borrower” means each of ARC, ARL, AIC, WDCIC, ASIC, AESIC and
Arch Europe and each Person which is designated as an additional Designated
Subsidiary Borrower after the Restatement Effective Date in accordance with
Section 2.20 (in each case, unless otherwise removed as such in accordance with
Section 2.21).

“Dispositions”
has the meaning provided in Section 7.02(b).

“Dividends”
has the meaning provided in Section 7.07.

“Documentation
Agents” means each of Barclays Bank
plc, The Bank of New York, Wachovia Bank, N.A., Calyon, New York Branch,
Citibank, N.A., ING Bank N.V., London Branch and Lloyds TSB Bank plc
each in its capacity as a documentation agent under this Agreement.

“Dollar
Equivalent” means, at any time for the determination thereof in accordance
with Section 10.15, the amount of Dollars which could be purchased with the
amount of the relevant Alternate Currency involved in such computation at the
spot exchange rate therefor as quoted by the Administrative Agent as of 11:00
a.m. (London time) on the date two Business Days prior to the date of any
determination thereof for purchase on such date.

“Dollar
Loans” means Loans denominated in Dollars.

“Dollars”
or “$” refers to lawful money of the United States of America.

“DSB
Assumption Agreement” means an assumption agreement in the form of Exhibit
K.

“Eligible
Securities” has the meaning provided in the definition of “Advance Rates.”

“EMU
Legislation” means the legislative measures of the European Council for the
introduction of, changeover to or operation of a single or unified European
currency.

“End
Date” means, with respect to any Margin Adjustment Period, the last day of
such Margin Adjustment Period.

“Environmental
Law” means all laws, rules, regulations, codes, ordinances, orders,
decrees, judgments, injunctions, notices or binding agreements issued,
promulgated or entered into by any Governmental Authority, relating in any way
to the environment, preservation or reclamation of natural resources, the
management, release or threatened release of any Hazardous Material or to
health and safety matters.

“Environmental
Liability” means any liability, contingent or otherwise (including any
liability for damages, costs of environmental remediation, fines, penalties or
indemnities), of the Parent Borrower or any Subsidiary directly or indirectly
resulting from or based upon (a) violation of any Environmental Law,
(b) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the release or threatened release of any Hazardous Materials
into the environment

 12
 

 

or (e) any contract, agreement or other consensual
arrangement pursuant to which liability is assumed or imposed with respect to
any of the foregoing.

“Equity
Interests” means, with respect to any Person, shares of capital stock of
(or other ownership or profit interests in) such Person, warrants, options or
other rights for the purchase or other acquisition from such Person of shares
of capital stock of (or other ownership or profit interests in) such Person,
securities convertible into or exchangeable for shares of capital stock of (or
other ownership or profit interests in) such Person or warrants, rights or
options for the purchase or other acquisition from such Person of such shares
(or such other interests), and other ownership or profit interests in such
Person (including, without limitation, partnership, member or trust interests
therein), whether voting or nonvoting, and whether or not such shares,
warrants, options, rights or other interests are authorized or otherwise existing
on any date of determination.

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended from time
to time and the regulations promulgated and rulings issued thereunder.  Section references to ERISA are to ERISA, as
in effect at the date of this Agreement and any subsequent provisions of ERISA,
amendatory thereof, supplemental thereto or substituted therefor.

“ERISA
Affiliate” means any corporation or trade or business which is a member of
the same controlled group of corporations (within the meaning of Section 414(b)
of the Code) as the Parent Borrower or any of its Subsidiaries or is under
common control (within the meaning of Section 414(c) of the Code) with the
Parent Borrower or any of its Subsidiaries.

“Euro”
or “€” refers to the lawful currency of the Participating Member States,
and when used in reference to any Loan or Borrowing, refers to whether such
Loan, or the Loans comprising such Borrowing, are bearing interest at a rate
determined by reference to Euro-LIBOR.

“Eurodollar”,
when used in reference to any Loan or Borrowing, refers to whether such Loan,
or the Loans comprising such Borrowing, are bearing interest at a rate
determined by reference to the Adjusted LIBO Rate.

“Euro-LIBOR”
means, with respect to any Euro Borrowing for any Interest Period, the rate
appearing on Page 3750 (or other appropriate page if the relevant currency does
not appear on such page) of the Dow Jones Market Service (or on any successor
or substitute page or pages of such Service, or any successor to or substitute
for such Service, providing rate quotations comparable to those currently
provided on such page or pages of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations of
interest rates applicable to deposits in Euros in the London interbank market)
at approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for deposits in Euros with a
maturity comparable to such Interest Period. 
In the event that such rate is not available at such time for any
reason, then “Euro-LIBOR” with respect to such Euro Borrowing for such
Interest Period shall be the rate at which deposits in Euros of €5,000,000 and
for a maturity comparable to such Interest Period are offered by the
Administrative Agent.

 13
 

 

“Event
of Default” has the meaning assigned to such term in Article VIII.

“Excluded
Taxes” means, with respect to the Administrative Agent, any Lender, or any
other recipient of any payment to be made by or on account of any obligation of
any Borrower hereunder, (a) income or franchise taxes imposed on (or measured
by) its net income or net profits by any jurisdiction under the laws of which
such recipient is organized or in which its principal office is located or, in
the case of any Lender, in which its applicable lending office is located, (b)
any branch profits taxes imposed by the United States of America or any similar
tax imposed by any other jurisdiction in which the recipient is located and (c)
in the case of a Foreign Lender (other than an assignee pursuant to a request
by a Borrower under Section 2.18(b)), any withholding tax that is imposed on
amounts payable to such Foreign Lender at the time such Foreign Lender becomes
a party to this Agreement (or designates a new lending office) or is
attributable to such Foreign Lender’s failure to comply with Section 2.16(e),
except to the extent that such Foreign Lender (or its assignor, if any) was
entitled, at the time of designation of a new lending office (or assignment),
to receive additional amounts from the Borrower with respect to such
withholding tax pursuant to Section 2.16(a).

“Existing
Credit Agreement” has the meaning provided in the first recital of this
Agreement.

“Existing
Lenders” means each “Lender” under and as defined in the Existing Credit
Agreement.

“Existing
Senior Notes” means the Parent Borrower’s 7.35% senior notes due 2034,
issued pursuant to that certain Indenture, dated as of May 4, 2004, among the
Parent Borrower, as issuer, and JPMorgan Chase Bank, N.A. (formerly known as
JPMorgan Chase Bank), as trustee, as in effect on the Restatement Effective
Date and as the same may be amended, restated, modified and/or supplemented
from time to time in accordance with the terms hereof and thereof.

“Existing
Tranche 1 Fronted Letters of Credit” has the meaning provided in Section
3A.11.

“Existing
Tranche 1 Several Letters of Credit” has the meaning provided in Section
3A.12.

“Facility
Fees” means, collectively, the Tranche 1 Facility Fee, the Tranche 2
Facility Fee and the Tranche 3 Facility Fee.

“Facility-wide
Liability Percentage” means the percentages set forth on Part III of
Schedule 1.01.

“Federal
Funds Effective Rate” means, for any day, the weighted average (rounded upwards,
if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day
that is a Business Day, the average (rounded upwards, if necessary, to the next
1/100 of 1%) of the quotations for such day for such transactions received

 14
 

 

by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.

“Final
Maturity Date” means the date when the Commitment Expiration Date has
occurred, all Letters of Credit have expired or terminated and all amounts
owing hereunder have been paid in full.

“Financial
Officer” means the chief financial officer, principal accounting officer,
treasurer or controller of any Borrower.

“Foreign
Lender” means, as to any Borrower, any Lender that is organized under the
laws of a jurisdiction other than that in which such Borrower is located.  For purposes of this definition, the United
States of America, each State thereof and the District of Columbia shall be
deemed to constitute a single jurisdiction.

“Foreign
Pension Plan” means any plan, fund (including, without limitation, any
superannuation fund) or other similar program established or maintained outside
the United States of America by the Parent Borrower or any one or more of its
Subsidiaries primarily for the benefit of employees of the Parent Borrower or
such Subsidiaries residing outside the United States of America, which plan,
fund or other similar program provides, or results in, retirement income, a
deferral of income in contemplation of retirement or payments to be made upon
termination of employment, and which plan is not subject to ERISA or the Code.

“Fronted
Letters of Credit” means, collectively, Fronted Tranche 1 Letters of Credit
and Fronted Tranche 2 Letters of Credit.

“Fronted
Tranche 1 Letter of Credit” has the meaning provided in Section 3A.08(a).

“Fronted
Tranche 1 Unpaid Drawing” has the meaning provided in Section 3A.09(a).

“Fronted
Tranche 2 Letter of Credit” has the meaning provided in Section 3B.08(a).

“Fronted
Tranche 2 Unpaid Drawing” has the meaning provided in Section 3B.09(a).

“Fronting
Lender” means JPMorgan Chase Bank, N.A., its successors or assigns, and any
other Lender reasonably acceptable to the Administrative Agent (or their
respective Affiliates) which is requested by the Parent Borrower and which
agrees in its sole discretion, in writing, to issue Fronted Letters of Credit
hereunder pursuant to Section 3A.08 or 3B.08; provided that no Fronting
Lender shall be required to issue more than an aggregate Stated Amount of all
Fronted Letters of Credit issued by such Fronting Lender as has been separately
agreed upon by such Fronting Lender and the Parent Borrower in writing.

“Fronting
Tranche 1 Participant” has the meaning provided in Section 3A.08(b).

 15
 

 

“Fronting
Tranche 2 Participant” has the meaning provided in Section 3B.08(b).

“GAAP”
means generally accepted accounting principles in the United States of America.

“Governmental
Authority” means the government of the United States of America, any other
nation or any political subdivision thereof, whether state or local, and any
agency, authority, instrumentality, regulatory body, court, central bank or
other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government.

“Guarantee”
of or by any Person (the “guarantor”) means any obligation guaranteeing
or intended to guarantee any Indebtedness, leases, dividends or other
obligations (“primary obligations”) of any other Person (the “primary
obligor”) in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent, (a) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital
or equity capital of the primary obligor or otherwise to maintain the net worth
or solvency of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation or (d) otherwise to assure or hold harmless the owner of
such primary obligation against loss in respect thereof; provided, however,
that the term Guarantee shall not include (x) endorsements of instruments for
deposit or collection in the ordinary course of business or (y) obligations of
any Regulated Insurance Company under Insurance Contracts, Reinsurance
Agreements or Retrocession Agreements. 
The amount of any Guarantee shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which
such Guarantee is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by such Person in good faith.

“Guaranteed
Creditors” means and includes each of the Administrative Agent, the
Collateral Agent, the Custodian, the Lenders, the Fronting Lenders and the
Issuing Agent.

“Guaranteed
Obligations” means (i) for purposes of Article XI, all reimbursement
obligations and Unpaid Drawings with respect to Letters of Credit issued for
the account of any Designated Subsidiary Borrower other than ARL and Arch
Europe (collectively, the “Guaranteed Parties” and each, a “Guaranteed
Party”), together with all interest on such reimbursement obligations and
Unpaid Drawings accruing before and after the filing of any insolvency
proceeding and all the other obligations (including obligations which, but for
the automatic stay under Section 362(a) of the Bankruptcy Code, would become
due) and liabilities (including, without limitation, indemnities, fees and
interest thereon) of any Guaranteed Party to any Lender, the Administrative
Agent, the Fronting Lenders and the Issuing Agent now existing or hereafter
incurred under, arising out of or in connection with, this Agreement and each
other Credit Document pursuant to which any Guaranteed Party is a party and the
due performance and compliance by any such Guaranteed Party with all the terms,
conditions and agreements contained in this Agreement and each such other
Credit Document and (ii) for purposes of

 16
 

 

Article XII, all reimbursement obligations and Unpaid
Drawings with respect to Letters of Credit issued for the account of Arch
Europe, together with all interest on such reimbursement obligations and Unpaid
Drawings accruing before and after the filing of any insolvency proceeding and
all the other obligations (including obligations which, but for the automatic
stay under Section 362(a) of the Bankruptcy Code, would become due) and
liabilities (including, without limitation, indemnities, fees and interest
thereon) of Arch Europe to any Lender, the Administrative Agent, the Fronting
Lenders and the Issuing Agent now existing or hereafter incurred under, arising
out of or in connection with, this Agreement and each other Credit Document
pursuant to which Arch Europe is a party and the due performance and compliance
by Arch Europe with all the terms, conditions and agreements contained in this
Agreement and each such other Credit Document.

“Guaranteed
Party” has the meaning provided in the definition of “Guaranteed
Obligations.”

“Guarantor”
means (i) Intermediate Holdings with respect to ARC, AIC, WDCIC, ASIC and AESIC
and (ii) the Parent Borrower solely with respect to Arch Europe .

“Hazardous
Materials” means all explosive or radioactive substances or wastes and all
hazardous or toxic substances, wastes or other pollutants, including petroleum
or petroleum distillates, asbestos or asbestos containing materials,
polychlorinated biphenyls, radon gas, infectious or medical wastes and all
other substances or wastes of any nature regulated pursuant to any Environmental
Law.

“Hedging
Agreements” means any foreign exchange contracts, currency swap agreements,
commodity price hedging arrangements or other similar arrangements, or
arrangements designed to protect against fluctuations in the currency values.

“Indebtedness”
of any Person means, without duplication, (a) all obligations of such
Person for borrowed money or with respect to deposits or advances of any kind,
(b) all obligations of such Person evidenced by bonds, debentures, notes
or similar instruments, (c) all obligations of such Person under
conditional sale or other title retention agreements relating to property
acquired by such Person, (d) all obligations of such Person in respect of
the deferred purchase price of property or services, (e) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the Indebtedness secured
thereby has been assumed, provided that the amount of Indebtedness of
such Person shall be the lesser of (A) the fair market value of such property
at such date of determination (determined in good faith by the Parent Borrower)
and (B) the amount of such Indebtedness of such other Person, (f) all
Guarantees by such Person of Indebtedness of others, (g) all Capital Lease
Obligations of such Person, (h) all obligations of such Person under Interest
Rate Protection Agreements, Hedging Agreements and Credit Protection Agreements,
and (i) all reimbursement obligations of such Person in respect of letters
of credit, letters of guaranty, bankers’ acceptances and similar credit
transactions.  The Indebtedness of any
Person shall include the Indebtedness of any other entity (including any partnership
in which such Person is a general partner) to the extent such Person is liable
therefor as a result of such Person’s ownership interest in or other
relationship with such entity, except to the extent the terms of such
Indebtedness provide that

 17
 

 

such Person is not liable
therefor.  For the avoidance of doubt,
Indebtedness shall not include (v) trade payables (including payables under
insurance contracts and reinsurance payables) and accrued expenses in each case
arising in the ordinary course of business, (w) obligations of Regulated
Insurance Companies with respect to Policies, (x) obligations arising under
deferred compensation plans of the Parent Borrower and its Subsidiaries in
effect on the date hereof or which have been approved by the board of directors
of the Parent Borrower, (y) obligations with respect to products underwritten
by Regulated Insurance Companies in the ordinary course of business, including
insurance policies, annuities, performance and surety bonds and any related
contingent obligations and (z) reinsurance agreements entered into by any
Regulated Insurance Company in the ordinary course of business.

“Indemnified
Taxes” means Taxes other than Excluded Taxes.

“Indemnitee”
has the meaning provided in Section 10.03(b).

“Information”
has the meaning provided in Section 10.12.

“Initial
First Amendment Effective Date” has the meaning provided in the First
Amendment dated as of April 18, 2006 to the Existing Credit Agreement,.

“Insignificant
Subsidiary” means any Subsidiary, other than any Designated Subsidiary
Borrower or Intermediate Holdings, which has assets, earnings or revenues
which, if aggregated with the assets, earnings or revenues, as the case may be,
of all other Subsidiaries of the Parent Borrower with respect to which an event
described under Section 8.05 has occurred and is continuing, would have assets,
earnings or revenues, as the case may be, in an amount less than 10% of the
consolidated assets, earnings or revenues, as the case may be, of the Parent
Borrower and its Subsidiaries as of the end of the most recent fiscal quarter
of year of the Parent Borrower for which financial statements are available.

“Insurance
Business” means one or more aspects of the business of selling, issuing or
underwriting insurance or reinsurance.

“Insurance
Contract” means any insurance contract or policy issued by a Regulated
Insurance Company but shall not include any Reinsurance Agreement or
Retrocession Agreement.

“Insurance
Licenses” has the meaning provided in Section 4.15.

“Interest
Election Request” means a request by a Tranche 2/3 Borrower to convert or
continue a Borrowing in accordance with Section 2.05.

“Interest
Payment Date” means (a) with respect to any ABR Loan, the last day of
each March, June, September and December and (b) with respect to any LIBOR
Loan, the last day of the Interest Period applicable to the Borrowing of which
such Loan is a part and, in the case of a LIBOR Borrowing with an Interest
Period of more than three months’ duration, each day that would have been an Interest
Payment Date had successive Interest Periods of three months duration been
applicable to such Borrowing.

 18
 

 

“Interest
Period” means, with respect to any LIBOR Borrowing, the period commencing
on the date of such Borrowing and ending on the numerically corresponding day
in the calendar month that is one, two, three or six months (or, with the
consent of each Lender with a Commitment in the respective Tranche, nine or
twelve months) thereafter, as the respective Tranche 2/3 Borrower may elect; provided,
that (i) if any Interest Period would end on a day other than a Business Day,
such Interest Period shall be extended to the next succeeding Business Day
unless such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business
Day, and (ii) any Interest Period pertaining to a LIBOR Borrowing that
commences on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the last calendar month of such
Interest Period) shall end on the last Business Day of the last calendar month
of such Interest Period.  For purposes
hereof, the date of a Borrowing initially shall be the date on which such Borrowing
is made and thereafter shall be the effective date of the most recent
conversion or continuation of such Borrowing.

“Interest
Rate Protection Agreement” means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement, interest rate hedging
agreement, interest rate floor agreement, interest rate futures contract traded
on a nationally or internationally recognized exchange (including, but not
limited to, the Chicago Board of Trade, Chicago Mercantile Exchange, New York
Mercantile Exchange, New York Futures Exchange and London International
Financial Futures Exchange) or other similar agreement or arrangement.

“Intermediate
Holdings” means Arch Capital Group (U.S.) Inc., a corporation organized
under the laws of Delaware.

“Intermediate
Holdings Guaranty” means the guaranty of Intermediate Holdings provided in
Article XI.

“Issuing
Agent” means JPMorgan Chase Bank, N.A..

“Judgment
Currency” has the meaning provided in Section 10.14(a).

“Judgment
Currency Conversion Date” has the meaning provided in Section 10.14(a).

“Legal
Requirements” means all applicable laws, rules and regulations made by any
governmental body or regulatory authority (including, without limitation, any
Applicable Insurance Regulatory Authority) having jurisdiction over the Parent
Borrower or a Subsidiary of the Parent Borrower.

“Lenders”
means each Tranche 1 Lender, each Tranche 2 Lender and each Tranche 3 Lender.

“Letter
of Credit Outstandings” means, collectively, the Tranche 1 Letter of Credit
Outstandings and the Tranche 2 Letter of Credit Outstandings.

 19
 

 

“Letter
of Credit Request” means each Tranche 1 Letter of Credit Request and each
Tranche 2 Letter of Credit Request.

“Letter
of Credit Supportable Obligations” means obligations of the Parent Borrower
or any of its Subsidiaries to any other Person which are permitted to exist
pursuant to the terms of this Agreement.

“Letters
of Credit” means, collectively, the Tranche 1 Letters of Credit and the
Tranche 2 Letters of Credit.

“LIBO
Rate” means, with respect to any Eurodollar Borrowing for any Interest
Period, the rate appearing on Page 3750 (or other appropriate page if the
relevant currency does not appear on such page) of the Dow Jones Market Service
(or on any successor or substitute page or pages of such Service, or any
successor to or substitute for such Service, providing rate quotations
comparable to those currently provided on such page or pages of such Service,
as determined by the Administrative Agent from time to time for purposes of
providing quotations of interest rates applicable to deposits in Dollars in the
London interbank market) at approximately 11:00 a.m., London time, two Business
Days prior to the commencement of such Interest Period, as the rate for
deposits in Dollars with a maturity comparable to such Interest Period.  In the event that such rate is not available
at such time for any reason, then the “LIBO Rate” with respect to such
Eurodollar Borrowing for such Interest Period shall be the rate at which
deposits in Dollars of $5,000,000 and for a maturity comparable to such
Interest Period are offered by the Administrative Agent.

“LIBOR”
(i) when used in reference to any Loan or Borrowing denominated in Dollars,
refers to whether such Loan, or the Loans comprising such Borrowing, are a
Eurodollar Loan or a Eurodollar Borrowing, (ii) when used in reference to any
Loan or Borrowing denominated in Euros, refers to whether such Loan, or the
Loans comprising such Borrowing, are a Euro Loan or a Euro Borrowing, and (iii)
when used in reference to any Loan or Borrowing denominated in Pounds Sterling,
refers to whether such Loan, or the Loans comprising such Borrowing, are a
Pounds Sterling Loan or a Pounds Sterling Borrowing.

“LIBOR
Rate” means the applicable Adjusted LIBO Rate, Euro-LIBOR or Pounds
Sterling LIBOR, as the case may be.

“Lien”
means, with respect to any asset, (a) any mortgage, deed of trust, lien,
pledge, hypothecation, encumbrance, charge or security interest in, on or of
such asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating
to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.

“Loan
Sublimit” means, at any time, an amount equal to the sum of the Total
Tranche 2 Commitment Total and Tranche 3 Commitment at such time, minus the sum
of all reductions therefore effected pursuant to Sections 2.07 or 2.10.

“Loan”
means each Tranche 2 Loan.

 20
 

 

“Long-Term
LC Facility” means the Amended Letter of Credit Reimbursement Agreement,
dated as of August 19, 2004 (as the same has been amended, modified or
supplemented to, but not including, the Restatement Effective Date), between
ARL and Barclays Bank plc, which provides for the issuance of letters of credit
in an aggregate amount of up to $175,000,000 (and any replacements, renewals
and extensions thereof and any successor facilities).

“Majority
Tranche 1 Lenders” means, at any time, Tranche 1 Lenders whose Tranche 1
Commitments (or, after the Tranche 1 Commitments have terminated, the sum of
such Tranche 1 Lenders’ Tranche 1 Percentages of the Tranche 1 Letter of Credit
Outstandings at such time) represent an amount greater than 50% of the Total
Tranche 1 Commitment (or after termination thereof, the Tranche 1 Letter of
Credit Outstandings at such time).

“Margin
Adjustment Period” means each period which shall commence on the date upon
which the respective officer’s certificate is delivered pursuant to Section
6.01(c) (together with the related financial statements pursuant to Section
6.01(a) or (b), as the case may be) and which shall end on the date of actual
delivery of the next officer’s certificate pursuant to Section 6.01(c)
(and related financial statements) or the latest date on which such next
officer’s certificate (and related financial statements) is required to be so
delivered; it being understood that the first Margin Adjustment Period shall
commence with the delivery of the Parent Borrower’s financial statements (and
related officer’s certificate) in respect of its fiscal year ending December
31, 2006.

“Margin
Stock” has the meaning provided in Regulation U.

“Material
Adverse Effect” means (i) a material adverse effect on the business,
operations, property or financial condition of the Parent Borrower and its
Subsidiaries taken as a whole, (ii) a material adverse effect on the business,
operations, property or financial condition of Intermediate Holdings and its
Subsidiaries taken as a whole or (iii) a material adverse effect on (x) the
rights and remedies of the Administrative Agent or the Lenders under the Credit
Documents, (y) the ability of either the Parent Borrower and its Subsidiaries
taken as a whole, or Intermediate Holdings and its Subsidiaries taken as a
whole, to perform their respective obligations under the Credit Documents to
which such entities are a party or (z) the legality, validity or enforceability
of any Credit Document.

“Maximum
Rate” has the meaning provided in Section 10.13.

“Multiemployer
Plan” means any multiemployer plan as defined in Section 4001(a)(3) of
ERISA, which is maintained or contributed to by (or to which there is an
obligation to contribute of) the Parent Borrower, any of its Subsidiaries or
any of its ERISA Affiliates, and each such plan for the five year period
immediately following the latest date on which the Parent Borrower, such
Subsidiary or such ERISA Affiliate contributed to or had an obligation to
contribute to such plan.

“NAIC”
means the National Association of Insurance Commissioners and any successor
thereto.

 21
 

 

“Net
Cash Proceeds” means, for any issuance of debt or equity, the gross cash
proceeds (including any cash received by way of deferred payment pursuant to a
promissory note, receivable or otherwise, but only as and when received)
received from such issuance, net of reasonable transaction costs (including, as
applicable, any underwriting, brokerage or other customary commissions and
reasonable legal, advisory and other fees and expenses associated therewith).

“Net
Worth” means, as to any Person, the sum of its capital stock (including,
without limitation, its preferred stock), capital in excess of par or stated
value of shares of its capital stock (including, without limitation, its
preferred stock), retained earnings and any other account which, in accordance
with GAAP, constitutes stockholders equity, but excluding (i) any treasury
stock and (ii) the effects of Financial Accounting Statement No. 115.

“Non-Continuing
Lender Agreement” means the Non-Continuing Lender Agreement substantially
in the form of Exhibit L (appropriately completed).

“Note”
means each Tranche 2 Note and each Tranche 3 Note.

“Notice
of Non-Extension” has the meaning provided in Section 3A.05.

“Obligation
Currency” has the meaning provided in Section 10.14(a).

“Obligations”
means all amounts, direct or indirect, contingent or absolute, of every type or
description, and at any time existing, owing to the Administrative Agent, the
Collateral Agent, the Custodian, any Fronting Lender, the Issuing Agent or any
Lender pursuant to the terms of this Agreement or any other Credit Document.

“Original
Effective Date” means the “Effective Date” under and as defined in the
Existing Credit Agreement.

“Other
Taxes” means any and all present or future stamp or documentary taxes or
any other similar excise or property taxes, charges or similar levies arising
from any payment made hereunder or from the execution, delivery or enforcement
of, or performance under, this Agreement.

“Parent
Borrower” means Arch Capital Group Ltd., a company organized under the laws
of Bermuda.

“Parent
Borrower Guaranty” means the guaranty of the Parent Borrower provided in
Article XII.

“Parent
Borrower Leverage Ratio” means, at any time, the ratio of
(i) Consolidated Indebtedness at such time to (ii) Consolidated Total
Capital at such time.

“Participant”
has the meaning set forth in Section 10.04(c).

 22
 

 

“Participating
Member State” means any member state of the European Communities that
adopts or has adopted the Euro as its lawful currency in accordance with the
legislation of the European Union relating to European Monetary Union.

“Patriot
Act” has the meaning set forth in Section 10.16.

“Payment
Office” means the office of the Administrative Agent located at 270 Park
Avenue, New York, New York or such other office as the Administrative Agent may
designate in writing to the Borrowers and the Lenders from time to time.

“PBGC”
means the Pension Benefit Guaranty Corporation referred to and defined in ERISA
and any successor entity performing similar functions.

“Permitted
Holders” means (i) the Arch Shareholder Group and their respective
Subsidiaries and any other Person of which any member of the Arch Shareholder
Group is a direct or indirect Subsidiary, (ii) any investment fund or vehicle
managed by, or the general partner of, any of the Persons described in
preceding clause (i), (iii) each of the directors and executive officers of the
Parent Borrower or any of its Subsidiaries on the Restatement Effective Date
and (iv) with respect to any of the foregoing who is an individual, any family
member of such Person, any trust or partnership for the benefit, or any
corporation that is a Subsidiary, of such Person or such Person’s family members
and any of such individuals’, heirs, executors, successors and legal
representatives.

“Permitted
Subsidiary Indebtedness” means:

(a)      Indebtedness of any Subsidiary of the
Parent Borrower incurred pursuant to this Agreement or any other Credit
Document;

(b)      Indebtedness of any Subsidiary of the
Parent Borrower existing on the date hereof and listed on Schedule 4.13 and
refinancings by such Subsidiary thereof; provided that the aggregate
principal amount of any such refinancing Indebtedness is not greater than the
aggregate principal amount of the Indebtedness being refinanced plus the amount
of any premiums required to be paid thereon and fees and expenses associated
therewith;

(c)      Indebtedness of any Subsidiary of the
Parent Borrower under any Interest Rate Protection Agreement or Hedging
Agreement, in each case entered into to protect any such Subsidiary against
fluctuations in interest rates, currency exchange rates or other rate
fluctuations and not entered into for speculative purposes;

(d)      any Indebtedness owed by Subsidiaries of
the Parent Borrower to the Parent Borrower or any of its Subsidiaries;

(e)      Indebtedness in respect of purchase money
obligations and Capital Lease Obligations of any Subsidiary of the Parent
Borrower, and refinancings thereof; provided that the aggregate
principal amount of all such purchase money obligations and Capital Lease
Obligations does not exceed at any time outstanding $25,000,000 at the time of
incurrence of any new Indebtedness under this clause (e);

 23

(f)       Indebtedness of any Subsidiary of the
Parent Borrower in respect of letters of credit issued to reinsurance cedents,
or to lessors of real property in lieu of security deposits in connection with
leases of any Subsidiary of the Parent Borrower, in each case in the ordinary
course of business;

(g)      Indebtedness of any Subsidiary of the
Parent Borrower incurred in the ordinary course of business in connection with
workers’ compensation claims, self-insurance obligations, unemployment
insurance or other forms of governmental insurance or benefits and pursuant to
letters of credit or other security arrangements entered into in connection
with such insurance or benefit;

(h)      Acquired Indebtedness of Subsidiaries of
the Parent Borrower;

(i)       Indebtedness incurred under securities
lending arrangements entered into in the ordinary course of business;

(j)       Indebtedness incurred under Credit
Protection Agreements entered into in the ordinary course of business;

(k)      additional Indebtedness of Subsidiaries of
the Parent Borrower not otherwise permitted under clauses (a) through (j) of
this definition which, when added to the aggregate amount of all outstanding
obligations secured by liens incurred by the Parent Borrower pursuant to
Section 7.03(t), shall not exceed at any time outstanding 5% of the Parent
Borrower’s Consolidated Net Worth at the time of incurrence of any new
Indebtedness under this clause (k); and

(l)       Indebtedness arising from Guarantees made
by any Subsidiary of the Parent Borrower of Indebtedness of the type described
in clauses (a) through (k) of this definition.

“Person”
means any natural person, corporation, limited liability company, trust, joint
venture, association, company, partnership, Governmental Authority or other
entity.

“Plan”
means any pension plan as defined in Section 3(2) of ERISA and subject to Title
IV of ERISA, which is maintained or contributed to by (or to which there is an
obligation to contribute of) the Parent Borrower or any of its Subsidiaries or
any of its ERISA Affiliates, and each such plan for the five year period
immediately following the latest date on which the Parent Borrower, any of its
Subsidiaries or any of its ERISA Affiliates maintained, contributed to or had
an obligation to contribute to such plan.

“Policies”
means all insurance policies, annuity contracts, guaranteed interest contracts
and funding agreements (including riders to any such policies or contracts,
certificates issued with respect to group life insurance or annuity contracts
and any contracts issued in connection with retirement plans or arrangements)
and assumption certificates issued or to be issued (or filed pending current
review by applicable Governmental Authorities) by any Regulated Insurance
Company and any coinsurance agreements entered into or to be entered into by
any Regulated Insurance Company.

 24
 

“Pounds
Sterling” or “₤” refers to the freely transferable lawful
money of the United Kingdom, and when used in reference to any Loan or
Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing,
are bearing interest at a rate determined by reference to Sterling LIBOR.

“Prime
Rate” means the rate of interest per annum publicly announced from time to
time by the Administrative Agent as its prime rate in effect at its principal
office in New York City; each change in the Prime Rate shall be effective from
and including the date such change is publicly announced as being effective.

“Principal
Amount” means (i) the outstanding principal amount of each Dollar Loan
and/or (ii) the Dollar Equivalent of the outstanding principal amount of each
Alternate Currency Loan, as the context may require.

“Private
Act” means separate legislation enacted in Bermuda with the intention that
such legislation apply specifically to any Borrower incorporated in Bermuda, in
whole or in part.

“Register”
has the meaning set forth in Section 10.04(b).

“Regulated
Insurance Company” means any Subsidiary of the Parent Borrower, whether now
owned or hereafter acquired, that is authorized or admitted to carry on or
transact Insurance Business in any jurisdiction (foreign or domestic) and is
regulated by any Applicable Insurance Regulatory Authority.

“Regulation
D” means Regulation D of the Board as from time to time in effect and any
successor to all or a portion thereof establishing reserve requirements.

“Regulation
T” means Regulation T of the Board as from time to time in effect and any
successor to all or a portion thereof establishing margin requirements.

“Regulation
U” means Regulation U of the Board as from time to time in effect and any
successor to all or a portion thereof establishing margin requirements.

“Regulation
X” means Regulation X of the Board as from time to time in effect and any
successor to all or a portion thereof establishing margin requirements.

“Reinsurance
Agreement” means any agreement, contract, treaty, certificate or other
arrangement whereby any Regulated Insurance Company agrees to transfer, cede or
retrocede to another insurer or reinsurer all or part of the liability assumed
or assets held by such Regulated Insurance Company under a policy or policies
of insurance issued by such Regulated Insurance Company or under a reinsurance
agreement assumed by such Regulated Insurance Company.

“Related
Parties” means, with respect to any specified Person, such Person’s
Affiliates and the respective directors, officers, employees, agents and
advisors of such Person and such Person’s Affiliates.

 25
 

“Required
Lenders” means, at any time, Lenders whose Commitments (or, after the
Commitments have terminated, the sum of such Lenders’ (x) then outstanding
Loans plus (y) Tranche 1 Percentages of the Tranche 1 Letter of Credit
Outstandings at such time plus (z) Tranche 2 Percentages of the Tranche
2 Letter of Credit Outstandings at such time) represent an amount greater than
50% of the Total Commitment (or after the termination thereof, the sum of (x)
the then total outstanding Loans plus (y) the Tranche 1 Letter of Credit
Outstandings at such time plus (z) the Tranche 2 Letter of Credit
Outstandings at such time).  For purposes
of this definition, the calculation of the outstanding principal amount of all
Alternate Currency Loans and Tranche 1 Percentage and Tranche 2 Percentage of
Alternate Currency Letter of Credit Outstandings shall be determined by taking
the Dollar Equivalent thereof at the time of any such calculation.

“Restatement
Effective Date” means the date on which the conditions specified in
Section 5.01 are satisfied (or waived in accordance with
Section 10.02).

“Retrocession
Agreement” means any agreement, contract, treaty or other arrangement
whereby one or more insurers or reinsurers, as retrocessionaires, assume
liabilities of reinsurers under a Reinsurance Agreement or other
retrocessionaires under another Retrocession Agreement.

“S&P” means Standard & Poor’s Ratings
Services.

“SAP”
means, with respect to any Regulated Insurance Company, the accounting
procedures and practices prescribed or permitted by the Applicable Insurance
Regulatory Authority of the state in which such Regulated Insurance Company is
domiciled; it being understood and agreed that determinations in accordance
with SAP for purposes of Article VIII, including defined terms as used therein,
are subject (to the extent provided therein) to Section 1.04.

“SEC”
means the Securities and Exchange Commission or any successor thereto.

“Security
Agreement” means the Third Amended and Restated Security Agreement,
substantially in the form of Exhibit F, dated as of the date of this Agreement,
among The Bank of New York, as Collateral Agent, the Grantors (as defined
therein) from time to time party thereto and the Custodian, as amended,
restated, modified or supplemented and as in effect from time to time.

“Security
Documents” means (i) the Security Agreement, (ii) the Account Control
Agreement, (iii) each other security agreement executed and delivered pursuant
to Section 6.13 and (iv) each other document, agreement, certificate and/or
financing statement executed, delivered, made or filed pursuant to the terms of
the documents specified in foregoing clauses (i), (ii) and (iii).

“Service
of Process Agent” means CT Corporation System, with offices on the date
hereof at 111 Eighth Avenue, 13th Floor, New York, New York 10011.

 26
 

“Shareholders
Agreement” means the Shareholders Agreement, dated as of November 20, 2001,
by and among the Parent Borrower, each member of the Arch Shareholder Group and
each other party thereto, as amended through the Restatement Effective Date.

“Solvent”
means, with respect to any Person on a particular date, that on such date
(a) the amount of the “present fair saleable value” of each of the
business and assets of such Person will, as of such date, exceed the amount of
all “liabilities of such Person, contingent or otherwise”, as of such date, as
such quoted terms are determined in accordance with applicable federal and
state laws governing determinations of the insolvency of debtors, (b) the
present fair saleable value of each of the business and assets of such Person
is greater than the amount that will be required to be paid on or in respect of
the probable “liability” on the existing debts and other “liabilities
contingent or otherwise” of such Person, (c) the assets of such Person do not
constitute unreasonably small capital for such Person to carry out its business
as now conducted and as proposed to be conducted including the capital needs of
such Person, taking into account the particular capital requirements of the
business conducted by such Person and projected capital requirements and
capital availability thereof, (d) such Person does not intend to incur debts
beyond their ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be received by such Person, and of amounts to be
payable on or in respect of debt of such Person) and (e) such Person does not
believe that final judgments against such Person in actions for money damages
presently pending will be rendered at a time when, or in an amount such that,
they will be unable to satisfy any such judgments promptly in accordance with
their terms (taking into account the maximum reasonable amount of such judgments
in any such actions and the earliest reasonable time at which such judgments
might be rendered) and such Person believes that its cash flow, after taking
into account all other anticipated uses of the cash of such Person (including,
without limitation, the payments on or in respect of debt referred to in
paragraph (d) of this definition), will at all times be sufficient to pay all
such judgments promptly in accordance with their terms.  For purposes of this definition, (i) “debt”
means liability on a “claim”, and (ii) “claim” means any (A) right to payment,
whether or not such a right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured or unsecured or (B) right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not
such right to an equitable remedy is reduced to judgment, fixed, contingent,
matured or unmatured, disputed, undisputed, secured or unsecured.

“Start
Date” means, with respect to any Margin Adjustment Period, the first day of
such Margin Adjustment Period.

“Stated
Amount” means, at any time, (i) if the respective Letter of Credit is
denominated in Dollars, the maximum amount available to be drawn thereunder
(regardless of whether any condition for drawing could then be met), and (ii)
if the respective Letter of Credit is denominated in an Alternate Currency, the
Dollar Equivalent of the maximum amount available to be drawn thereunder
(regardless of whether any conditions for drawing could then be met).

“Statutory
Reserve Rate” means a fraction (expressed as a decimal), the numerator of
which is the number one and the denominator of which is the number one minus
the aggregate of the maximum reserve percentages (including any marginal,
special, emergency

 27
 

or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is subject for
Eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in
Regulation D of the Board).  Such
reserve percentages shall include those imposed pursuant to such
Regulation D.  Eurodollar Loans
shall be deemed to constitute Eurocurrency funding and to be subject to such
reserve requirements without benefit of or credit for proration, exemptions or
offsets that may be available from time to time to any Lender under such
Regulation D or any comparable regulation. 
The Statutory Reserve Rate shall be adjusted automatically on and as of
the effective date of any change in any reserve percentage.

“Statutory
Statements” means, with respect to any Regulated Insurance Company for any
fiscal year or fiscal quarter, the annual or quarterly financial statements of
such Regulated Insurance Company as required to be filed with the Insurance
Regulatory Authority of its jurisdiction of domicile and in accordance with the
laws of such jurisdiction, together with all exhibits, schedules, certificates
and actuarial opinions required to be filed or delivered therewith.

“Sterling
LIBOR” means, with respect to any Pounds Sterling Borrowing for any
Interest Period, the rate appearing on Page 3750 (or other appropriate page if
the relevant currency does not appear on such page) of the Dow Jones Market
Service (or on any successor or substitute page or pages of such Service, or
any successor to or substitute for such Service, providing rate quotations
comparable to those currently provided on such page or pages of such Service,
as determined by the Administrative Agent from time to time for purposes of
providing quotations of interest rates applicable to deposits in Pounds
Sterling in the London interbank market) at approximately 11:00 a.m., London
time, two Business Days prior to the commencement of such Interest Period, as
the rate for deposits in Pounds Sterling with a maturity comparable to such
Interest Period.  In the event that such
rate is not available at such time for any reason, then “Sterling LIBOR”
with respect to such Pounds Sterling Borrowing for such Interest Period shall
be the rate at which deposits in Pounds Sterling of ₤5,000,000 and for a
maturity comparable to such Interest Period are offered by the Administrative
Agent.

“Sublimit”
means, at any time, an amount equal to (x) in the case of each Designated
Subsidiary Borrower other than ARC, 75% of such Designated Subsidiary Borrower’s
capital plus surplus (each determined in accordance with SAP) as of the
last day of the then most recent quarter for which financial statements have
been provided pursuant to Section 6.01 and (y) in the case of ARC, 75% of ARC’s
Consolidated Net Worth as of the last day of the then most recent quarter for
which financial statements have been provided pursuant to Section 6.01.

“Subscription
Agreement” means the Subscription Agreement, dated as of October 24, 2001,
as amended as of November 20, 2001, by and among the Parent Borrower and the
Purchasers party thereto.

“Subsequent
First Amendment Effective Date” has the meaning provided in the First
Amendment dated as of April 18, 2006 to the Existing Credit Agreement,

“Subsidiary”
means, with respect to any Person (the “parent”) at any date, any
corporation, limited liability company, partnership, association or other
entity the accounts of

 28
 

which would be consolidated with those of the parent
in the parent’s consolidated financial statements if such financial statements
were prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other
entity of which securities or other ownership interests representing more than
50% of the ordinary voting power or, in the case of a partnership, more than
50% of the general partnership interests are, as of such date, owned,
controlled or held by the parent or one or more subsidiaries of the parent or
by the parent and one or more subsidiaries of the parent.

“Syndication
Agent” means Bank of America, N.A. in its capacity as syndication agent
under this Agreement.

“Taxes”
means any and all present or future taxes, levies, imposts, duties, deductions,
charges or withholdings imposed by any Governmental Authority.

“Test
Date” means, with respect to any Start Date, the last day of the most
recent fiscal quarter of the Parent Borrower ended immediately prior to such
Start Date.

“Total
Commitment” means the sum of (i) the Total Tranche 1 Commitment plus
(ii) the Total Tranche 2 Commitment.

“Total
Tranche 1 Commitment” means the sum of the Tranche 1 Commitments of each
Tranche 1 Lender.

“Total
Tranche 2 Commitment” means the sum of the Tranche 2 Commitments of each
Tranche 2 Lender.

“Total
Tranche 3 Commitment” means the sum of the Tranche 3 Commitments of each
Tranche 3 Lender.

“Tranche” means, at any time, the respective
facility and commitments utilized in making Loans and/or issuing Letters of
Credit hereunder, with there being three separate Tranches hereunder,
designated as Tranche 1, Tranche 2 and Tranche 3.

“Tranche
1 Commitment” means, with respect to each Lender, the amount set forth
opposite such Lender’s name on Schedule 2.01 under the heading “Tranche 1
Commitment”, as the same may be (x) reduced or terminated pursuant to Section
2.06 and/or Article VIII, (y) increased from time to time pursuant to Section
2.19 or (z) adjusted from time to time as a result of assignment to or from
such Lender pursuant to Section 10.04(b).

“Tranche
1 Facility Fee” has the meaning provided in Section 2.11(a).

“Tranche
1 Lenders” means each Lender and each Additional Tranche 1 Lender with a
Tranche 1 Commitment and/or Tranche 1 Letter of Credit Outstandings.

“Tranche
1 Letter of Credit” has the meaning provided in Section 3A.01(a).

 29
 

“Tranche
1 Letter of Credit Fee” has the meaning provided in Section 2.11(f).

“Tranche
1 Letter of Credit Outstandings” means, at any time, the sum of, without
duplication, (i) the aggregate Stated Amount of all Tranche 1 Letters of Credit
plus (ii) the aggregate amount of all Tranche 1 Unpaid Drawings in
respect of all Tranche 1 Letters of Credit.

“Tranche
1 Letter of Credit Request” has the meaning provided in Section 3A.02(a).

“Tranche
1 Liability Percentage” means the percentages set forth on Part I of
Schedule 1.01.

“Tranche
1 Percentage” means, at any time for each Tranche 1 Lender, the percentage
obtained by dividing such Tranche 1 Lender’s Tranche 1 Commitment at such time
by the Total Tranche 1 Commitment then in effect, provided that, if the
Total Tranche 1 Commitment has been terminated, the Tranche 1 Percentage of
each Tranche 1 Lender shall be determined by dividing such Tranche 1 Lender’s
Tranche 1 Commitment as in effect immediately prior to such termination by the
Total Tranche 1 Commitment as in effect immediately prior to such termination
(but also giving effect to any assignments made in accordance with Section
10.04(b) after the date on which the Total Tranche 1 Commitment has
terminated).

“Tranche
1 Unpaid Drawings” has the meaning provided in Section 3A.03(a).

“Tranche
2/3 Borrower” means each of the Parent Borrower and ARC.

“Tranche
2/3 Liability Percentage” means the percentages set forth in Part II of
Schedule 1.01.

“Tranche
2 Commitment” means, with respect to each Lender, the amount set forth
opposite such Lender’s name on Schedule 2.01 under the heading “Tranche 2
Commitment”, as the same may be (x) reduced or terminated pursuant to Section
2.07 and/or Article VIII or (y) adjusted from time to time as a result of
assignment to or from such Lender pursuant to Section 10.04(b).

“Tranche
2 Credit Exposure” means, with respect to any Tranche 2 Lender at any time,
the sum of the aggregate outstanding Principal Amount of such Tranche 2 Lender’s
Tranche 2 Loans at such time plus such Tranche 2 Lender’s Tranche 2
Percentage of all Tranche 2 Letter of Credit Outstandings at such time.

“Tranche
2 Facility Fee” has the meaning provided in Section 2.11(b).

“Tranche
2 Lenders” means each Lender with a Tranche 2 Commitment or with
outstanding Tranche 2 Loans and/or Tranche 2 Letter of Credit Outstandings.

“Tranche
2 Letter of Credit” has the meaning provided in Section 3B.01(a).

“Tranche
2 Letter of Credit Fee” has the meaning provided in Section 2.11(g).

 30
 

“Tranche
2 Letter of Credit Outstandings” means, at any time, the sum of, without
duplication, (i) the aggregate Stated Amount of all Tranche 2 Letters of Credit
plus (ii) the aggregate amount of all Tranche 2 Unpaid Drawings in
respect of all Tranche 2 Letters of Credit.

“Tranche
2 Letter of Credit Request” has the meaning provided in Section 3B.02(a).

“Tranche
2 Loans” has the meaning provided in Section 2.01(a).

“Tranche
2 Note” has the meaning provided in Section 2.09(e).

“Tranche
2 Percentage” means, at any time for each Tranche 2 Lender, the percentage
obtained by dividing such Tranche 2 Lender’s Tranche 2 Commitment at such time
by the Total Tranche 2 Commitment then in effect, provided that, if the
Total Tranche 2 Commitment has been terminated, the Tranche 2 Percentage of
each Tranche 2 Lender shall be determined by dividing such Tranche 2 Lender’s
Tranche 2 Commitment as in effect immediately prior to such termination by the
Total Tranche 2 Commitment as in effect immediately prior to such termination
(but also giving effect to any assignments made in accordance with Section
10.04(b) after the date on which the Total Tranche 2 Commitment has
terminated).

“Tranche 2 Revolving Percentage” means, at any time, a percentage the numerator of
which is the Total Tranche 2 Commitment and the denominator of which is the sum
of the Total Tranche 2 Commitment and the Total Tranche 3 Commitment.

“Tranche
2 Unpaid Drawings” has the meaning provided in Section 3B.03(a).

“Tranche
2 Utilization Fee” has the meaning provided in Section 2.11(c).

“Tranche
3 Commitment” means, with respect to each Tranche 3 Lender, the amount set
forth opposite such Tranche 3 Lender’s name on Schedule 2.01 hereto under the
heading “Tranche 3 Commitment”, as the same may be (x) reduced or terminated
pursuant to Sections 2.09 and or Article VIII or (y) adjusted from time to time
as a result of assign­ment to or from such Tranche 3 Lender pursuant to Section
10.04(b).

“Tranche
3 Credit Exposure” means, with respect to any Tranche 3 Lender at any time,
the sum of the aggregate outstanding Principal Amount of such Tranche 3 Lender’s
Tranche 3 Loans at such time.

“Tranche
3 Facility Fee” has the meaning provided in Section 2.11(c).

“Tranche
3 Lenders” means each Lender with a Tranche 3 Commitment and/or outstanding
Tranche 3 Loans.

“Tranche
3 Loans” has the meaning provided in Section 2.01(b).

“Tranche
3 Note” has the meaning provided in Section 2.09(f).

 31
 

“Tranche
3 Percentage” means, at any time for each Tranche 3 Lender, the percentage
obtained by dividing such Tranche 3 Lender’s Tranche 3 Commitment at such time
by the Total Tranche 3 Commitment then in effect, provided that, if the
Total Tranche 3 Commitment has been terminated, the Tranche 3 Percentage of
each Tranche 3 Lender shall be determined by dividing such Tranche 3 Lender’s
Tranche 3 Commitment as in effect immedi­ately prior to such termination by the
Total Tranche 3 Commitment as in effect immediately prior to such termination
(but also giving effect to any assignments made in accordance with Section
10.04(b) after the date on which the Total Tranche 3 Commitment has
terminated).

“Tranche
3 Revolving Percentage” means, at any time, a percentage the numerator of
which is the Total Tranche 3 Commitment and the denominator of which is the sum
of the Total Tranche 2 Commitment and the Total Tranche 3 Commitment.

“Tranche
3 Utilization Fee” has the meaning provided in Section 2.11(e).

“Transactions”
means the execution, delivery and performance by each Borrower of this Agreement,
the borrowing of Loans, the issuing of Letters of Credit and the use of the
proceeds thereof.

“Type”,
when used in reference to any Loan or Borrowing, refers to whether the rate of
interest on such Loan, or on the Loans comprising such Borrowing, is determined
by reference to the Adjusted LIBO Rate, the Alternate Base Rate, Euro-LIBOR or
Sterling LIBOR.

“Unpaid
Drawings” means, collectively, the Tranche 1 Unpaid Drawings and Tranche 2
Unpaid Drawings.

“Utilization
Fees” means, collectively, the Tranche 2 Utilization Fee and the Tranche 3
Utilization Fee.

“WDCIC”
means Western Diversified Casualty Insurance Company, a corporation organized
under the laws of Wisconsin.

“Wholly-Owned
Subsidiary” of any Person means any Subsidiary of such Person to the extent
all of the capital stock or other ownership interests in such Subsidiary, other
than directors’ or nominees’ qualifying shares, is owned directly or indirectly
by such Person.

Section
1.02.  Classification of Loans and
Borrowings.  For purposes of this
Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar
Loan”).  In addition, Borrowings and
Letters of Credit also may be classified and referred to by Tranche (e.g.,
a “Tranche 2 Borrowing”).

Section
1.03.  Terms Generally.  The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and “including”
shall be deemed to be followed by the phrase “without limitation”.  The word “will” shall be construed to have
the same meaning and effect as the word “shall”.  Unless the context requires otherwise (a) any
definition of or reference to any agreement, instrument or other document
herein shall be construed as referring to such

 32
 

agreement, instrument or other document as from time
to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth
herein), (b) any reference herein to any Person shall be construed to include
such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”,
and words of similar import, shall be construed to refer to this Agreement in
its entirety and not to any particular provision hereof, (d) all references
herein to Articles, Sections, Exhibits and Schedules shall be construed to
refer to Articles and Sections of, and Exhibits and Schedules to, this
Agreement and (e) the words “asset” and “property” shall be construed to have
the same meaning and effect and to refer to any and all tangible and intangible
assets and properties, including cash, securities, accounts and contract
rights.

Section
1.04.  Accounting Terms; GAAP.  (a) 
Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with GAAP, as
in effect from time to time; provided that, if the Parent Borrower (on
behalf of the Borrowers) notifies the Administrative Agent that the Borrowers
request an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if the Administrative Agent notifies the
Parent Borrower (on behalf of the Borrowers) that the Required Lenders request
an amendment to any provision hereof for such purpose), regardless of whether
any such notice is given before or after such change in GAAP or in the application
thereof, then such provision shall be interpreted on the basis of GAAP as in
effect and applied immediately before such change shall have become effective
until such notice shall have been withdrawn or such provision  amended in accordance herewith.

ARTICLE II

The Credits

Section
2.01.  Tranche 2 and Tranche 3
Commitments.  (a)  Subject to and upon the terms and conditions
set forth herein, each Tranche 2 Lender severally agrees, at any time and from
time to time on and after the Restatement Effective Date and prior to the
Commitment Expiration Date, to make a revolving loan or loans (each, a “Tranche
2 Loan” and, collectively, the “Tranche 2 Loans”) to one or more of
the Tranche 2/3 Borrowers (on a several basis), which Tranche 2 Loans (i) shall
be denominated in Dollars or in an Alternate Currency; provided, however,
in no event shall the aggregate Principal Amount of all outstanding Alternate
Currency Loans at any time exceed the Alternate Currency Loan Sublimit; (ii)
may be repaid and reborrowed in accordance with the provisions hereof; (iii)
except as hereinafter provided, shall, at the option of the respective Tranche
2/3 Borrower, (x) in the case of Dollar Loans, be incurred and maintained as,
and/or converted into, ABR Loans or Eurodollar Loans, and (y) in the case of
Alternate Currency Loans, be incurred and maintained as LIBOR Loans in the
respective Alternate Currency, provided that (in either case) all
Tranche 2 Loans made as part of the same Borrowing shall, unless otherwise
specified herein, consist of Tranche 2 Loans of the same Type; (iv) shall not
exceed for any Tranche 2 Lender at any time outstanding that aggregate
Principal Amount which, when added to such Tranche 2 Lender’s Tranche 2
Percentage of all Tranche 2 Letter of Credit Outstandings (if any) (exclusive
of Tranche 2 Unpaid Drawings which are repaid with the proceeds of, and
simultaneously with the incurrence of, the respective incurrence of

 33
 

Tranche 2 Loans) at such time, equals the Tranche 2
Commitment of such Tranche 2 Lender at such time; (v) may not be incurred by
any Tranche 2/3 Borrower if the Principal Amount of such Tranche 2 Loans, when
added to (x) all Tranche 2 Letter of Credit Outstandings and (y) the aggregate
Principal Amount of all Tranche 2 Loans then outstanding, exceeds the Total
Tranche 2 Commitment at such time; (vi) may not be incurred by any Tranche 2/3
Borrower if the Principal Amount of such Tranche 2 Loans, when added to the
aggregate Principal Amount of all Tranche 2 Loans and Tranche 3 Loans then
outstanding, exceeds the Loan Sublimit at such time; (vii) may not be
incurred by ARC if the Principal Amount of such Tranche 2 Loans, when added to
(x) the Tranche 2 Letter of Credit Outstandings in respect of Tranche 2 Letters
of Credit issued for the account of ARC at such time and (y) the aggregate
Principal Amount of all Tranche 2 and Tranche 3 Loans incurred by ARC and then
outstanding, exceeds an amount equal to $100,000,000 at such time; and (viii)
may not be incurred by ARC if the Principal Amount of such Tranche 2 Loans,
when added to (w) the Tranche 1 Letter of Credit Outstandings in respect of
Tranche 1 Letters of Credit issued for the account of ARC at such time, (x) the
Tranche 2 Letter of Credit Outstandings in respect of Tranche 2 Letters of
Credit issued for the account of ARC at such time, (y) the aggregate Principal
Amount of all Tranche 2 Loans incurred by ARC and then outstanding and (z) the
aggregate Principal Amount of all Tranche 3 Loans incurred by ARC and then
outstanding, exceeds ARC’s Sublimit at such time.

(b)           Subject to and upon
the terms and conditions set forth herein, each Tranche 3 Lender severally
agrees, at any time and from time to time on and after the Restatement
Effective Date and prior to the Commitment Expiration Date, to make a revolving
loan or loans (each, a “Tranche 3 Loan” and, collectively, the “Tranche
3 Loans”) to one or more of the Tranche 2/3 Borrowers, which Tranche 3
Loans (i) shall be denominated in Dollars; (ii) except as hereinafter
provided, shall, at the option of the respective Tranche 2/3 Borrower, be
incurred and maintained as and/or converted into ABR Loans or Eurodollar Loans,
provided that all Tranche 3 Loans comprising the same Borrowing shall at
all times be of the same Type; (iii) may be repaid and reborrowed at any time
in accordance with the provisions hereof; (iv) shall not exceed for any Tranche
3 Lender at any time outstanding that aggregate Principal Amount which equals
the Tranche 3 Commitment of such Tranche 3 Lender at such time; (v) may not be
incurred by any Tranche 2/3 Borrower if such Tranche 3 Loan, when added to the
aggregate principal amount of all Tranche 3 Loans then outstanding, exceeds the
Total Tranche 3 Commitment at such time; (vi) may not be incurred by any
Tranche 2/3 Borrower if the Principal Amount of such Tranche 3 Loans, when
added to the aggregate Principal Amount of all Tranche 2 Loans and Tranche 3
Loans then outstanding, exceeds the Loan Sublimit at such time; (vii) may not
be incurred by ARC if the Principal Amount of such Tranche 3 Loans, when added
to (x) the Tranche 2 Letter of Credit Outstandings in respect of Tranche 2
Letters of Credit issued for the account of ARC at such time and (y) the
aggregate Principal Amount of all Tranche 2 Loans and Tranche 3 Loans incurred
by ARC and then outstanding, exceeds $100,000,000 at such time; and (viii) may
not be incurred by ARC if the Principal Amount of such Tranche 3 Loan, when
added to (w) the Tranche 1 Letter of Credit Outstandings in respect of Tranche
1 Letters of Credit issued for the account of ARC at such time, (x) the Tranche
2 Letter of Credit Outstandings in respect of Tranche 2 Letters of Credit
issued for the account of ARC at such time, (y) the aggregate Principal Amount
of all Tranche 2 Loans incurred by ARC and then outstanding and (z) the
aggregate Principal Amount of all Tranche 3 Loans incurred by ARC and then
outstanding, exceeds ARC’s Sublimit at such time.

 34
 

(c)           Notwithstanding
anything to the contrary contained in this Section 2.01 or elsewhere in this
Agreement, each incurrence of Tranche 2 Loans or Tranche 3 Loans shall, in each
case, consist of a Borrowing of Tranche 2 Loans and a Borrowing of Tranche 3
Loans, with such Borrowings to be made pro  rata on the basis of
the Tranche 2 Revolving Percentage and the Tranche 3 Revolving Percentage, in
each case as in effect at the time of such Borrowings (and, in the case of any
Borrowing of Alternate Currency Loans, taking the Dollar Equivalent thereof at
the time of such Borrowing).

Section
2.02.  Loans and Borrowings.  (a) 
All Borrowings of Loans under this Agreement shall be incurred by the
respective Tranche 2/3 Borrower from the Lenders pro  rata on the
basis of their respective Tranche 2 Commitments or Tranche 3 Commitments, as
the case may be.  The failure of any Lender
to make any Loans required to be made by it shall not relieve any other Lender
of its obligations hereunder. 

(b)           Subject to Section
2.13, each Borrowing shall be comprised entirely of ABR Loans, Eurodollar
Loans, Euro Loans or Pounds Sterling Loans as the respective Tranche 2/3
Borrower may request in accordance herewith. 
Each Lender at its option may make any LIBOR Loan by causing any
domestic or foreign branch or Affiliate of such Lender to make such Loan; provided
that any exercise of such option shall not affect the obligation of the
respective Tranche 2/3 Borrower to repay such Loan in accordance with the terms
of this Agreement.

(c)           At the commencement
of each Interest Period for any LIBOR Borrowing, such Borrowing shall be in an
aggregate amount that is an integral multiple of $1,000,000 and not less than
$5,000,000 (in either case, using the Dollar Equivalent thereof in the case of
an Alternate Currency Loan).  At the time
that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount
that is an integral multiple of $1,000,000 and not less than $5,000,000.  Borrowings of more than one Type may be
outstanding at the same time under each respective Tranche; provided
that there shall not at any time be more than a total of ten LIBOR Borrowings
outstanding in the aggregate for all Tranches.

(d)           Notwithstanding any
other provision of this Agreement, no Tranche 2/3 Borrower shall be entitled to
request, or to elect to convert or continue, any Borrowing if the Interest
Period requested with respect thereto would end after the Commitment Expiration
Date.

Section
2.03.  Requests for Borrowings.  To request a Borrowing, a Tranche 2/3
Borrower shall notify the Administrative Agent of such request by telephone (a)
in the case of a Eurodollar Borrowing, not later than 10:00 a.m., New
York City time, three Business Days before the date of the proposed
Borrowing, (b) in the case of a Euro Borrowing or a Pounds Sterling Borrowing,
not later than 10:00 a.m., New York City time, four Business Days before
the date of the proposed Borrowing, or (c) in the case of an ABR Borrowing, not
later than 11:00 a.m., New York City time, on the date of the proposed
Borrowing.  Each such telephonic
Borrowing Request shall be irrevocable and shall be confirmed promptly by hand
delivery or telecopy to the Administrative Agent of a written Borrowing Request
in the form of Exhibit A appropriately completed and signed by such Tranche 2/3
Borrower.  Each such telephonic and written
Borrowing Request shall specify the following information in compliance with
Section 2.02:

 35
 

(i)            the aggregate Principal Amount of
the requested Borrowing;

(ii)           in the case of an Alternate Currency
Loan, the Alternate Currency for such Borrowing;

(iii)          the date of such Borrowing, which
shall be a Business Day;

(iv)          whether such Borrowing shall consist
of Tranche 2 Loans or Tranche 3 Loans;

(v)           whether such Borrowing is to be an
ABR Borrowing, a Eurodollar Borrowing, a Euro Borrowing or a Pounds Sterling
Borrowing;

(vi)          in the case of a LIBOR Borrowing, the
initial Interest Period to be applicable thereto, which shall be a period
contemplated by the definition of the term “Interest Period”; and

(vii)         the location and number of such Tranche
2/3 Borrower’s account to which funds are to be disbursed.

If
no election as to the Type of Borrowing is specified, then such Borrowing shall
be an ABR Borrowing.  If no Interest
Period is specified with respect to any requested LIBOR Borrowing, then such
Tranche 2/3 Borrower shall be deemed to have selected an Interest Period of one
month’s duration.  Promptly following
receipt of a Borrowing Request in accordance with this Section, the
Administrative Agent shall advise each Lender which is required to make Loans
under the respective Tranche specified in the respective Borrowing Request of
the details thereof and of the amount of such Lender’s Loan to be made as part
of the requested Borrowing.

Section
2.04.  Funding of Borrowings.  (a) 
Each Lender shall make each Loan to be made by it hereunder on the
proposed date thereof by wire transfer of immediately available funds by 12:00
noon, New York City time, to the account of the Administrative Agent most
recently designated by it for such purpose by notice to the Lenders.  All such amounts shall be made available to
the Administrative Agent (x) in Dollars in the case of Dollar Loans and (y) in
the applicable Alternate Currency in the case of Alternate Currency Loans.  The Administrative Agent will make such Loans
available to the respective Tranche 2/3 Borrower by wire transfer of
immediately available funds not later than 2:00 p.m. New York City time to the
account of such Tranche 2/3 Borrower designated by such Tranche 2/3 Borrower in
the applicable Borrowing Request.

(b)           Unless the
Administrative Agent shall have received notice from a Lender prior to the
proposed date of any Borrowing that such Lender will not make available to the
Administrative Agent its respective share of such Borrowing, the Administrative
Agent may assume that such Lender has made such share available on such date in
accordance with paragraph (a) of this Section and may, in reliance upon such
assumption, make available to each Tranche 2/3 Borrower a corresponding
amount.  In such event, if a Lender has not
in fact made its share of the applicable Borrowing available to the
Administrative Agent, then the applicable Lender and the respective Tranche 2/3
Borrower severally agree to pay to the Administrative Agent forthwith on demand
such corresponding amount with interest thereon, for each day from

 36
 

and including the date such amount is made available to such Tranche
2/3 Borrower to but excluding the date of payment to the Administrative Agent,
at (i) in the case of such Lender, the rate determined by the Administrative
Agent in accordance with banking industry rules on interbank compensation, or
in the case of a Loan in Dollars, if such rate is greater, the Federal Funds
Effective Rate or (ii) in the case of such Tranche 2/3 Borrower, the interest
rate applicable to the Loans, or in the case of a Loan in Dollars, applicable
to ABR Loans.  If such Lender pays such
amount to the Administrative Agent, then such amount shall constitute such
Lender’s Loan included in such Borrowing.

Section
2.05.  Interest Elections.  (a)  Each Borrowing initially shall be of the Type and
Tranche specified in the applicable Borrowing Request and, in the case of a
LIBOR Borrowing, shall have an initial Interest Period as specified in such
Borrowing Request.  Thereafter, the
respective Tranche 2/3 Borrower may (x) in the case of Dollar Loans, elect to
convert such Borrowing of the same Tranche to a different Type of Dollar Loan
of such Tranche or (y) in the case of each Type of Loan of such Tranche, to
continue such Borrowing and, in the case of a LIBOR Borrowing, may elect Interest
Periods therefor, all as provided in this Section.  Subject to the other provisions of this
Section 2.05, the respective Tranche 2/3 Borrower may elect different options
with respect to different portions of the affected Borrowing, in which case each
such portion shall be allocated ratably among the respective Lenders holding
the Loans comprising such Borrowing, and the Loans comprising each such portion
shall be considered a separate Borrowing.

(b)           To make an election
pursuant to this Section 2.05, a Tranche 2/3 Borrower shall notify the
Administrative Agent of such election by telephone by the time that a Borrowing
Request would be required under Section 2.03 if such Tranche 2/3 Borrower were
requesting a Borrowing of the Type and Tranche resulting from such election to
be made on the effective date of such election. 
Each such telephonic Interest Election Request shall be irrevocable and
shall be confirmed promptly by hand delivery or telecopy to the Administrative
Agent of a written Interest Election Request in a form approved by the
Administrative Agent and signed by such Tranche 2/3 Borrower.

(c)           Each telephonic and
written Interest Election Request shall specify the following information in
compliance with Section 2.02:

(i)            the Borrowing to which such Interest
Election Request applies and, if different options are being elected with
respect to different portions thereof, the portions thereof to be allocated to
each resulting Borrowing (in which case the information to be specified
pursuant to clauses (iv) and (v) below shall be specified for each resulting
Borrowing);

(ii)           the effective date of the election
made pursuant to such Interest Election Request, which shall be a Business Day;

(iii)          whether such Borrowing consists of
Tranche 2 Loans or Tranche 3 Loans;

(iv)          whether the resulting Borrowing is to
be an ABR Borrowing, a Eurodollar Borrowing, a Euro Borrowing or a Pounds
Sterling Borrowing; and

 37
 

(v)           if the resulting Borrowing is a LIBOR
Borrowing, the Interest Period to be applicable thereto after giving effect to
such election, which shall be a period contemplated by the definition of the
term “Interest Period”.

If
any such Interest Election Request requests a LIBOR Borrowing but does not
specify an Interest Period, then such Tranche 2/3 Borrower shall be deemed to
have selected an Interest Period of one month’s duration.

(d)           Promptly following
receipt of an Interest Election Request, the Administrative Agent shall advise
each relevant Lender of the details thereof and of such Lender’s portion of
each resulting Borrowing.

(e)           If any Tranche 2/3
Borrower fails to deliver a timely Interest Election Request with respect to a
LIBOR Borrowing prior to the end of the Interest Period applicable thereto,
then, unless such Borrowing is repaid as provided herein, at the end of such
Interest Period such Borrowing shall (x) in the case of a Eurodollar Borrowing,
be converted to an ABR Borrowing and (y) in the case of a Euro Borrowing or a
Pounds Sterling Borrowing, be continued as a LIBOR Borrowing of the same Type
and with an Interest Period of one month’s duration.  Notwithstanding any contrary provision
hereof, if an Event of Default has occurred and is continuing and the
Administrative Agent, at the request of the Required Lenders, so notifies such
Tranche 2/3 Borrower, then, so long as an Event of Default is continuing (i) no
outstanding Borrowing may be converted to or continued as a Eurodollar
Borrowing, (ii) unless repaid, each Eurodollar Borrowing shall be converted to
an ABR Borrowing at the end of the Interest Period applicable thereto and (iii)
unless repaid, each Euro Borrowing and Pounds Sterling Borrowing shall be
continued as a LIBOR Borrowing of the same Type with an Interest Period of one
month’s duration.

Section
2.06.  Termination and Reduction of
Tranche 1 Commitments.  (a)  Unless previously terminated, the Tranche 1
Commitments shall terminate on the Commitment Expiration Date.

(b)           In addition to any
other Tranche 1 Commitment reductions hereunder, the Tranche 1 Commitments
shall be reduced on the dates and in the amounts specified in Section 2.10.

(c)           Any Designated
Subsidiary Borrowers may at any time terminate, or from time to time reduce,
its respective Tranche 1 Commitments; provided that (i) each reduction
of the Tranche 1 Commitments shall be in an amount that is an integral multiple
of $5,000,000 and not less than $5,000,000 and (ii) such Designated Subsidiary
Borrower shall not terminate or reduce the Tranche 1 Commitments if, as a
result thereof, the aggregate amount of all Tranche 1 Letter of Credit
Outstandings would exceed the Total Tranche 1 Commitments.  Each such reduction shall be applied to the
Tranche 1 Commitments of the Tranche 1 Lenders on a pro  rata
basis based on the amount of such Tranche 1 Lenders’ respective Tranche 1
Commitments.

(d)           Any Designated
Subsidiary Borrower shall notify the Administrative Agent of any election to
terminate or reduce the Tranche 1 Commitments under paragraph (c) of this
Section at least three Business Days prior to the effective date of such
termination or

 38
 

reduction, specifying such election and the effective date
thereof.  Promptly following receipt of
any notice, the Administrative Agent shall advise the Tranche 1 Lenders of the
contents thereof.  Each notice delivered
by such Designated Subsidiary Borrower pursuant to this Section 2.06 shall be
irrevocable; provided that a notice of termination of Tranche 1
Commitments delivered by such Designated Subsidiary Borrower may state that
such notice is conditioned upon the effectiveness of other credit facilities,
in which case such notice may be revoked by such Designated Subsidiary Borrower
(by notice to the Administrative Agent on or prior to the specified effective
date) if such condition is not satisfied. 
Any termination or reduction of any Tranche 1 Commitments shall be
permanent.

Section
2.07.  Termination and Reduction of
Tranche 2 Commitments.  (a) Unless
previously terminated, the Tranche 2 Commitments shall terminate on the
Commitment Expiration Date.

(b)           In addition to any
other Tranche 2 Commitment reductions hereunder, the Tranche 2 Commitments
shall be reduced on the dates and in the amounts specified in Section 2.10.

(c)           Any Tranche 2/3
Borrower may at any time terminate, or from time to time reduce, Tranche 2
Commitments; provided that (i) each reduction of the Tranche 2
Commitments, when combined with the pro  rata reduction of the
Tranche 3 Commitments as required below, shall be in an aggregate amount that
is an integral multiple of $5,000,000 and not less than $5,000,000 and (ii)
such Tranche 2/3 Borrower shall not terminate or reduce the Tranche 2
Commitments if, after giving effect to any concurrent prepayment of the Tranche
2 Loans in accordance with Section 2.10, (x) any Tranche 2 Lender’s Tranche 2
Credit Exposure would exceed such Tranche 2 Lender’s Tranche 2 Commitment or
(y) the sum of the aggregate Principal Amount of all Tranche 2 Loans
outstanding plus the aggregate amount of all Tranche 2 Letter of Credit
Outstandings would exceed the Total Tranche 2 Commitment.  Notwithstanding anything to the contrary
contained in this Section or elsewhere in this Agreement, any reduction to the
Tranche 2 Commitment shall be applied pro  rata to the Total
Tranche 2 Commitment and the Total Tranche 3 Commitment based on the Tranche 2
Revolving Percentage and the Tranche 3 Revolving Percentage, in each case as in
effect at the time of any such reduction. 
Each reduction to the Total Tranche 2 Commitment shall be applied to the
Tranche 2 Commitments of each Tranche 2 Lender on a pro  rata
basis based on the amount of such Tranche 2 Lenders’ respective Tranche 2
Commitments.

(d)           Any Tranche 2/3
Borrower shall notify the Administrative Agent of any election to terminate or
reduce the Tranche 2 Commitments under paragraph (c) of this Section at
least three Business Days prior to the effective date of such termination or
reduction, specifying such election and the effective date thereof.  Promptly following receipt of any notice, the
Administrative Agent shall advise such Tranche 2 Lender of the contents
thereof.  Each notice delivered by such
Tranche 2/3 Borrower pursuant to this Section 2.07 shall be irrevocable; provided
that a notice of termination of Tranche 2 Commitments delivered by such Tranche
2/3 Borrowers may state that such notice is conditioned upon the effectiveness
of other credit facilities, in which case such notice may be revoked by such
Tranche 2/3 Borrowers (by notice to the Administrative Agent on or prior to the
specified effective date) if such condition is not satisfied.  Any termination or reduction of any Tranche 2
Commitments shall be permanent.

 39
 

Section
2.08.  Termination and Reduction of
Tranche 3 Commitments.  (a)  Unless previously terminated, the Tranche 3
Commitments shall termi­nate on the Commitment Expiration Date.

(b)           In addition to any
other Tranche 3 Commitment reductions hereunder, the Tranche 3 Commitments
shall be reduced on the dates and in the amounts specified in Section 2.10.

(c)           The Tranche 2/3
Borrowers may at any time terminate, or from time to time reduce, the Tranche 3
Commitments; provided that (i) each reduction of the Tranche 3
Commitments, when combined with the pro  rata reduction of the
Tranche 2 Commitments as required below, shall be in an aggregate amount that
is an integral multiple of $5,000,000 and not less than $5,000,000 and (ii) the
Tranche 2/3 Borrowers shall not terminate or reduce the Tranche 3 Commitments
if, after giving effect to any concurrent prepayment of the Tranche 3 Loans in
accordance with Section 2.10, (x) any Tranche 3 Lender’s Tranche 3 Credit
Exposure would exceed such Tranche 3 Lender’s Tranche 3 Commitment or (y) the
sum of the aggregate Principal Amount of all Tranche 3 Loans outstanding would
exceed the Total Tranche 3 Commitment. 
Notwithstanding anything to the contrary contained in this Section or
elsewhere in this Agreement, any reduction to the Tranche 3 Commitment shall be
applied pro  rata to the Total Tranche 2 Commitment and the Total
Tranche 3 Commitment based on the Tranche 2 Revolving Percentage and the Tranche
3 Revolving Percentage, in each case as in effect at the time of any such
reduction.  Each reduction to the Total
Tranche 3 Commitment shall be applied to the Tranche 3 Commitments of each
Tranche 3 Lender on a pro  rata basis based on the respective amount
of such Tranche 3 Lender’s Tranche 3 Commitments.

(d)           The Tranche 2/3
Borrowers shall notify the Administrative Agent of any election to terminate or
reduce the Tranche 3 Commitments under paragraph (c) of this Section at
least three Business Days prior to the effective date of such termination or
reduction, specifying such election and the effective date thereof.  Promptly following receipt of any notice, the
Administrative Agent shall advise the Tranche 3 Lenders of the contents
thereof.  Each notice delivered by the
Tranche 2/3 Borrowers pursuant to this Section 2.08 shall be irrevocable; provided
that a notice of termination of Tranche 3 Commitments delivered by the Tranche
2/3 Borrowers may state that such notice is conditioned upon the effectiveness
of other credit facilities, in which case such notice may be revoked by the
Tranche 2/3 Borrowers (by notice to the Administrative Agent on or prior to the
specified effective date) if such condition is not satisfied.  Any termination or reduction of any Tranche 3
Commitments shall be permanent.

Section
2.09.  Repayment of Loans;
Evidence of Debt.  (a)  Each Tranche 2/3 Borrower hereby severally
and unconditionally promises to pay to the Administrative Agent for the account
of each Lender with any Loans outstanding to such Tranche 2/3 Borrower the then
unpaid principal amount of all such Loans on the Commitment Expiration Date.

(b)           Each Lender shall
maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of each Tranche 2/3 Borrower to such Lender
resulting from each Loan made by such Lender, including the amounts of
principal and interest payable and paid to such Lender from time to time
hereunder.

 40
 

(c)           The Administrative
Agent shall maintain accounts in which it shall record (i) the amount of
each Loan made hereunder, the Tranche and Type thereof and the Interest Period
applicable thereto, (ii) the amount of any principal or interest due and
payable or to become due and payable from each Tranche 2/3 Borrower to each
Lender hereunder and (iii) the amount of any sum received by the
Administrative Agent hereunder for the account of the Lenders and each such
Lender’s share thereof.

(d)           The entries made in
the accounts maintained pursuant to paragraph (b) or (c) of this
Section shall be prima  facie evidence of the existence and
amounts of the obligations recorded therein; provided that the failure
of any Lender or the Administrative Agent to maintain such accounts or any
error therein shall not in any manner affect the obligation of any Tranche 2/3
Borrower to repay the Loans in accordance with the terms of this Agreement.

(e)           Any Tranche 2 Lender
may request that Tranche 2 Loans made by it be evidenced by a promissory
note.  In such event, the relevant
Tranche 2/3 Borrower shall prepare, execute and deliver to such Tranche 2
Lender a promissory note payable to the order of such Tranche 2 Lender (or, if
requested by such Tranche 2 Lender, to such Tranche 2 Lender and its registered
assigns) substantially in the form of Exhibit B-1 with blanks appropriately
completed in conformity herewith (each, a “Tranche 2 Note” and
collectively, the “Tranche 2 Notes”). 
Thereafter, the Tranche 2 Loans evidenced by such Tranche 2 Note
and interest thereon shall at all times (including after assignment pursuant to
Section 10.04) be represented by one or more Tranche 2 Notes payable to the
order of the payee named therein (or, if such promissory note is a registered
note, to such payee and its registered assigns).

(f)            Any Tranche 3
Lender may request that Tranche 3 Loans made by it be evidenced by a promissory
note.  In such event, the relevant
Tranche 2/3 Borrower shall prepare, execute and deliver to such Tranche 3
Lender a promissory note payable to the order of such Tranche 3 Lender (or, if
requested by such Tranche 3 Lender, to such Tranche 3 Lender and its registered
assigns) substantially in the form of Exhibit B-2 with blanks appropriately
completed in conformity herewith (each, a “Tranche 3 Note” and
collectively, the “Tranche 3 Notes”). 
Thereafter, the Tranche 3 Loans evidenced by such Tranche 3 Note and
interest thereon shall at all times (including after assignment pursuant to
Section 10.04) be represented by one or more Tranche 3 Notes payable to the
order of the payee named therein (or, if such promissory note is a registered
note, to such payee and its registered assigns).

Section
2.10.  Prepayments; Additional
Collateral.  (a)  Each Tranche 2/3 Borrower shall have
the right at any time and from time to time to prepay any of its Borrowings in
whole or in part, without premium or penalty, except as provided in Section
2.15, subject to the terms and conditions set forth in paragraph (b) of this
Section.

(b)           Such
Tranche 2/3 Borrower shall notify the Administrative Agent by telephone
(confirmed by telecopy) of any prepayment of Loans hereunder (i) in the case of
prepayment of a LIBOR Borrowing, not later than 11:00 a.m., New York City time,
three Business Days before the date of prepayment, or (ii) in the case of
prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time,
one Business Day before the date of prepayment. 
Each such notice shall be irrevocable and shall specify (i) whether the
prepayment is in respect to the Tranche 2 Loans or the Tranche 3 Loans, (ii)
the prepayment date, (iii) in the

 41
 

case of LIBOR
Loans, the specific Borrowing or Borrowings which are to be prepaid and (iv)
the principal amount of each such Borrowing or portion thereof to be prepaid
(stated in Dollars or in the applicable Alternate Currency, as the case may
be); provided that, if a notice of prepayment is given in connection
with a conditional notice of termination of the Commitments as contemplated by
Section 2.07 or 2.08, as the case may be, then such notice of prepayment
may be revoked if such notice of termination is revoked in accordance with such
Section 2.07 or 2.08.  Promptly
following receipt of any such notice relating to a Borrowing, the
Administrative Agent shall advise the Lenders of the contents thereof.  Each partial prepayment of any Borrowing
shall be in an amount that would be permitted in the case of an advance of a
Borrowing of the same Type as provided in Section 2.02.  Each prepayment of a Borrowing shall be
applied ratably to the Loans included in the prepaid Borrowing of the
respective Tranche. Prepayments shall be accompanied by accrued interest to the
extent required by Section 2.12.  Each
prepayment of a Loan pursuant to this Section shall consist of a pro  rata
prepayment of Tranche 2 Loans and Tranche 3 Loans on the basis of the Tranche 2
Revolving Percentage and Tranche 3 Revolving Percentage, in each case as in
effect at the time of any such prepayment (using the Dollar Equivalent thereof
in the case of Alternate Currency Loans).

(c)           If
on any date prior to the Commitment Expiration Date, the Tranche 1 Letter of
Credit Outstandings exceed the Total Tranche 1 Commitment, each Designated
Subsidiary Borrower for whose account Tranche 1 Letters of Credit were issued
shall pay to the Administrative Agent at the Payment Office on such date an
amount of cash and/or Cash Equivalents equal to the amount of such excess, such
cash and/or Cash Equivalents to be held as security for all obligations of the
respective Designated Subsidiary Borrower to the Tranche 1 Lenders hereunder in
the Collateral Account applicable to such Designated Subsidiary Borrower.

(d)           If on any date the
Tranche 1 Letter of Credit Outstandings applicable to a Designated Subsidiary
Borrower (other than ARC) exceed the lesser of (i) such Designated Subsidiary
Borrower’s Borrowing Base and (ii) such Designated Subsidiary Borrower’s
Sublimit, such Designated Subsidiary Borrower shall pay or deliver to the
Collateral Agent within the Applicable Grace Period an amount of Cash and/or
Eligible Securities (valued for this purpose based on the respective Advance
Rate applicable thereto) in an aggregate amount equal to the amount of such
excess, with any such Cash or Eligible Securities to be held as additional
security for all obligations of the respective Designated Subsidiary Borrower
hereunder in the Collateral Account applicable to such Designated Subsidiary
Borrower.

(e)           If on any date the
Tranche 1 Letter of Credit Outstandings applicable to ARC exceed ARC’s
Borrowing Base, ARC shall pay or deliver to the Collateral Agent within the
Applicable Grace Period an amount of Cash and/or Eligible Securities (valued
for this purpose based on the respective Advance Rate applicable thereto) in an
aggregate amount equal to the amount of such excess, with any such Cash or
Eligible Securities to be held as additional security for all obligations of
ARC hereunder in the Collateral Account applicable to ARC.

(f)            If on any date the
sum of (i) the Tranche 1 Letter of Credit Outstandings applicable to ARC, (ii)
the Tranche 2 Letter of Credit Outstandings applicable to ARC, (iii) the
aggregate outstanding Principal Amount of all Tranche 2 Loans incurred by ARC
and (iv) the aggregate outstanding Principal Amount of all Tranche 3 Loans
incurred by ARC shall exceed ARC’s Sublimit, ARC shall pay or deliver to the
Administrative Agent at the Payment Office on

 42
 

such date an amount of cash and/or Cash Equivalents equal to the amount
of such excess, such cash and/or Cash Equivalents to be held as security for
all obligations of ARC to the respective Lenders hereunder in a cash collateral
account to be established by the Administrative Agent on terms reasonably
satisfactory to the Administrative Agent.

(g)           If on any date prior
to the Commitment Expiration Date, the sum of the aggregate outstanding
Principal Amount of Tranche 2 Loans plus the Tranche 2 Letter of Credit
Outstandings exceeds the Total Tranche 2 Commitment as then in effect, each
Tranche 2/3 Borrower to whom Tranche 2 Loans were made and/or for whose account
Tranche 2 Letters of Credit were issued shall on such date repay the
outstanding Tranche 2 Loans in an aggregate Principal Amount equal to the
amount by which the aggregate outstanding Principal Amount of Tranche 2 Loans plus
the Tranche 2 Letter of Credit Outstandings exceeds the Total Tranche 2
Commitment as then in effect.  If, after
giving effect to the prepayment of all outstanding Tranche 2 Loans, as set
forth above, the Tranche 2 Letter of Credit Outstandings exceed the Total Tranche
2 Commitment as then in effect, each Tranche 2/3 Borrower for whose account
Tranche 2 Letters of Credit were issued shall on such date pay  to the Administrative Agent at the Payment
Office an amount of cash and/or Cash Equivalents equal to the amount of such
excess, such cash and/or Cash Equivalents to be held as security for all
obligations of the respective Tranche 2/3 Borrower to the Tranche 2 Lenders
hereunder in a cash collateral account to be established by the Administrative
Agent on terms reasonably satisfactory to the Administrative Agent.

(h)           If on any date prior
to the Commitment Expiration Date, the aggregate outstanding Principal Amount
of all Alternate Currency Loans exceeds the Alternate Currency Loan Sublimit,
each Tranche 2/3 Borrower to whom Alternate Currency Loans were made shall on
such date repay the outstanding Alternate Currency Loans in an aggregate
Principal Amount equal to the amount by which the aggregate outstanding
Principal Amount of Alternate Currency Loans exceeds the Alternate Currency
Loan Sublimit.

(i)            If on any date
prior to the Commitment Expiration Date, the aggregate Alternate Currency
Letter of Credit Outstandings exceeds the Alternate Currency Letter of Credit
Sublimit, each Borrower for whose account Alternate Currency Letters of Credit
were issued shall on such date pay to the Administrative Agent at the Payment
Office an amount of cash and/or Cash Equivalents equal to the amount of such
excess, such cash and/or Cash Equivalents to be held as security for all
obligations of the respective Borrower hereunder in a cash collateral account
to be established by the Administrative Agent on terms reasonably satisfactory
to the Administrative Agent.

(j)            If on any date the
aggregate outstanding Principal Amount of Tranche 3 Loans exceeds the Total
Tranche 3 Commitment as then in effect, each Tranche 2/3 Borrower to whom such
Tranche 3 Loans were made shall on such date repay the outstanding Tranche 3
Loans in an aggregate Principal Amount equal to the amount by which the
aggregate outstanding Principal Amount of Tranche 3 Loans exceeds the Total
Tranche 3 Commitment as then in effect.

(k)           If on any date,
after giving effect to any other prepayment of outstanding Loans on such date,
the sum of the aggregate outstanding Principal Amount of all Tranche 2

 43
 

Loans and Tranche 3 Loans incurred by ARC plus the Tranche 2
Letter of Credit Outstandings attributable to ARC exceeds $100,000,000, ARC
shall on such date repay the outstanding Loans incurred by it in an aggregate
Principal Amount equal to such excess (with such repayment to be applied pro
rata to the outstanding Tranche 2 and Tranche 3 Loans (and using the
Dollar Equivalent thereof in the case of Alternate Currency Loans)).  If, after giving effect to the prepayment of
all outstanding Loans incurred by ARC, as set forth above, the Tranche 2 Letter
of Credit Outstandings applicable to ARC exceed $100,000,000, ARC shall pay or
deliver to the Administrative Agent at the Payment Office on such date an
amount of cash and/or Cash Equivalents in an aggregate amount equal to the
amount of such excess, with any such cash and/or Cash Equivalents to be held as
additional security for all obligations of ARC hereunder in a cash collateral
account to be established by the Administrative Agent on terms reasonably
satisfactory to the Administrative Agent.

(l)            If on any date the
aggregate outstanding Principal Amount of all Tranche 2 Loans and Tranche 3
Loans exceeds the Loan Sublimit, each Tranche 2/3 Borrower to whom Tranche 2
Loans and Tranche 3 Loans were made shall on such date repay the outstanding
Tranche 2 Loans and Tranche 3 Loans in an aggregate Principal Amount equal to
the amount by which the aggregate outstanding Principal Amount of Tranche 2
Loans and Tranche 3 Loans exceeds the Loan Sublimit as then in effect (with such
repayment to be applied pro  rata to the outstanding Tranche 2
Loans and Tranche 3 Loans (and using the Dollar Equivalent thereof in the case
of Alternate Currency Loans)).

(m)          With respect to each
prepayment of Loans required by Sections 2.10(g), (h), (j), (k) or (l), the
respective Tranche 2/3 Borrower may designate the Type of Loans to be prepaid
and the specific Borrowing or Borrowings pursuant to which such Loans were
made, provided that (i) if any prepayment of Eurodollar Loans made
pursuant to a single Borrowing shall reduce the outstanding Eurodollar Loans
made pursuant to such Borrowing to an amount less than $5,000,000 for such
Borrowing, then all Eurodollar Loans outstanding pursuant to such Borrowing
shall be immediately converted into a Borrowing of ABR Loans, (ii) if any
prepayment of Alternate Currency Loans made pursuant to a single Borrowing
shall reduce the outstanding Alternate Currency Loans made pursuant to such
Borrowing to an amount less than the Dollar Equivalent of $5,000,000 for such Borrowing,
then all Alternate Currency Loans outstanding pursuant to such Borrowing shall
be immediately repaid, (iii) each prepayment of Loans made pursuant to the same
Borrowing shall be applied pro  rata among the Loans comprising
such Borrowing and Borrowing and (iv) each such prepayment of Loans shall
consist of a pro  rata prepayment of Tranche 2 Loans and Tranche 3
Loans on the basis of the Tranche 2 Revolving Percentage and the Tranche 3
Revolving Percentage, in each case as in effect at the time of any such pre­payment
(and using the Dollar Equivalent thereof in the case of Alternate Currency
Loans).  In the absence of a designation
by the respective Tranche 2/3 Borrower as described in the preceding sentence,
the Administrative Agent shall, subject to the above, make such designation in
its sole discretion.

(n)           Notwithstanding the
foregoing provisions of this Section 2.10, if at any time the mandatory
repayment of Loans pursuant to Section 2.10(g), (h), (j) or (l) would result in
any Tranche 2/3 Borrower incurring breakage costs under Section 2.15 as a
result of LIBOR Loans being repaid other than on the last day of an Interest
Period applicable hereto (any such LIBOR Loans, “Affected Loans”), such
Tranche 2/3 Borrower may elect, by written notice to the

 44
 

Administrative Agent, to have the provisions of the following sentence
be applicable so long as no Default or Event of Default then exists.  At the time any Affected Loans are otherwise
required to be prepaid, such Tranche 2/3 Borrower may elect to deposit 100% (or
such lesser percentage elected by such Tranche 2/3 Borrower as not being
repaid) of the Principal Amounts that otherwise would have been paid in respect
of the Affected Loans with the Administrative Agent to be held as security for
the obligations of such Tranche 2/3 Borrower hereunder pursuant to a cash
collateral agreement to be entered into in form and substance satisfactory to
the Administrative Agent and shall provide for investments of such deposits as
directed by such Tranche 2/3 Borrower and satisfactory to the Administrative
Agent, with such cash collateral to be released from such cash collateral
account (and applied to repay the principal amount of such LIBOR Loans) upon
each occurrence thereafter of the last day of an Interest Period applicable to
such LIBOR Loans (or such earlier date or dates as shall be requested by such
Tranche 2/3 Borrower, with the amount to be so released and applied on the last
day of each Interest Period to be the amount of such LIBOR Loans to which such
Interest Period applies (or, if less, the amount remaining in such cash
collateral account); provided that (i) interest in respect of such
Affected Loans shall continue to accrue thereon at the rate provided hereunder
until such Affected Loans have been repaid in full and (ii) at any time while
an Event of Default has occurred and is continuing or upon written notice from
the Required Lenders, the Required Lenders may direct the Administrative Agent
(in which case the Administrative Agent shall, and is hereby authorized by such
Tranche 2/3 Borrower to, follow said directions) to apply any or all proceeds
then on deposit in such collateral account to the payment of such Affected
Loans.  Each Tranche 2/3 Borrower agrees
to pay the  balance of any Affected Loan
if the amount on deposit is not sufficient. 
All risk of loss in respect of investments made as contemplated in this
Section 2.10(l) shall be on such Tranche 2/3 Borrower.  Under no circumstances shall the
Administrative Agent be liable or accountable to such Tranche 2/3 Borrower or
any other Person for any decrease in the value of the cash collateral account
or for any loss resulting from the sale of any investment so made.

Section
2.11.  Fees.  (a) 
ARL, ARC, AIC and Arch Europe each agrees to pay, severally in
accordance with its respective Tranche 1 Liability Percentage and not jointly,
to the Administrative Agent a facility fee (the “Tranche 1 Facility Fee”)
for the account of the Tranche 1 Lenders pro  rata on the basis of
(i) prior to the earlier of the date the Total Tranche 1 Commitment terminates
and the Commitment Expiration Date, their respective Tranche 1 Commitments and
(ii) on or after the earlier of the date the Total Tranche 1 Commitment
terminates and the Commitment Expiration Date, their respective Tranche 1
Percentages of Tranche 1 Letter of Credit Outstandings at such time, in each
case for the period from and including the Restatement Effective Date to but
not including the Final Maturity Date, computed at a per annum rate equal to the Applicable Rate for Tranche 1 Facility
Fees of (x) in the case of clause (i) of this Section 2.11(a), the Total
Tranche 1 Commitment (as in effect from time to time) (regardless of
utilization) and (y) in the case of clause (ii) of this Section 2.11(a), the Tranche
1 Letter of Credit Outstandings at such time. 
Accrued Tranche 1 Facility Fees shall be due and payable quarterly in
arrears on the last Business Day of each calendar quarter and on the Final
Maturity Date and, with respect to any Tranche 1 Facility Fee owing to any
Tranche 1 Lender which is replaced pursuant to Section 2.18, on the date on
which such Tranche 1 Lender is replaced.

 45
 

(b)           The Parent Borrower
and ARC each agrees to pay, severally in accordance with its respective Tranche
2/3 Liability Percentage and not jointly, to the Administrative Agent a
facility fee (the “Tranche 2 Facility Fee”) for the account of the
Tranche 2 Lenders pro  rata on the basis of (i) prior to the
earlier of the date the Total Tranche 2 Commitment terminates and the Commitment
Expiration Date, their respective Tranche 2 Commitments and (ii) on or after
the earlier of the date the Total Tranche 2 Commitment terminates and the
Commitment Expiration Date, their respective Tranche 2 Percentage of Tranche 2
Letter of Credit Outstandings at such time, in each case for the period from
and including the Restatement Effective Date to but not including the Final
Maturity Date, computed at a per annum rate
equal to the Applicable Rate for Tranche 2 Facility Fees of (x) in the case of clause
(i) of this Section 2.11(b), the Total Tranche 2 Commitment (as in effect
from time to time) (regardless of utilization) and (y) in the case of clause
(ii) of this Section 2.11(b), the Tranche 2 Letter of Credit Outstandings at
such time.  Accrued Tranche 2 Facility
Fees shall be due and payable quarterly in arrears on the last Business Day of
each calendar quarter and on the Final Maturity Date and, with respect to any
Tranche 2 Facility Fee owing to any Tranche 2 Lender which is replaced pursuant
to Section 2.18, on the date on which such Tranche 2 Lender is replaced.

(c)           The Parent Borrower
and ARC each agrees to pay, severally in accordance with its respective Tranche
2/3 Liability Percentage and not jointly, to the Administrative Agent a
facility fee (the “Tranche 3 Facility Fee”) for the account of the
Tranche 3 Lenders pro  rata on the basis of their respective
Tranche 3 Commitments for the period from and including the Restatement
Effective Date to but not including the earlier of the date the Total Tranche 3
Commitment terminates and the Commitment Expiration Date, computed at a rate
per annum equal to the Applicable Rate for Tranche 3 Facility Fees of the Total
Tranche 3 Commitment (as in effect from time to time) (regardless of
utilization).  Accrued Tranche 3 Facility
Fees shall be due and payable quarterly in arrears on the last Business Day of
each calendar quarter and on the earlier of the date the Total Tranche 3
Commitment terminates and the Commitment Expiration Date and, with respect to
any Tranche 3 Facility Fee owing to any Tranche 3 Lender which is replaced
pursuant to Section 2.18, on the date on which such Tranche 3 Lender is
replaced.

(d)           The Parent Borrower
and ARC each agrees to pay, severally in accordance with its respective Tranche
2/3 Liability Percentage and not jointly, to the Administrative Agent a utiliza­tion
fee (the “Tranche 2 Utilization Fee”) for the account of the Tranche 2
Lenders pro  rata on the basis of their respective Tranche 2 Loans
then outstanding for the period from and including the Restatement Effective
Date to but not including the earlier of the date the Total Tranche 2
Commitment terminates and the Commitment Expiration Date, computed at a rate
per annum equal to the Applicable Rate for Tranche 2 Utilization Fees of the
aggregate outstanding Principal Amount of Tranche 2 Loans at any time when the
aggregate outstanding Principal Amount of Tranche 2 Loans and Tranche 3 Loans
incurred by all Tranche 2/3 Borrowers is greater than 50% of the sum of the
Total Tranche 2 Commitment and the Total Tranche 3 Commitment (each as in
effect from time to time).  Accrued
Tranche 2 Utilization Fees shall be due and payable quarterly in arrears on the
last Business Day of each calendar quarter and, with respect to any Tranche 2
Utilization Fee owing to any Tranche 2 Lender which is replaced pursuant to
Section 2.18, on the date on which such Tranche 2 Lender is replaced.

(e)           The Parent Borrower
and ARC each agrees to pay, severally in accordance with its respective Tranche
2/3 Liability Percentage and not jointly, to the Administrative Agent

 46
 

a utilization fee (the “Tranche 3 Utilization Fee”) for the
account of the Tranche 3 Lenders pro  rata on the basis of their
respective Tranche 3 Loans then outstanding for the period from and including
the Restatement Effective Date to but not including the earlier of the date the
Total Tranche 3 Commitment terminates and the Commitment Expiration Date,
computed at a rate per annum equal to the Applicable Rate for Tranche 3
Utilization Fees of the aggregate outstanding Principal Amount of Tranche 3
Loans at any time when the aggregate outstanding Principal Amount of Tranche 2
Loans and Tranche 3 Loans incurred by all Tranche 2/3 Borrowers is greater than
50% of the sum of the Total Tranche 2 Commitment and the Total Tranche 3
Commitment (each as in effect from time to time).  Accrued Tranche 3 Utilization Fees shall be
due and payable quarterly in arrears on the last Business Day of each calendar
quarter and, with respect to any Tranche 3 Utilization Fee owing to any Tranche
3 Lender which is replaced pursuant to Section 2.18, on the date on which such
Tranche 3 Lender is replaced.

(f)            Each Borrower
agrees to pay to the Administrative Agent for pro  rata
distribution to each Tranche 1 Lender (based on their respective Tranche 1
Percentages), a fee in respect of each Tranche 1 Letter of Credit (the “Tranche
1 Letter of Credit Fee”) issued for the account of such Borrower computed
at a rate per  annum equal to the Applicable Rate for Tranche 1 Letter
of Credit Fees, on the daily Stated Amount of such Tranche 1 Letter of
Credit.  Accrued Tranche 1 Letter of
Credit Fees shall be due and payable quarterly in arrears on the last Business
Day of each calendar quarter and upon the first day on or after the termination
of the Total Tranche 1 Commitment upon which no Tranche 1 Letters of Credit
remain outstanding.

(g)           Each Borrower agrees
to pay to the Administrative Agent for pro  rata distribution to
each Tranche 2 Lender (based on their respective Tranche 2 Percentages), a fee
in respect of each Tranche 2 Letter of Credit (the “Tranche 2 Letter of
Credit Fee”) issued for the account of such Borrower computed at a rate per
annum equal to the Applicable Rate for Tranche 2 Letter of Credit Fees,
on the daily Stated Amount of such Tranche 2 Letter of Credit. Accrued Tranche
2 Letter of Credit Fees shall be due and payable quarterly in arrears on the
last Business Day of each calendar quarter and upon the first day on or after
the termination of the Total Tranche 2 Commitment upon which no Tranche 2
Letters of Credit remain outstanding.

Section
2.12.  Interest.  (a) 
The Loans comprising each ABR Borrowing shall bear interest at the
Alternate Base Rate plus the Applicable Rate.

(b)           The Loans comprising
each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the
Interest Period in effect for such Borrowing plus the Applicable Rate.

(c)           The Loans comprising
each Euro Borrowing shall bear interest at Euro-LIBOR for the Interest Period
in effect for such Borrowing plus the Applicable Rate plus the Associated Costs
Rate, if any.

(d)           The
Loans comprising each Pounds Sterling Borrowing shall bear interest at Pounds
Sterling LIBOR for the Interest Period in effect for such Borrowing plus the
Applicable Rate plus the Associated Costs Rate, if any.

 47
 

(e)           Notwithstanding the
foregoing, if any principal of or interest on any Loan or any fee or other
amount payable by any Borrower hereunder is not paid when due, whether at
stated maturity, upon acceleration or otherwise, such overdue amount shall bear
interest, after as well as before judgment, at a rate per annum equal to (i) in
the case of overdue principal of any Loan, 2% plus the rate otherwise
applicable to such Loan as provided in the preceding paragraphs of this Section
2.12 or (ii) in the case of any other amount, 2% plus the rate applicable to
ABR Loans as provided in paragraph (a) of this Section 2.12.

(f)            Accrued interest on
each Loan shall be payable in arrears on each Interest Payment Date for such
Loan and on the Commitment Expiration Date; provided that (i) interest
accrued pursuant to paragraph (e) of this Section 2.12 shall be payable on
demand, (ii) in the event of any repayment or prepayment of any Loan (other
than a prepayment of an ABR Loan prior to the Commitment Expiration Date),
accrued interest on the principal amount repaid or prepaid shall be payable on
the date of such repayment or prepayment and (iii) in the event of any
conversion of any Eurodollar Loan prior to the end of the current Interest
Period therefor, accrued interest on such Loan shall be payable on the
effective date of such conversion.

(g)           All interest
hereunder shall be computed on the basis of a year of 360 days, except that
interest computed by reference to the Alternate Base Rate at times when the
Alternate Base Rate is based on the Prime Rate shall be computed on the basis
of a year of 365 days (or 366 days in a leap year), and in each case shall be
payable for the actual number of days elapsed (including the first day but
excluding the last day).  The applicable
Alternate Base Rate or LIBOR Rate shall be determined by the Administrative
Agent, and such determination shall be conclusive absent manifest error.

Section
2.13.  Alternate Rate of Interest.  If prior to the commencement of any Interest
Period for a LIBOR Borrowing:

(a)           the Administrative Agent determines
(which determination shall be conclusive absent manifest error) that adequate
and reasonable means do not exist for ascertaining the applicable LIBOR Rate for
such Interest Period;

(b)           the Administrative Agent is advised
by the Required Lenders that the applicable LIBOR Rate for such Interest Period
will not adequately and fairly reflect the cost to such Lenders of making or
maintaining their Loans included in such Borrowing for such Interest Period; or

(c)           in the case of any Alternate Currency
Loan, the Administrative Agent determines (which determination shall be
conclusive absent manifest error) that the requested Alternate Currency is not
available in sufficient amounts;

then the Administrative Agent shall give notice
thereof to the respective Tranche 2/3 Borrower and the relevant Lenders by
telephone or telecopy as promptly as practicable thereafter and, until the
Administrative Agent notifies such Tranche 2/3 Borrower and the relevant
Lenders that the circumstances giving rise to such notice no longer exist, (i)
in the case of clauses (a), (b) and (c) above, any Interest Election Request
that requests the conversion of any Borrowing to, or continuation of any
Borrowing as, the affected LIBOR Borrowing shall be ineffective, (ii) if any

 48
 

Borrowing Request requests a LIBOR Borrowing of the
affected Type, such Borrowing shall be made as an ABR Borrowing and (iii) in
the case of clause (c) above in which the affected Alternate Currency Loan is
outstanding, the respective Tranche 2/3 Borrower shall repay such Alternate
Currency Loan in full.

Section
2.14.  Increased Costs.  (a)  If
any Change in Law shall:

(i)            impose, modify or deem applicable
any reserve, special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by, any Lender (except any such
reserve requirement reflected in the Adjusted LIBO Rate or included in the
Associated Costs Rate pursuant to Section 2.12(c) or (d));  or

(ii)           impose on any Lender or the London
interbank market any other condition affecting this Agreement or LIBOR Loans
made by such Lender;

and
the result of any of the foregoing shall be to increase the cost to such Lender
of making or maintaining any LIBOR Loan (or of maintaining its obligation to
make any such Loan) or to increase the cost to such Lender or to reduce the
amount of any sum received or receivable by such Lender hereunder (whether of
principal, interest or otherwise), then the Parent Borrower, ARL, ARC, AIC and
Arch Europe each will pay, severally in accordance with its respective
Facility-wide Liability Percentage and not jointly,  to such Lender, as the case may be, such
additional amount or amounts as will compensate such Lender, as the case may
be, for such additional costs incurred or reduction suffered.

(b)           If any Lender
determines that any Change in Law regarding capital requirements has or would
have the effect of reducing the rate of return on such Lender’s capital or on
the capital of such Lender’s holding company, if any, as a consequence of this
Agreement or the Loans made by such Lender, to a level below that which such
Lender or such Lender’s holding company could have achieved but for such Change
in Law (taking into consideration such Lender’s policies and the policies of
such Lender’s holding company with respect to capital adequacy), then from time
to time the Parent Borrower ARL, ARC, AIC and Arch Europe each will pay,
severally in accordance with its respective Facility-wide Liability Percentage
and not jointly, to such Lender such additional amount or amounts as will
compensate such Lender or such Lender’s holding company for any such reduction
suffered.

(c)           A certificate of a
Lender setting forth the amount or amounts necessary to compensate such Lender
or its holding company, as the case may be, as specified in paragraph (a)
or (b) of this Section shall be delivered to the respective Tranche 2/3
Borrower and shall be conclusive absent manifest error.  Such Tranche 2/3 Borrower shall pay such
Lender the amount shown as due on any such certificate within 10 days
after receipt thereof.

(d)           Failure or delay on
the part of any  Lender to demand
compensation pursuant to this Section shall not constitute a waiver of such
Lender’s right to demand such compensation; provided that no Tranche 2/3
Borrower shall be required to compensate a Lender pursuant to this Section for
any increased costs or reductions incurred more than 90 days prior to the date
that such Lender notifies such Tranche 2/3 Borrower of the Change in Law giving
rise to such increased costs or reductions and of such Lender’s intention to
claim compensation

 49
 

therefor; provided, further, that, if the Change in Law
giving rise to such increased costs or reductions is retroactive, then the
90-day period referred to above shall be extended to include the period of
retroactive effect thereof.

Section
2.15.  Break Funding Payments.  In the event of (a) the payment of any
principal of any LIBOR Loan other than on the last day of an Interest Period
applicable thereto (including as a result of a mandatory prepayment under
Section 2.10 or an Event of Default), (b) the conversion of any LIBOR Loan
other than on the last day of the Interest Period applicable thereto, (c) the
failure to borrow, convert, continue or prepay any LIBOR Loan on the date
specified in any notice delivered pursuant hereto (regardless of whether such
notice may be revoked under Section 2.10(b) and is revoked in accordance
therewith), or (d) the assignment of any LIBOR Loan other than on the last
day of the Interest Period applicable thereto as a result of a request by a
Borrower pursuant to Section 2.18, then, in any such event, such Tranche 2/3
Borrower shall compensate each Lender for the loss, cost and expense
attributable to such event.  In the case
of a LIBOR Loan, such loss, cost or expense to any Lender shall be deemed to
include an amount determined by such Lender to be the excess, if any, of (i)
the amount of interest which would have accrued on the principal amount of such
Loan had such event not occurred, at the applicable LIBOR Rate that would have
been applicable to such Loan, for the period from the date of such event to the
last day of the then current Interest Period therefor (or, in the case of a
failure to borrow, convert or continue, for the period that would have been the
Interest Period for such Loan), over (ii) the amount of interest which would
accrue on such principal amount for such period at the interest rate which such
Lender would bid were it to bid, at the commencement of such period, for dollar
or the applicable Alternate Currency deposits of a comparable amount and period
from other banks in the Eurodollar or other relevant market.  A certificate of any Lender setting forth any
amount or amounts that such Lender is entitled to receive pursuant to this
Section shall be delivered to the respective Tranche 2/3 Borrower and shall be
conclusive absent manifest error.  Such
Tranche 2/3 Borrower shall pay such Lender the amount shown as due on any such
certificate within 10 days after receipt thereof.

Section
2.16.  Taxes.  (a) 
Any and all payments by or on account of any obligation of any Borrower
hereunder shall be made free and clear of and without deduction for any
Indemnified Taxes or Other Taxes; provided that if any Borrower shall be
required to deduct any Indemnified Taxes or Other Taxes from such payments,
then (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) the Administrative Agent or Lender (as the
case may be) receives an amount equal to the sum it would have received had no
such deductions been made, (ii) such Borrower shall make such deductions
and (iii) such Borrower shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.

(b)           In addition, each
Borrower shall pay, severally and not jointly, any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.

(c)           Each Borrower shall
indemnify, severally and not jointly, the Administrative Agent and each Lender
within 10 days after written demand therefor, for the full amount of any
Indemnified Taxes or Other Taxes that such Borrower failed to deduct or
withhold and that were paid by the Administrative Agent or such Lender on or
with respect to

 50
 

any payment by or on account of any obligation of such Borrower
hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any penalties, interest
and reasonable expenses arising therefrom or with respect thereto, whether or
not such Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.  A certificate as to the amount of such
payment or liability delivered to such Borrower by a Lender or by the
Administrative Agent on its own behalf or on behalf of a Lender, shall be
conclusive absent manifest error.

(d)           As soon as
practicable after any payment of Indemnified Taxes or Other Taxes by any
Borrower to a Governmental Authority, such Borrower shall deliver to the
Administrative Agent the original or a certified copy of a receipt issued by
such Governmental Authority evidencing such payment, a copy of the return
reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.

(e)           Each Foreign Lender
shall deliver to each Borrower (with a copy to the Administrative Agent), at
the time or times prescribed by applicable law, such properly completed and
executed documentation prescribed by applicable law or reasonably requested by
such Borrower (if any), or will comply with such other requirements, if any, as
is currently applicable, as will permit payments under this Agreement to be
made without withholding or at a reduced rate; provided, however,
that such Borrower shall have furnished to each such Lender in a reasonably
timely manner copies of such documentation and notice of such requirements
together with applicable instructions; provided, further, that no
such Lender shall have any obligation to provide such documentation or comply
with such requirements if it would result in a material economic, legal or regulatory
disadvantage to any such Lender.

(f)            If
the Administrative Agent or a Lender determines, in its sole discretion, that
it has received a refund of any Taxes or Other Taxes as to which it has been
indemnified by a Borrower or with respect to which a Borrower has paid
additional amounts pursuant to this Section 2.16, it shall pay over such refund
to such Borrower (but only to the extent of indemnity payments made, or
additional amounts paid, by such Borrower under this Section 2.16 with respect
to the Taxes or Other Taxes giving rise to such refund), net of all
out-of-pocket expenses of the Administrative Agent or such Lender and without
interest (other than any interest paid by the relevant Governmental Authority
with respect to such refund); provided, that such Borrower, upon the
request of the Administrative Agent or such Lender, agrees to repay the amount
paid over to such Borrower (plus any penalties, interest or other charges
imposed by the relevant Governmental Authority) to the Administrative Agent or
such Lender in the event the Administrative Agent or such Lender is required to
repay such refund to such Governmental Authority.  This Section shall not be construed to
require the Administrative Agent or any Lender to make available its tax returns
(or any other information relating to its taxes which it deems confidential) to
such Borrower or any other Person.

(g)           Any Lender that is
not a Lender as of the Restatement Effective Date shall not be entitled to any
greater payment under this Section 2.16 than such Lender’s assignor could have
been entitled to absent such assignment except to the extent that the
entitlement to a greater payment resulted from a Change in Law.

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Section
2.17.  Payments Generally; Pro Rata
Treatment; Sharing of Set-offs.  (a)  Each Borrower shall make each payment
required to be made by it hereunder (whether of principal, interest, fees or of
amounts payable under Section 2.14, 2.15 or 2.16, or otherwise) prior to 12:00
noon, New York City time, on the date when due, in immediately available funds,
without set-off or counterclaim (x) in Dollars, if such payment is made
in respect of any obligation of the Borrowers under this Agreement or any other
Credit Document except as otherwise provided in the immediately succeeding
clause (y), and (y) in the applicable Alternate Currency, if such payment is
made in respect of (i) principal of, or interest on, Alternate Currency Loans,
(ii) Unpaid Drawings on Alternate Currency Letters of Credit or (iii) increased
costs, indemnities or other amounts owing with respect to Alternate Currency
Loans or Alternate Currency Letters of Credit (except for fees payable under
Section 2.11, which fees shall be paid in Dollars calculated by using the
applicable Dollar Equivalent thereof of any amounts denominated in an Alternate
Currency).  Any amounts received after
such time on any date may, in the discretion of the Administrative Agent, be
deemed to have been received on the next succeeding Business Day for purposes
of calculating interest thereon.  All
such payments shall be made (including, without limitation, by way of wire
transfer) to the Administrative Agent at the Payment Office, except that
payments pursuant to Sections 2.14, 2.15, 2.16 and 10.03 shall be made directly
to the Persons entitled thereto.  The
Administrative Agent shall distribute any such payments received by it for the
account of any other Person to the appropriate recipient promptly following
receipt thereof.  If any payment
hereunder shall be due on a day that is not a Business Day, the date for
payment shall be extended to the next succeeding Business Day, and, in the case
of any payment accruing interest, interest thereon shall be payable for the
period of such extension.

(b)           If at any time
insufficient funds are received by and available to the Administrative Agent to
pay fully all amounts of principal, interest and fees then due hereunder, such
funds shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of interest and fees then due to such parties, and (ii) second, towards
payment of principal then due hereunder, ratably among the parties entitled
thereto in accordance with the amounts of principal then due to such parties.

(c)           If any Lender shall,
by exercising any right of set-off or counterclaim or otherwise, obtain
payment in respect of any particular Obligation resulting in such Lender
receiving payment of a greater proportion of such Obligation than the
proportion of such Obligation received by any other Lender, then the Lender
receiving such greater proportion shall purchase (for cash at face value)
participations in the related Obligations of other Lenders to the extent
necessary so that the benefit of all such payments shall be shared by the
Lenders ratably in accordance with the aggregate of such Obligations; provided
that (i) if any such participations are purchased and all or any portion of the
payment giving rise thereto is recovered, such participations shall be rescinded
and the purchase price restored to the extent of such recovery, without
interest, (ii) the provisions of this paragraph shall not be construed to apply
to any payment made by a Borrower pursuant to and in accordance with the
express terms of this Agreement or any payment obtained by a Lender as
consideration for the assignment of or sale of a participation in any of its
Loans to any assignee or participant, other than to any Borrower or any
Subsidiary or Affiliate thereof (as to which the provisions of this paragraph
shall apply) and (iii) the provisions of this paragraph shall not be construed
to apply to any payment received by

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any Tranche 1 Lender pursuant to the terms of the Security
Documents.  Each Borrower consents to the
foregoing and agrees, to the extent it may effectively do so under applicable
law, that any Lender acquiring a participation pursuant to the foregoing
arrangements may exercise against such Borrower rights of set-off and
counterclaim with respect to such participation as fully as if such Lender were
a direct creditor of such Borrower in the amount of such participation.

(d)           Unless the
Administrative Agent shall have received notice from a Borrower prior to the
date on which any payment is due to the Administrative Agent for the account of
the Lenders hereunder that such Borrower will not make such payment, the
Administrative Agent may assume that such Borrower has made such payment on
such date in accordance herewith and may, in reliance upon such assumption,
distribute to the Lenders the amount due. 
In such event, if such Borrower has not in fact made such payment, then
each of the Lenders severally agrees to repay to the Administrative Agent
forthwith on demand the amount so distributed to such Lender with interest
thereon, for each day from and including the date such amount is distributed to
it to but excluding the date of payment to the Administrative Agent, at the
greater of the Federal Funds Effective Rate and a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank
compensation.

(e)           If any Lender shall
fail to make any payment required to be made by it pursuant to Section 2.04(b)
or 2.17(d), then the Administrative Agent may, in its discretion
(notwithstanding any contrary provision hereof), apply any amounts thereafter
received by the Administrative Agent for the account of such Lender to satisfy
such Lender’s obligations under such Sections until all such unsatisfied
obligations are fully paid.

Section
2.18.  Mitigation Obligations;
Replacement of Lenders.  (a)  If any Lender requests compensation under
Section 2.14, 3A.04 or 3B.04, or if a Borrower is required to pay any
additional amount to any Lender or any Governmental Authority for the account
of any Lender pursuant to Section 2.16, then such Lender shall use reasonable
efforts to designate a different lending office for funding or booking its
Loans or Letters of Credit hereunder or to assign its rights and obligations
hereunder to another of its offices, branches or affiliates, if, in the
judgment of such Lender, such designation or assignment (i) would eliminate or
reduce amounts payable pursuant to Section 2.14, 2.16, 3A.04 or 3B.04, as the
case may be, in the future and (ii) would not subject such Lender to any unreimbursed
cost or expense and would not otherwise be disadvantageous to such Lender.  The Parent Borrower, ARL, ARC, AIC and Arch
Europe each agrees to pay, severally in accordance with its respective
Facility-wide Liability Percentage and not jointly, all reasonable costs and
expenses incurred by any Lender in connection with any such designation or
assignment.

(b)           If any Lender
requests compensation under Section 2.14, 3A.04 or 3B.04, or if a Borrower is
required to pay any additional amount to any Lender or any Governmental
Authority for the account of any Lender pursuant to Section 2.16, or if any
Lender defaults in its obligation to fund Loans hereunder, then the respective
Borrower may, at its sole expense and effort, upon notice to such Lender and
the Administrative Agent, require such Lender to assign and delegate, without
recourse (in accordance with and subject to the restrictions contained in
Section 10.04), all its interests, rights and obligations under this Agreement
to an assignee that shall assume such obligations (which assignee may be
another Lender, if such Lender accepts such assignment); provided that
(i) such Borrower shall have received the prior written consent

 

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of the
Administrative Agent, which consent shall not unreasonably be withheld, (ii)
such Lender shall have received payment of an amount equal to the outstanding
principal of its Loans, accrued interest thereon, accrued fees and all other
amounts payable to it hereunder, from the assignee (to the extent of such
outstanding principal and accrued interest and fees) or the respective Borrower
(in the case of all other amounts), (iii) in the case of any such
assignment resulting from a claim for compensation under Section 2.14, 3A.04 or
3B.04 or payments required to be made pursuant to Section 2.16, such assignment
will result in a reduction in such compensation or payments and (iv) no
assignments pursuant to this Section 2.18 shall be effective until all then outstanding
Letters of Credit are returned by each respective beneficiary to the Issuing
Agent for cancellation or exchange for new or amended Letters of Credit which
give effect to such assignment (it being understood that to the extent the
respective beneficiaries do not consent to such assignment, such assignment
cannot occur).  A Lender shall not be
required to make any such assignment and delegation if, prior thereto, as a
result of a waiver by such Lender or otherwise, the circumstances entitling
such Borrower to require such assignment and delegation cease to apply.

Section 2.19.  Additional
Tranche 1 Commitments.  (a)  The Designated Subsidiary Borrowers shall
have the right at any time and from time to time after the Restatement
Effective Date and prior to the Commitment Expiration Date to request (so long
as no Default or Event or Default is then in existence or would result
therefrom) on one or more occasions that one or more Tranche 1 Lenders (and/or
one or more other Persons which will become Tranche 1 Lenders as provided
pursuant to clause (vi) below) provide Additional Tranche 1 Commitments and,
subject to the applicable terms and conditions contained in this Agreement and
the relevant Additional Tranche 1 Commitment Agreement, issue Tranche 1 Letters
of Credit; it being understood and agreed, however, that (i) no Tranche 1
Lender shall be obligated to provide an Additional Tranche 1 Commitment as a
result of any request by the Designated Subsidiary Borrowers, (ii) until such
time, if any, as (x) such Tranche 1 Lender has agreed in its sole
discretion to provide an Additional Tranche 1 Commitment and executed and
delivered to the Administrative Agent an Additional Tranche 1 Commitment
Agreement in respect thereof as provided in Section 2.19(b) and (y) such other
conditions set forth in Section 2.19(b) shall have been satisfied, such Tranche
1 Lender shall not be obligated to issue any Tranche 1 Letters of Credit, in
excess of the amounts provided for in Section 3A.01, as the case may be, before
giving effect to such Additional Tranche 1 Commitments provided pursuant to
this Section 2.19, (iii) any Tranche 1 Lender (and/or one or more other Persons
which will become Tranche 1 Lenders as provided pursuant to clause (vi) below)
may so provide an Additional Tranche 1 Commitment without the consent of any
other Tranche 1 Lender (it being understood and agreed that the consent of the
Administrative Agent and the Issuing Agent (such consent (in either case) not
to be unreasonably withheld or delayed) shall be required if any such
Additional Tranche 1 Commitments are to be provided by a Person which is not
already a Tranche 1 Lender), (iv) (x) each provision of Additional Tranche 1
Commitments on a given date pursuant to this Section 2.19 shall be in a minimum
aggregate amount (for all Tranche 1 Lenders (including, in the circumstances
contemplated by clause (vi) below, banks or other financial institutions who
will become Tranche 1 Lenders)) of at least $1,000,000 and (y) the aggregate
amount of Additional Tranche 1 Commitments provided pursuant to this Section
2.19 shall not exceed $500,000,000, (v) the up-front fees payable to any Person
providing an Additional Tranche 1 Commitment in accordance with this Section
2.19 shall be as set forth in the relevant Additional Tranche 1 Commitment
Agreement, (vi) if, on or after the tenth Business 

 54
 

 

Day following the request by the Designated Subsidiary Borrowers of the
then existing Tranche 1 Lenders to provide Additional Tranche 1
Commitments pursuant to this Section 2.19 on the terms to be applicable
thereto, the Designated Subsidiary Borrowers have not received Additional
Tranche 1 Commitments in an aggregate amount equal to that amount of the
Additional Tranche 1 Commitments which the Designated Subsidiary Borrowers desire
to obtain pursuant to such request (as set forth in the notice provided by the
Designated Subsidiary Borrowers to the Administrative Agent as provided above),
then the Designated Subsidiary Borrowers may request Additional Tranche 1
Commitments from other Lenders and/or other NAIC approved banks or financial
institutions (unless otherwise agreed by the Designated Subsidiary Borrowers
and the Administrative Agent) in an aggregate amount equal to such deficiency
on terms which are no more favorable to such other bank or financial
institution in any respect than the terms offered to the existing Tranche 1
Lenders, and (vii) all actions taken by the Designated Subsidiary Borrowers
pursuant to this Section 2.19 shall be done in coordination with the Administrative
Agent.

(b)           At the time of any
provision of Additional Tranche 1 Commitments pursuant to this Section 2.19,
(i) each Designated Subsidiary Borrower, the Administrative Agent, the
Guarantor and each such Tranche 1 Lender or other bank or financial institution
which agrees to provide an Additional Tranche 1 Commitment (each, an “Additional
Tranche 1 Lender”) shall execute and deliver to the Administrative Agent an
Additional Tranche 1 Commitment Agreement substantially in the form of Exhibit
I, subject to such modifications in form and substance reasonably satisfactory
to the Administrative Agent as may be necessary or appropriate (with the
effectiveness of such Additional Tranche 1 Lender’s Additional Tranche 1
Commitment to occur upon delivery of such Additional Tranche 1 Commitment
Agreement to the Administrative Agent, the payment of any fees required in
connection therewith and the satisfaction of the other conditions in this
Section 2.19 to the reasonable satisfaction of the Administrative Agent),
(ii) all of the outstanding Tranche 1 Letters of Credit shall have been
returned by each respective beneficiary to the Issuing Agent and shall either
have been cancelled and/or exchanged for new or amended Tranche 1 Letters of
Credit which give effect to such Additional Tranche 1 Commitment, (iii) if such
Additional Tranche 1 Lender is not a United States person (as such term is
defined in Section 7701(a)(3) of the Code) for U.S. Federal income tax purposes
and such Additional Tranche 1 Lender is issuing Letters of Credit for the
account of a U.S. Borrower or U.S. Borrowers, such Additional Tranche 1 Lender
shall provide to such U.S. Borrower or U.S. Borrowers the appropriate Internal
Revenue Service documentation described in Section 2.16, (iv) each Designated
Subsidiary Borrower shall deliver to the Administrative Agent resolutions
authorizing the incurrence of the Obligations to be incurred pursuant to each
Additional Tranche 1 Commitment, together with evidence of good standing of
such Designated Subsidiary Borrower (if requested) and (v) each Designated
Subsidiary Borrower shall deliver to the Administrative Agent an opinion, in
form and substance reasonably satisfactory to the Administrative Agent, from
counsel to such Designated Subsidiary Borrowers reasonably satisfactory to the
Administrative Agent and dated such date, covering such matters similar to
those set forth in the opinions of counsel delivered to the Lenders on the
Restatement Effective Date pursuant to Section 5.01(b) and such other matters
as the Administrative Agent may reasonably request.  The Administrative Agent shall promptly
notify each Tranche 1 Lender as to the occurrence of each Additional Tranche 1
Commitment Date, and (x) on each such date, the Total Tranche 1 Commitment
under, and for all purposes of, this Agreement shall be increased by the
aggregate amount of such Additional Tranche 1 Commitments and (y) on each such
date, 

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Schedule 2.01 shall be deemed modified to reflect the revised Tranche 1
Commitments of the affected Tranche 1 Lenders.

Section 2.20.  Additional
Designated Subsidiary Borrowers.  The
Parent Borrower may from time to time after the Restatement Effective Date,
with the prior written consent of the Agents, designate one or more Persons as
an additional Designated Subsidiary Borrower, subject to the following terms
and conditions:

(a)           each such Person
shall be a Wholly-Owned Subsidiary of the Parent Borrower;

(b)           on or prior to the
date of designation, each such Person shall enter into an appropriately
completed DSB Assumption Agreement;

(c)           on or prior to the
date of designation, the Administrative Agent shall have received from such
Person a certificate, signed by an Authorized Officer of such Person in the
form of Exhibit D with appropriate insertions or deletions, together with (x)
copies of its certificate of incorporation, by-laws or other equivalent
organizational documents and (y) resolutions relating to the Credit Documents
which shall be satisfactory to the Administrative Agent;

(d)           on or prior to the
date of designation, the Administrative Agent shall have received an opinion,
addressed to the Administrative Agent and each of the Lenders and dated the
date of designation, from counsel to such Person, which opinion shall (x) in
the case of an additional Designated Subsidiary Borrower located in the United
States, be substantially in the form of Exhibit G-l and otherwise satisfactory
to the Administrative Agent, (y) in the case of an additional Designated
Subsidiary Borrower located in Bermuda, be substantially in the form of Exhibit
G-2 and otherwise satisfactory to the Administrative Agent, and (z) in the case
of an additional Designated Subsidiary Borrower located in a jurisdiction other
than the United States or Bermuda, be in form and substance satisfactory to the
Administrative Agent; and

(e)           on or prior to the
date of designation, the Administrative Agent shall have received such other
documentation and/or certificates (including, without limitation, certificates
of existence and/or good standing certificates in the case of additional
Designated Subsidiary Borrowers organized under the laws of the United States
or any State thereof, or any other jurisdiction where the concept of “good
standing” is applicable) as the Administrative Agent may reasonably request.

Section 2.21.  Removal of
Designated Subsidiary Borrowers.  The
Parent Borrower may from time to time after the Restatement Effective Date, by
written notice to the Administrative Agent (which notice the Administrative
Agent shall promptly forward to each Lender), remove one or more Designated
Subsidiary Borrowers, provided that on the date of removal (i) no Letters of
Credit shall be outstanding for the account of such Designated Subsidiary
Borrower; (ii) no Loans shall be outstanding for the account of such Designated
Subsidiary Borrower; (iii) all fees, interest or other amounts payable under
this Agreement or the other Credit Documents by such Designated Subsidiary
Borrower shall have been paid in full and (iv) no other Obligations of such
Designated Subsidiary Borrower shall remain outstanding.

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ARTICLE IIIA

Tranche 1 Letters
of Credit

Section 3A.01.  Tranche 1
Letters of Credit.  (a)  Subject to and upon the terms and conditions
set forth herein, each Designated Subsidiary Borrower may request the Issuing
Agent, at any time and from time to time after the Restatement Effective Date
and prior to the date which is 30 days prior to the Commitment Expiration Date,
to issue on behalf of the Tranche 1 Lenders, for the account of such Designated
Subsidiary Borrower and in support of, on a standby basis, Letter of Credit
Supportable Obligations and, subject to and upon the terms and conditions set
forth herein, the Issuing Agent agrees to issue on behalf of the Tranche 1
Lenders at any time and from time to time after the Restatement Effective Date
and prior to the date which is 30 days prior to the Commitment Expiration Date,
one or more irrevocable standby letters of credit in such form as may be
approved by the Issuing Agent (each such letter of credit, a “Tranche 1
Letter of Credit” and, collectively, the “Tranche 1 Letters of Credit”).  Notwithstanding the foregoing, the Issuing
Agent shall be under no obligation to issue any Tranche 1 Letter of Credit if
at the time of such issuance:

(i)            any order, judgment or decree of any
Governmental Authority or arbitrator shall purport by its terms to enjoin or
restrain the Issuing Agent from issuing such Tranche 1 Letter of Credit or any
requirement of law applicable to such Issuing Agent or any Tranche 1 Lender or
any request or directive (whether or not having the force of law) from any
Governmental Authority with jurisdiction over the Issuing Agent or any Tranche
1 Lender shall prohibit, or request that the Issuing Agent or any Tranche 1
Lender refrain from, the issuance of letters of credit generally or such
Tranche 1 Letter of Credit in particular or shall impose upon the Issuing Agent
or any Lender with respect to such Tranche 1 Letter of Credit any restriction
or reserve or capital requirement (for which the Issuing Agent or any Tranche 1
Lender is not otherwise compensated) not in effect on the Restatement Effective
Date, or any unreimbursed loss, cost or expense which was not applicable, in
effect or known to the Issuing Agent or any Tranche 1 Lender as of the
Restatement Effective Date;

(ii)           the conditions precedent set forth in
Section 5.02 are not satisfied at that time; or

(iii)          the Issuing Agent shall have received
notice from any Borrower or the Required Lenders prior to the issuance of such
Tranche 1 Letter of Credit of the type described in clause (viii) of Section
3A.01(b).

(b)           Notwithstanding anything to the
contrary contained in this Section 3A.01 or elsewhere in this Agreement (i) no
Tranche 1 Letter of Credit shall be issued the Stated Amount of which, when
added to the Tranche 1 Letter of Credit Outstandings (exclusive of Tranche 1
Unpaid Drawings which are repaid on the date of, and prior to the issuance of,
the respective Tranche 1 Letter of Credit) at such time, would exceed an amount
equal to the Total Tranche 1 Commitment at such time; (ii) no Tranche 1 Letter
of Credit shall be issued for the account of any Designated Subsidiary Borrower
(other than ARC) the Stated Amount of which, when added to the Tranche 1 Letter
of Credit Outstandings in respect of outstanding Tranche 1 

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Letters of Credit issued for the account of such
Designated Subsidiary Borrower (exclusive of Tranche 1 Unpaid Drawings in
respect of Tranche 1 Letters of Credit issued for the account of such
Designated Subsidiary Borrower which are repaid on the date of, and prior to
the issuance of, the respective Tranche 1 Letter of Credit) at such time, would
exceed an amount equal to the lesser of (x) such Designated Subsidiary Borrower’s
Borrowing Base and (y) such Designated Subsidiary Borrower’s Sublimit; (iii) no
Tranche 1 Letter of Credit shall be issued for the account of ARC the Stated
Amount of which, when added to the Tranche 1 Letter of Credit Outstandings in
respect of outstanding Tranche 1 Letters of Credit issued for the account of
ARC (exclusive of Tranche 1 Unpaid Drawings in respect of Tranche 1 Letters of
Credit issued for the account of ARC which are repaid on the date of, and prior
to the issuance of, the respective Tranche 1 Letter of Credit) at such time,
would exceed an amount equal to ARC’s Borrowing Base; (iv) no Tranche 1 Letter
of Credit shall be issued for the account of ARC the Stated Amount of which,
when added to (x) the Tranche 1 Letter of Credit Outstandings applicable to ARC
(exclusive of Tranche 1 Unpaid Drawings which are repaid on the date of, and
prior to the issuance of, the respective Tranche 1 Letter of Credit) at such
time, (y) the Tranche 2 Letter of Credit Outstandings applicable to ARC at such
time and (z) the aggregate Principal Amount of all Tranche 2 Loans and Tranche
3 Loans incurred by ARC and then outstanding, would exceed an amount equal to
ARC’s Sublimit; (v) no Tranche 1 Letter of Credit denominated in an Alternate
Currency shall be issued the Stated Amount of which, when added to the Alternate
Currency Letter of Credit Outstandings at such time in respect of all Alternate
Currency Letters of Credit, would exceed the Alternate Currency Letter of
Credit Sublimit; (vi) each Tranche 1 Letter of Credit shall have an expiry date
occurring not later than one year after such Tranche 1 Letter of Credit’s date
of issuance; provided that each such Tranche 1 Letter of Credit may by
its terms automatically renew annually for one additional year unless the
Issuing Agent notifies the beneficiary thereof, in accordance with the terms of
such Tranche 1 Letter of Credit, that such Tranche 1 Letter of Credit will not
be renewed; (vii) each Tranche 1 Letter of Credit shall be denominated in
Dollars or, subject to preceding clause (v), an Alternate Currency; and (viii)
the Issuing Agent will not issue any Tranche 1 Letter of Credit after it has
received written notice from any Borrower or the Required Lenders stating that
a Default or an Event of Default exists until such time as the Issuing Agent
shall have received a written notice of (x) rescission of such notice from the
party or parties originally delivering the same or (y) a waiver of such Default
or Event of Default by the Required Lenders (or, to the extent provided by
Section 10.02, each of the Lenders).

(c)           Each Tranche 1 Letter of Credit will
be issued by the Issuing Agent on behalf of the Tranche 1 Lenders and each
Tranche 1 Lender will participate in each Tranche 1 Letter of Credit pro
rata in accordance with its Tranche 1 Percentage.  The obligations of each Tranche 1 Lender
under and in respect of each Tranche 1 Letter of Credit are several, and the
failure by any Tranche 1 Lender to perform its obligations hereunder or under
any Tranche 1 Letter of Credit shall not affect the obligations of the respective
Designated Subsidiary Borrower toward any other party hereto nor shall any
other such party be liable for the failure by such Tranche 1 Lender to perform
its obligations hereunder or under any Tranche 1 Letter of Credit.

(d)           Subject to and on the terms and
conditions set forth herein, the Issuing Agent is hereby authorized by each
Designated Subsidiary Borrower and the Tranche 1 Lenders to arrange for the
issuance of any Tranche 1 Letter of Credit pursuant to Section 3A.01(a) and 

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the amendment of any Tranche 1 Letter of Credit
pursuant to Section 2.18, Section 2.19, Section 3A.06 and/or Section 10.04(b)
by:

(i)            completing the commencement date and
the expiry date of such Tranche 1 Letter of Credit;

(ii)           in the case of an amendment
increasing or reducing the amount thereof, amending such Tranche 1 Letter of
Credit in such manner as the Issuing Agent and the respective beneficiary may
agree;

(iii)          completing such Tranche 1 Letter of
Credit with the participation of each Tranche 1 Lender as allocated pursuant to
the terms hereof; and

(iv)          executing such Tranche 1 Letter of
Credit on behalf of each Tranche 1 Lender and following such execution
delivering such Tranche 1 Letter of Credit to the beneficiary of such Tranche 1
Letter of Credit.

(e)           Each Tranche 1 Letter of Credit shall
be executed and delivered by the Issuing Agent in the name and on behalf of,
and as attorney-in-fact for, each Tranche 1 Lender party to such Tranche 1
Letter of Credit, and the Issuing Agent shall act under each Tranche 1 Letter
of Credit, and each Tranche 1 Letter of Credit shall expressly provide that the
Issuing Agent shall act, as the agent of each Tranche 1 Lender to (a) receive
drafts, other demands for payment and other documents presented by the
beneficiary under such Tranche 1 Letter of Credit, (b) determine whether such
drafts, demands and documents are in compliance with the terms and conditions
of such Tranche 1 Letter of Credit and (c) notify such Tranche 1 Lender and
such Designated Subsidiary Borrower that a valid drawing has been made and the
date that the related Tranche 1 Unpaid Drawing is to be made; provided
that the Issuing Agent shall have no obligation or liability for any Tranche 1
Unpaid Drawing under such Tranche 1 Letter of Credit, and each Tranche 1 Letter
of Credit shall expressly so provide. 
Each Tranche 1 Lender hereby irrevocably appoints and designates the
Issuing Agent as its attorney-in-fact, acting through any duly authorized
officer of the Issuing Agent, solely for the purpose of executing and
delivering in the name and on behalf of such Tranche 1 Lender each Tranche 1
Letter of Credit to be issued by such Tranche 1 Lender hereunder.  Promptly upon the request of the Issuing
Agent, each Tranche 1 Lender will furnish to the Issuing Agent such powers of
attorney or other evidence as any beneficiary of any Tranche 1 Letter of Credit
may reasonably request in order to demonstrate that the Issuing Agent has the
power to act as attorney-in-fact for such Tranche 1 Lender to execute and
deliver such Tranche 1 Letter of Credit.

Section 3A.02.  Tranche 1
Letter of Credit Requests.  (a)  Whenever a Designated Subsidiary Borrower
desires that a Tranche 1 Letter of Credit be issued, such Designated Subsidiary
Borrower shall give the Administrative Agent and the Issuing Agent written
notice (including by way of facsimile transmission, immediately confirmed in
writing by submission of the original of such request by mail to the Issuing
Agent) thereof prior to 11:00 a.m. (New York time) at least five Business Days
(or such shorter period as may be acceptable to the Issuing Agent) prior to the
proposed date of issuance (which shall be a Business Day), which written notice
shall be in the form of Exhibit C-1 (each, a “Tranche 1 Letter of Credit
Request”).  Each 

 59
 

 

Tranche 1
Letter of Credit Request shall include any other documents as the Issuing Agent
customarily requires in connection therewith.

(b)           The making of each Tranche 1 Letter
of Credit Request shall be deemed to be a representation and warranty by the
applicable Designated Subsidiary Borrower that such Tranche 1 Letter of Credit
may be issued in accordance with, and it will not violate the requirements of,
Section 3A.01(a) or (b).

(c)           Upon its issuance of, or amendment
to, any Tranche 1 Letter of Credit, the Issuing Agent shall promptly notify the
respective Designated Subsidiary Borrower and the Tranche 1 Lenders of such
issuance or amendment, which notice shall include a summary description of the
Tranche 1 Letter of Credit actually issued and any amendments thereto.

Section 3A.03.  Agreement to
Repay Tranche 1 Letter of Credit Drawings. 
(a)  Each Designated Subsidiary Borrower agrees to reimburse
each Tranche 1 Lender, by making payment to the Administrative Agent in
immediately available funds at the Payment Office, for any payment or
disbursement made by such Tranche 1 Lender under any Tranche 1 Letter of Credit
which has been issued for such Designated Subsidiary Borrower’s account (each
such amount so paid or disbursed until reimbursed by such Designated Subsidiary
Borrower, a “Tranche 1 Unpaid Drawing”) no later than one Business Day
following the date of such payment or disbursement, with interest on the amount
so paid or disbursed by such Lender, to the extent not reimbursed prior to 1:00
p.m. (New York time) on the date of such payment or disbursement, from and
including the date paid or disbursed to but not including the date such Tranche
1 Lender is reimbursed therefor at a rate per annum which shall be the
Alternative Base Rate plus the Applicable Rate for Loans maintained as ABR
Loans (or, in the case of any payment or disbursement in an Alternate Currency,
such comparable rate for such Alternate Currency as the Administrative Agent
shall reasonably determine) as in effect from time to time (plus an additional
2% per annum, payable on demand, if not reimbursed by the third Business Day
after the date of such payment or disbursement).

(b)           Each Designated Subsidiary Borrower’s
obligation under this Section 3A.03 to reimburse each Tranche 1 Lender with
respect to Tranche 1 Unpaid Drawings (including, in each case, interest
thereon) shall be absolute and unconditional under any and all circumstances
and irrespective of any setoff, counterclaim or defense to payment which such
Designated Subsidiary Borrower may have or have had against such Tranche 1
Lender or the Issuing Agent, including, without limitation, any defense based
upon the failure of any drawing under a Tranche 1 Letter of Credit to conform
to the terms of the Tranche 1 Letter of Credit or any non-application or
misapplication by the beneficiary of the proceeds of such drawing; provided,
however, that no Designated Subsidiary Borrower shall be obligated to
reimburse any Tranche 1 Lender for any wrongful payment made by such Tranche 1
Lender under a Tranche 1 Letter of Credit as a result of acts or omissions
constituting willful misconduct or gross negligence on the part of such Tranche
1 Lender (as determined by a court of competent jurisdiction in a final and
non-appealable decision).

Section 3A.04.  Increased
Costs.  If after the Restatement
Effective Date, a Change in Law shall either (i) impose, modify or make
applicable any reserve, deposit, capital adequacy or similar requirement
against letters of credit issued by or participated in by such 

 60
 

 

Tranche 1
Lender, or (ii) impose on such Tranche 1 Lender any other conditions directly
or indirectly affecting this Agreement or any Tranche 1 Letter of Credit; and
the result of any of the foregoing is to increase the cost to such Tranche 1
Lender of issuing, maintaining or participating in any Tranche 1 Letter of
Credit, or to reduce the amount of any sum received or receivable by such
Tranche 1 Lender hereunder or reduce the rate of return on its capital with
respect to Tranche 1 Letters of Credit, then, upon written demand to the
respective Designated Subsidiary Borrower by such Tranche 1 Lender (with a copy
to the Administrative Agent), such Designated Subsidiary Borrower agrees to pay
to such Tranche 1 Lender such additional amount or amounts as will compensate
such Tranche 1 Lender for such increased cost or reduction.  A certificate submitted to the respective
Designated Subsidiary Borrower by such Tranche 1 Lender (with a copy to the
Administrative Agent), setting forth the basis for the determination of such
additional amount or amounts necessary to compensate such Tranche 1 Lender as
aforesaid shall be final and conclusive and binding on such Designated
Subsidiary Borrower absent manifest error, although the failure to deliver any
such certificate shall not release or diminish any Designated Subsidiary
Borrower’s obligations to pay additional amounts pursuant to this Section 3A.04
upon subsequent receipt of such certificate; provided that such
Designated Subsidiary Borrower shall not be required to compensate such Tranche
1 Lender pursuant to this Section 3A.04 for any increased costs or reductions
incurred more than 90 days prior to the date that such Tranche 1 Lender
notifies such Designated Subsidiary Borrower of the Change in Law giving rise to
such increased costs or reductions and of such Tranche 1 Lender’s intention to
claim compensation therefor; provided, further, that, if the
Change in Law giving rise to such increased costs or reductions is retroactive,
then the 90-day period referred to above shall be extended to include the
period of retroactive effect thereof.

Section 3A.05.  Tranche 1
Letter of Credit Expiration Extensions. 
Each Tranche 1 Lender acknowledges that to the extent provided under the
terms of any Tranche 1 Letter of Credit, the expiration date of such Tranche 1
Letter of Credit will be automatically extended for an additional year, without
written amendment, unless at least 30 days, or 60 days if so required by any
Applicable Regulatory Authority, prior to the expiration date of such Tranche 1
Letter of Credit, notice is given by the Issuing Agent to the beneficiary of
such Tranche 1 Letter of Credit in accordance with the terms of the respective
Tranche 1 Letter of Credit (a “Notice of Non-Extension”) that the
expiration date of such Tranche 1 Letter of Credit will not be extended beyond
its current expiration date.  The Issuing
Agent will give Notices of Non-Extension as to any or all outstanding Tranche 1
Letters of Credit if requested to do so by the Required Lenders pursuant to
Article VIII.  The Issuing Agent will
give Notices of Non-Extension as to all outstanding Tranche 1 Letters of Credit
if the Commitment Expiration Date has occurred. 
The Issuing Agent will send a copy of each Notice of Non-Extension to
the respective Designated Subsidiary Borrower concurrently with delivery
thereof to the respective beneficiary, unless prohibited by law from doing so.

Section 3A.06.  Changes to
Stated Amount.  At any time when any
Tranche 1 Letter of Credit is outstanding, at the request of the respective
Designated Subsidiary Borrower, the Issuing Agent will enter into an amendment
increasing or reducing the Stated Amount of such Tranche 1 Letter of Credit, provided
that (i) in no event shall the Stated Amount of any Tranche 1 Letter of Credit
be increased to an amount which would exceed the applicable limitations set
forth in Section 3A.01(b), (ii) the Stated Amount of a Tranche 1 Letter of
Credit may not be increased at any time if the conditions precedent set forth
in Section 5.02 are not 

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satisfied at
such time, and (iii) the Stated Amount of a Tranche 1 Letter of Credit may not
be increased at any time after the date which is 30 days prior to the
Commitment Expiration Date.

Section 3A.07.  Representations
and Warranties of Tranche 1 Lenders. 
Each Tranche 1 Lender represents and warrants that each Tranche 1 Letter
of Credit constitutes a legal, valid and binding obligation of such Tranche 1
Lender enforceable in accordance with its terms.

Section 3A.08.  Fronted
Tranche 1 Letters of Credit 
Notwithstanding the foregoing in this Article IIIA:

(a)           Subject to and upon
the terms and conditions set forth herein, each Designated Subsidiary Borrower
may request that any Fronting Lender at any time and from time to time on or
after the Restatement Effective Date and prior to the date which is 30 days
prior to the Commitment Expiration Date, to issue for its own account a letter
of credit designated as a Tranche 1 Letter of Credit for the account of such
Designated Subsidiary Borrower subject to and upon the terms and conditions
herein set forth.  Each Fronting Lender
agrees to issue at any time and from time to time on or after the Restatement
Effective Date and prior to the date which is 30 days prior to the Commitment
Expiration Date one or more irrevocable standby letters of credit designated as
a Tranche 1 Letter of Credit in such form as may be approved by such Fronting
Lender (each such letter of credit, a “Fronted Tranche 1 Letter of Credit”
and, collectively, the “Fronted Tranche 1 Letters of Credit”), provided
that no Fronted Tranche 1 Letter of Credit will be issued by any Fronting
Lender if after giving effect thereto (x) the Stated Amount thereof, when added
to the aggregate Stated Amount of all Fronted Letters of Credit then outstanding,
shall exceed $200,000,000, or (y) any provision set forth in Section 3A.01
shall be violated as a result thereof. 
Except as expressly provided in this Section 3A.08 or in Section 3A.09
or 3A.10, for all purposes of this Agreement and the other Credit Documents,
Fronted Tranche 1 Letters of Credit shall be deemed to be Tranche 1 Letters of
Credit.

(b)           Immediately upon the
issuance by any Fronting Lender of any Fronted Tranche 1 Letter of Credit, such
Fronting Lender shall be deemed to have sold and transferred to each Tranche 1
Lender other than such Fronting Lender (each such Tranche 1 Lender in its
capacity as a “participant” under any Fronted Tranche 1 Letter of Credit, a “Fronting
Tranche 1 Participant”), and each such Fronting Tranche 1 Participant shall
be deemed irrevocably and unconditionally to have purchased and received from
such Fronting Lender, without recourse or warranty, an undivided interest and
participation, to the extent of such Fronting Tranche 1 Participant’s Tranche 1
Percentage in such Fronted Tranche 1 Letter of Credit, each drawing made
thereunder and the obligations of each Designated Subsidiary Borrower under
this Agreement with respect thereto, and any security therefor or guaranty
pertaining thereto.  Upon any change in
the Tranche 1 Commitments or Tranche 1 Percentages of the Tranche 1 Lenders
pursuant to this Agreement, it is hereby agreed that, with respect to all then
outstanding Fronted Tranche 1 Letters of Credit and Fronted Tranche 1 Unpaid
Drawings, there shall be an automatic adjustment to the participations pursuant
to this Section 3A.08 to reflect the new Tranche 1 Percentages resulting from
such change or changes, as the case may be.

(c)           In determining
whether to pay under any Fronted Tranche 1 Letter of Credit, such Fronting
Lender shall have no obligation relative to the other Tranche 1 Lenders 

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other than to confirm that any documents required to be delivered under
such Fronted Tranche 1 Letter of Credit appear to have been delivered and that
they appear to substantially comply on their face with the requirements of such
Fronted Tranche 1 Letter of Credit.  Any
action taken or omitted to be taken by any Fronting Lender under or in
connection with any Fronted Tranche 1 Letter of Credit shall not create for such
Fronting Lender any resulting liability to any Designated Subsidiary Borrower
or any of its Affiliates or any Tranche 1 Lender unless such action is taken or
omitted to be taken with gross negligence or willful misconduct on the part of
such Fronting Lender (as determined by a court of competent jurisdiction).

(d)           In the event that
any Fronting Lender makes any payment under any Fronted Tranche 1 Letter of
Credit and the respective Designated Subsidiary Borrower shall not have
reimbursed such amount in full to such Fronting Lender pursuant to Section
3A.09, such Fronting Lender shall promptly notify the Administrative Agent,
which shall promptly notify each Fronting Tranche 1 Participant, of such
failure, and each Fronting Tranche 1 Participant shall promptly and
unconditionally pay to such Fronting Lender the amount of such Fronting Tranche
1 Participant’s Tranche 1 Percentage of such unreimbursed payment in Dollars
(or, in the case of an Alternate Currency Letter of Credit, in the applicable
Alternate Currency) and in immediately available funds.  If, prior to 11:00 a.m. (New York time) on
any Business Day, the Administrative Agent so notifies any Fronting Tranche 1
Participant required to fund a payment under a Fronted Tranche 1 Letter of
Credit, such Fronting Tranche 1 Participant shall make available to such
Fronting Lender in Dollars (or, in the case of an Alternate Currency Letter of
Credit, in the applicable Alternate Currency) and in immediately available
funds such Fronting Tranche 1 Participant’s Tranche 1 Percentage of the amount
of such payment on such Business Day (or, if notice is given after 11:00 a.m.
(New York time) on any Business Day, on the next Business Day).  If and to the extent such Fronting Tranche 1
Participant shall not have so made its Tranche 1 Percentage of the amount of
such payment available to such Fronting Lender, such Fronting Tranche 1
Participant agrees to pay to such Fronting Lender, forthwith on demand such
amount, together with interest thereon, for each day from such date to but
excluding the date such amount is paid to such Fronting Lender at the rate
determined by such Fronting Lender in accordance with banking industry rules on
interbank compensation, or in the case of a Fronted Tranche 1 Letter of Credit
in Dollars, if such rate is greater, the Federal Funds Effective Rate.  The failure of any Fronting Tranche 1
Participant to make available to such Fronting Lender its Tranche 1 Percentage
of any payment under any Fronted Tranche 1 Letter of Credit shall not relieve
any other Fronting Tranche 1 Participant of its obligation hereunder to make
available to such Fronting Lender its Tranche 1 Percentage of any payment on
the date required, as specified above, but no Fronting Tranche 1 Participant
shall be responsible for the failure of any other Fronting Tranche 1
Participant to make available to such Fronting Lender such other Fronting
Tranche 1 Participant’s Tranche 1 Percentage of any such payment.

(e)           Whenever any
Fronting Lender receives any payment by any Designated Subsidiary Borrower as
to which it has also received payments from the Fronting Tranche 1 Participants
pursuant to clause (d) above, such Fronting Lender shall forward such
payment to the Administrative Agent, which in turn shall distribute to each
Fronting Tranche 1 Participant which has paid its Tranche 1 Percentage thereof,
in Dollars (or, in the case of an Alternate Currency Letter of Credit, in the
applicable Alternate Currency) and in immediately available funds, an amount
equal to such Fronting Tranche 1 Participant’s share (based upon the amount
funded by such Fronting Tranche 1 Participant to the aggregate amount funded by
all Fronting 

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Tranche 1 Participants and retained by such Fronting Lender) of the
principal amount of such payment and interest thereon accruing after the
purchase of the respective participations.

(f)            Upon the request of
any Fronting Tranche 1 Participant, each Fronting Lender shall furnish to such
Fronting Tranche 1 Participant copies of any Fronted Tranche 1 Letter of Credit
issued by it and such other documentation as may reasonably be requested by
such Fronting Tranche 1 Participant.

(g)           The obligations of
the Fronting Tranche 1 Participants to make payments to each Fronting Lender
with respect to Fronted Tranche 1 Letters of Credit issued by it shall be
irrevocable and not subject to any qualification or exception whatsoever and
shall be made in accordance with the terms and conditions of this Agreement
under all circumstances, including, without limitation, any of the following
circumstances:

(i)            any lack of validity or
enforceability of this Agreement or any of the other Credit Documents or any
amendment, supplement or modification to any of the foregoing;

(ii)           the existence of any claim, setoff,
defense or other right which the Fronting Tranche 1 Participant or any of its
Affiliates may have at any time against a beneficiary named in a Fronted
Tranche 1 Letter of Credit, any transferee of any Fronted Tranche 1 Letter of
Credit (or any Person for whom any such transferee may be acting), the
Administrative Agent, any Fronting Lender, any Fronting Tranche 1 Participant,
any Tranche 1 Lender, or any other Person, whether in connection with this
Agreement, any Fronted Tranche 1 Letter of Credit, the transactions
contemplated herein or any unrelated transactions (including any underlying
transaction between any Designated Subsidiary Borrower or any of its Affiliates
and the beneficiary named in any such Fronted Tranche 1 Letter of Credit);

(iii)          any draft, certificate or any other document
presented under any Fronted Tranche 1 Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect;

(iv)          the surrender or impairment of any
security for the performance or observance of any of the terms of any of the
Credit Documents;

(v)           the occurrence of any Default or
Event of Default; or

(vi)          any matter or event set forth in
Section 3A.03 or 3A.09.

(h)           Notwithstanding
anything to the contrary contained in this Agreement, the provisions of this
Article IIIA shall not be amended, modified or waived in a manner adverse to
the rights or obligations of any Fronting Lender without the consent of each
Fronting Lender affected thereby.

Section 3A.09.  Agreement to
Repay Fronted Tranche 1 Letter of Credit Drawings; Fronting Fee  (a)  Each Designated Subsidiary
Borrower hereby agrees to reimburse the respective Fronting Lender for any
payment or disbursement made by such Fronting Lender 

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under any
Fronted Tranche 1 Letter of Credit (each such amount so paid, until reimbursed
by such Designated Subsidiary Borrower, a “Fronted Tranche 1 Unpaid Drawing”)
in the manner and subject to the terms of Section 3A.03.  The respective Fronting Lender shall give the
respective Designated Subsidiary Borrower and the Administrative Agent prompt
notice of any payment or disbursement made under any Fronted Tranche 1 Letter
of Credit, provided that the failure to give any such notice shall in no
way affect, impair or diminish such Designated Subsidiary Borrower’s
obligations hereunder.

(b)           Any action taken or
omitted to be taken by any Fronting Lender under or in connection with any
Fronted Tranche 1 Letter of Credit shall not create for such Fronting Lender
any resulting liability to any Designated Subsidiary Borrower or any of its
Affiliates or any Tranche 1 Lender unless such action is taken or omitted to be
taken with gross negligence or willful misconduct on the part of such Fronting
Lender (as determined by a court of competent jurisdiction).

(c)           Each Designated
Subsidiary Borrower agrees to pay to each Fronting Lender, for its own account,
a fronting fee in an amount and on dates as shall have separately been agreed
to by the Designated Subsidiary Borrowers and such Fronting Lender.

Section 3A.10.  Defined Terms.  For purposes of this Article IIIA and except
as expressly provided in Section 3A.08 or 3A.09, (a) all references to (i) the
Issuing Agent shall be deemed to include the Fronting Lender and (ii) Tranche 1
Letters of Credit shall be deemed to include the Fronted Tranche 1 Letters of
Credit and (b) all terms and conditions herein applicable to the Issuing Agent
and Tranche 1 Letters of Credit shall apply in all respects to the Fronting
Lender and Fronted Tranche 1 Letters of Credit.

Section 3A.11.  Existing
Tranche 1 Fronted Letters of Credit. 
It is hereby agreed and acknowledged that all Fronted Tranche 1 Letters
of Credit described on Schedule 3A.11 (the “Existing Tranche 1 Fronted
Letters of Credit”) which were issued under the Existing Credit Agreement
and which remain outstanding on the Restatement Effective Date shall be deemed
issued under this Agreement as a “Fronted Tranche 1 Letter of Credit”
on the Restatement Effective Date.

Section 3A.12.  Existing
Tranche 1 Several Letters of Credit. 
(a)  It is hereby agreed and
acknowledged that all Tranche 1 Letters of Credit described on Schedule 3A.12
that are not Existing Tranche 1 Fronted Letters of Credit (the “Existing
Tranche 1 Several Letters of Credit”) which were issued and which remain
outstanding on the Restatement Effective Date shall be deemed issued under this
Agreement as a “Tranche 1 Letter of Credit” on the Restatement Effective
Date.  As soon as possible following the
Restatement Effective Date, each Existing Tranche 1 Several Letter of Credit
shall be amended to replace each Existing Lender with each Tranche 1 Lender
party to this Agreement at the time of such amendment in accordance with each
such Tranche 1 Lender’s Tranche 1 Percentage. 
Until an Existing Tranche 1 Several Letter of Credit has been amended in
accordance with this Section 3A.12, each Existing Lender shall be deemed to
have sold and transferred to each Tranche 1 Lender, and each such Tranche 1
Lender shall be deemed irrevocably and unconditionally to have purchased and
received from such Existing Lender, without recourse or warranty, an undivided
interest and participation, to the extent of such Tranche 1 Lender’s Tranche 1
Percentage, in such Existing 

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Tranche 1
Several Letter of Credit, each substitute Existing Tranche 1 Several Letter of
Credit, each drawing made thereunder, the obligations of the respective
Designated Subsidiary Borrower under this Agreement with respect thereto and
any security therefore or guaranty pertaining thereto.  Upon any change in the Tranche 1 Commitments
or Tranche 1 Percentages of the Tranche 1 Lenders pursuant to this Agreement,
it is hereby agreed that, with respect to all outstanding Existing Tranche 1
Several Letters of Credit and Tranche 1 Unpaid Drawings with respect thereto,
there shall be an automatic adjustment to the participations pursuant to this
Section 3A.12 to reflect the new Tranche 1 Percentages from such change or
changes, as the case may be.

(b)           In determining
whether to pay under any Existing Tranche 1 Several Letter of Credit, no
Existing Lender shall have any obligation relative to the Tranche 1 Lenders
other than to determine that any documents required to be delivered under such
Existing Tranche 1 Several Letter of Credit have been delivered and that they
appear to substantially comply on their face with the requirements of such
Existing Tranche 1 Several Letter of Credit, which obligation, it is
understood, is being performed by the Issuing Agent, and upon whom each
Existing Lender shall be entitled to rely. 
Any action taken or omitted to be taken by the Issuing Agent or  any Existing Lender under or in connection
with any Existing Tranche 1 Several Letter of Credit issued by it shall not
create for the Issuing Agent or such Existing Lender any resulting liability to
any Borrower, any Tranche 1 Lender or any other Person unless such action is
taken or omitted to be taken with gross negligence or willful misconduct on the
part of the Issuing Agent or such Existing Lender, as the case may be (as
determined by a court of competent jurisdiction).

(c)           In the event that
any Existing Lender makes any payment under any Existing Tranche 1 Several
Letter of Credit issued by it and the respective Designated Subsidiary Borrower
shall not have reimbursed such amount in full as provided in Section 3A.03,
such Existing Lender shall promptly notify the Administrative Agent, and the
Administrative Agent shall promptly notify each Tranche 1 Lender of such
failure, and each such Tranche 1 Lender shall promptly and unconditionally pay
to the Administrative Agent for the account of such Existing Lender, the amount
of such Tranche 1 Lender’s Tranche 1 Percentage of such payment in Dollars (or,
in the case of an Alternate Currency Letter of Credit, in the applicable
Alternate Currency) and in immediately available funds.  If the Administrative Agent so notifies any
Tranche 1 Lender required to fund a payment under an Existing Tranche 1 Several
Letter of Credit prior to 11:00 a.m. (New York time) on any Business Day, such
Tranche 1 Lender shall make available to the Administrative Agent at the
Payment Office for the account of the respective Existing Lender such Tranche 1
Lender’s Tranche 1 Percentage of the amount of such payment on such Business
Day in immediately available funds (and, to the extent such notice is given
after 11:00 a.m. (New York time) on any Business Day, such Tranche 1
Lender shall make such payment on the immediately following Business Day).  If and to the extent such Tranche 1 Lender
shall not have so made its Tranche 1 Percentage of the amount of such payment
available to the Administrative Agent for the account of the respective
Existing Lender, such Tranche 1 Lender agrees to pay to the Administrative
Agent for the account of such Existing Lender, forthwith on demand such amount,
together with interest thereon, for each day from such date until the date such
amount is paid to the Administrative Agent for the account of the Existing
Lender at the greater of the Federal Funds Effective Rate and a rate determined
by such Existing Lender in accordance with banking industry rules on interbank
compensation.  The failure of any 

 66
 

 

Tranche 1 Lender to make available to the Administrative Agent for the
account of the respective Existing Lender its Tranche 1 Percentage of any
payment under any Existing Tranche 1 Several Letter of Credit issued by it
shall not relieve any other Tranche 1 Lender of its obligation hereunder to
make available to the Administrative Agent for the account of such Existing
Lender its Tranche 1 Percentage of any payment under any such Existing Tranche
1 Several Letter of Credit on the date required, as specified above, but no
Tranche 1 Lender shall be responsible for the failure of any other Tranche 1
Lender to make available to the Administrative Agent for the account of such
Existing Lender such other Tranche 1 Lender’s Tranche 1 Percentage of any such
payment.

(d)           Whenever any
Existing Tranche 1 Lender receives a payment of a reimbursement obligation as
to which the Administrative Agent has received for the account of such Existing
Tranche 1 Lender any payments from the Tranche 1 Lenders pursuant to clause (c)
above, such Existing Tranche 1 Lender shall pay to the Administrative Agent and
the Administrative Agent shall promptly pay to each Tranche 1 Lender which has
paid its Tranche 1 Percentage thereof in immediately available funds, an amount
equal to such Tranche 1 Lender’s Tranche 1 Percentage of the principal amount
thereof and interest thereon accruing after the purchase of the respective
participations.

(e)           The obligations of
the Tranche 1 Lenders to make payments to the Administrative Agent for the
account of the respective Existing Lender with respect to Existing Tranche 1
Several Letters of Credit issued by it shall be irrevocable and not subject to
counterclaim, set-off or other defense or any other qualification or exception
whatsoever and shall be made in accordance with the terms and conditions of
this Agreement under all circumstances, including, without limitation, any of
the following circumstances:

(i)            any lack of validity or
enforceability of this Agreement or any of the other Credit Documents;

(ii)           the existence of any claim, set-off,
defense or other right which the Parent Borrower or any of its Subsidiaries may
have at any time against a beneficiary named in an Existing Tranche 1 Several
Letter of Credit, any transferee of any Existing Tranche 1 Several Letter of
Credit (or any Person for whom any such transferee may be acting), the
Administrative Agent, any Existing Lender, or other Person, whether in
connection with this Agreement, any Existing Tranche 1 Several Letter of
Credit, the transactions contemplated herein or any unrelated transactions
(including any underlying transaction between the Parent Borrower or any of its
Subsidiaries and the beneficiary named in any such Existing Tranche 1 Several
Letter of Credit);

(iii)          any draft, certificate or other
document presented under the Existing Tranche 1 Several Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect;

(iv)          the surrender or impairment of any
security for the performance or observance of any of the terms of any of the
Credit Documents; or

(v)           the occurrence of any Default or
Event of Default.

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ARTICLE IIIB

Tranche 2 Letters
of Credit

Section
3B.01.  Tranche 2 Letters of Credit.  (a) 
Subject to and upon the terms and conditions set forth herein, each
Tranche 2/3 Borrower may request the Issuing Agent, at any time and from time
to time after the Restatement Effective Date and prior to the date which is 30
days prior to the Commitment Expiration Date, to issue on behalf of the Tranche
2 Lenders, for the account of such Tranche 2/3 Borrower and in support of, on a
standby basis, Letter of Credit Supportable Obligations and, subject to and
upon the terms and conditions set forth herein, the Issuing Agent agrees to
issue on behalf of the Tranche 2 Lenders at any time and from time to time
after the Restatement Effective Date and prior to the date which is 30 days
prior to the Commitment Expiration Date, one or more irrevocable standby
letters of credit in such form as may be approved by the Issuing Agent (each
such letter of credit, a “Tranche 2 Letter of Credit” and, collectively,
the “Tranche 2 Letters of Credit”). 
Notwithstanding the foregoing, the Issuing Agent shall be under no
obligation to issue any Tranche 2 Letter of Credit if at the time of such
issuance:

(i)            any order, judgment or decree of any
Governmental Authority or arbitrator shall purport by its terms to enjoin or
restrain the Issuing Agent from issuing such Tranche 2 Letter of Credit or any
requirement of law applicable to such Issuing Agent or any Tranche 2 Lender or
any request or directive (whether or not having the force of law) from any
Governmental Authority with jurisdiction over the Issuing Agent or any Tranche
2 Lender shall prohibit, or request that the Issuing Agent or any Tranche 2
Lender refrain from, the issuance of letters of credit generally or such
Tranche 2 Letter of Credit in particular or shall impose upon the Issuing Agent
or any Tranche 2 Lender with respect to such Tranche 2 Letter of Credit any
restriction or reserve or capital requirement (for which the Issuing Agent or
any Tranche 2 Lender is not otherwise compensated) not in effect on the
Restatement Effective Date, or any unreimbursed loss, cost or expense which was
not applicable, in effect or known to the Issuing Agent or any Tranche 2 Lender
as of the Restatement Effective Date;

(ii)           the conditions precedent set forth in
Section 5.02 are not satisfied at that time; or

(iii)          the Issuing Agent shall have received
notice from any Borrower or the Required Lenders prior to the issuance of such
Tranche 2 Letter of Credit of the type described in clause (viii) of Section
3B.01(b).

(b)           Notwithstanding
anything to the contrary contained in this Section 3B.01 or elsewhere in this
Agreement, (i) no Tranche 2 Letter of Credit shall be issued the Stated Amount
of which, when added to (x) the Tranche 2 Letter of Credit Outstandings
(exclusive of Tranche 2 Unpaid Drawings which are repaid on the date of, and
prior to the issuance of, the respective Tranche 2 Letter of Credit) at such
time and (y) the aggregate Principal Amount of all Tranche 2 Loans then
outstanding, would exceed, an amount equal to the Total Tranche 2 Commitment at
such time; (ii) no Tranche 2 Letter of Credit shall be issued if any Tranche 2
Lender’s Tranche 2 Percentage of the Stated Amount of such Tranche 2 Letter of
Credit, when 

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added to such
Tranche 2 Lender’s Tranche 2 Credit Exposure, would exceed the Tranche 2
Commitment of such Tranche 2 Lender at such time; (iii) no Tranche 2 Letter of
Credit shall be issued for the account of ARC the Stated Amount of which, when
added to (x) the Tranche 2 Letter of Credit Outstandings applicable to ARC
(exclusive of Tranche 2 Unpaid Drawings which are repaid on the date of, and
prior to the issuance of, the respective Tranche 2 Letter of Credit) at such
time and (y) the aggregate Principal Amount of all Tranche 2 Loans and Tranche
3 Loans incurred by ARC and then outstanding, would exceed an amount equal to
$100,000,000 at such time; (iv) no Tranche 2 Letter of Credit shall be issued
for the account of ARC if the Stated Amount thereof, when added to (x) the
Tranche 1 Letter of Credit Outstandings in respect of Tranche 1 Letters of
Credit issued for the account of ARC, (y) the Tranche 2 Letter of Credit
Outstandings in respect of Tranche 2 Letters of Credit issued for the account of
ARC and (z) the aggregate Principal Amount of all Tranche 2 Loans and Tranche 3
Loans incurred by ARC and then outstanding, would exceed an amount equal to ARC’s
Sublimit at such time; (v) no Tranche 2 Letter of Credit denominated in an
Alternate Currency shall be issued the Stated Amount of which, when added to
the Alternate Currency Letter of Credit Outstandings at such time in respect of
all Alternate Currency Letters of Credit, would exceed the Alternate Currency
Letter of Credit Sublimit; (vi) each Tranche 2 Letter of Credit shall have an
expiry date occurring not later than one year after such Tranche 2 Letter of
Credit’s date of issuance; provided that each such Tranche 2 Letter of
Credit may by its terms automatically renew annually for one additional year
unless the Issuing Agent notifies the beneficiary thereof, in accordance with
the terms of such Tranche 2 Letter of Credit, that such Tranche 2 Letter of
Credit will not be renewed; (vii) each Tranche 2 Letter of Credit shall be
denominated in Dollars or, subject to preceding clause (v), an Alternate
Currency; and (viii) the Issuing Agent will not issue any Tranche 2 Letter of
Credit after it has received written notice from any Borrower or the Required
Lenders stating that a Default or an Event of Default exists until such time as
the Issuing Agent shall have received a written notice of (x) rescission of
such notice from the party or parties originally delivering the same or (y) a
waiver of such Default or Event of Default by the Required Lenders (or, to the
extent provided by Section 10.02, each of the Lenders).

(c)           Each Tranche 2
Letter of Credit will be issued by the Issuing Agent on behalf of the Tranche 2
Lenders and each Tranche 2 Lender will participate in each Tranche 2 Letter of
Credit pro  rata in accordance with its Tranche 2 Percentage; provided
that a Tranche 2 Lender shall have no obligation to participate in an Alternate
Currency Letter of Credit if such Tranche 2 Lender notifies the Issuing Agent
and the Administrative Agent that it is not able to issue letters of credit in
the relevant Alternate Currency (in which case the Issuing Agent shall be
entitled to issue such Alternate Currency Letter of Credit on behalf of the
remaining Tranche 2 Lenders pro  rata in accordance with their Tranche
2 Percentages).  The obligations of each
Tranche 2 Lender under and in respect of each Tranche 2 Letter of Credit are
several, and the failure by any Tranche 2 Lender to perform its obligations
hereunder or under any Tranche 2 Letter of Credit shall not affect the
obligations of the respective Tranche 2/3 Borrower toward any other party
hereto nor shall any other such party be liable for the failure by such Tranche
2 Lender to perform its obligations hereunder or under any Tranche 2 Letter of
Credit.

(d)           Subject to and on
the terms and conditions set forth herein, the Issuing Agent is hereby
authorized by each Tranche 2/3 Borrower and the Tranche 2 Lenders to arrange
for the issuance of any Tranche 2 Letter of Credit pursuant to Section 3B.01(a)
and the 

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amendment of
any Tranche 2 Letter of Credit pursuant to Section 2.18, Section 3B.06
and/or Section 10.04(b) by:

(i)            completing the commencement date and
the expiry date of such Tranche 2 Letter of Credit;

(ii)           in the case of an amendment
increasing or reducing the amount thereof, amending such Tranche 2 Letter of
Credit in such manner as the Issuing Agent and the respective beneficiary may
agree;

(iii)          completing such Tranche 2 Letter of
Credit with the participation of each Tranche 2 Lender as allocated pursuant to
the terms hereof; and

(iv)          executing such Tranche 2 Letter of
Credit on behalf of each Tranche 2 Lender and following such execution
delivering such Tranche 2 Letter of Credit to the beneficiary of such Tranche 2
Letter of Credit.

(e)           Each Tranche 2
Letter of Credit shall be executed and delivered by the Issuing Agent in the
name and on behalf of, and as attorney-in-fact for, each Tranche 2 Lender party
to such Tranche 2 Letter of Credit, and the Issuing Agent shall act under each
Tranche 2 Letter of Credit, and each Tranche 2 Letter of Credit shall expressly
provide that the Issuing Agent shall act, as the agent of each Tranche 2 Lender
to (a) receive drafts, other demands for payment and other documents presented
by the beneficiary under such Tranche 2 Letter of Credit, (b) determine whether
such drafts, demands and documents are in compliance with the terms and
conditions of such Tranche 2 Letter of Credit and (c) notify such Tranche 2
Lender and such Tranche 2/3 Borrower that a valid drawing has been made and the
date that the related Tranche 2 Unpaid Drawing is to be made; provided
that the Issuing Agent shall have no obligation or liability for any Tranche 2
Unpaid Drawing under such Tranche 2 Letter of Credit, and each Tranche 2 Letter
of Credit shall expressly so provide. 
Each Tranche 2 Lender hereby irrevocably appoints and designates the
Issuing Agent as its attorney-in-fact, acting through any duly authorized
officer of the Issuing Agent, solely for the purpose of executing and delivering
in the name and on behalf of such Tranche 2 Lender each Tranche 2 Letter of
Credit to be issued by such Tranche 2 Lender hereunder.  Promptly upon the request of the Issuing
Agent, each Tranche 2 Lender will furnish to the Issuing Agent such powers of attorney
or other evidence as any beneficiary of any Tranche 2 Letter of Credit may
reasonably request in order to demonstrate that the Issuing Agent has the power
to act as attorney-in-fact for such Tranche 2 Lender to execute and deliver
such Tranche 2 Letter of Credit.

Section
3B.02.  Tranche 2 Letter of Credit
Requests.  (a)  Whenever a
Tranche 2/3 Borrower desires that a Tranche 2 Letter of Credit be issued, such
Tranche 2/3 Borrower shall give the Administrative Agent and the Issuing Agent
written notice (including by way of facsimile transmission, immediately
confirmed in writing by submission of the original of such request by mail to
the Issuing Agent) thereof prior to 11:00 a.m. (New York time) at least five
Business Days (or such shorter period as may be acceptable to the Issuing
Agent) prior to the proposed date of issuance (which shall be a Business Day),
which written notice shall be in the form of Exhibit C-2 (each, a “Tranche 2
Letter of Credit Request”).  Each
Tranche 2 Letter of 

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Credit Request shall
include any other documents as the Issuing Agent customarily requires in
connection therewith.

(b)           The making of each Tranche 2 Letter
of Credit Request shall be deemed to be a representation and warranty by the
applicable Tranche 2/3 Borrower that such Tranche 2 Letter of Credit may be
issued in accordance with, and it will not violate the requirements of, Section
3B.01(a) or (b).

(c)           Upon its issuance of, or amendment
to, any Tranche 2 Letter of Credit, the Issuing Agent shall promptly notify the
respective Tranche 2/3 Borrower and the Tranche 2 Lenders of such issuance or
amendment, which notice shall include a summary description of the Tranche 2
Letter of Credit actually issued and any amendments thereto.

Section
3B.03.  Agreement to Repay Tranche 2
Letter of Credit Drawings. 
(a)  Each Tranche 2/3 Borrower agrees to reimburse each
Tranche 2 Lender, by making payment to the Administrative Agent in immediately
available funds at the Payment Office, for any payment or disbursement made by
such Tranche 2 Lender under any Tranche 2 Letter of Credit which has been
issued for such Tranche 2/3 Borrower’s account (each such amount so paid or
disbursed until reimbursed by such Tranche 2/3 Borrower, a “Tranche 2 Unpaid
Drawing”) no later than one Business Day following the date of such payment
or disbursement, with interest on the amount so paid or disbursed by such
Tranche 2 Lender, to the extent not reimbursed prior to 1:00 p.m. (New York
time) on the date of such payment or disbursement, from and including the date
paid or disbursed to but not including the date such Tranche 2 Lender is
reimbursed therefor at a rate per annum which shall be the Alternative Base
Rate plus the Applicable Rate for Loans maintained as ABR Loans as in effect
from time to time; provided that (x) if all or a portion of the
principal amount of any such payment or disbursement shall not be paid when
due, such overdue amount shall bear interest at a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank
compensation, or in the case of a Loan in Dollars, if such rate is greater, the
Federal Funds Effective Rate plus an additional 2% per annum and (y) if
all or a portion of any interest payable on such payment or disbursement shall
not be paid when due, such overdue amount shall bear interest at rate
determined by the Administrative Agent in accordance with banking industry
rules on interbank compensation, or in the case of a Loan in Dollars, if such
rate is greater, the Federal Funds Effective Rate plus an additional 2%
per annum, in each case with respect to clauses (x) and (y) above, payable on
demand, if not reimbursed by the third Business Day after the date of such
payment or disbursement).

(b)           Each Tranche 2/3 Borrower’s
obligation under this Section 3B.03 to reimburse each Tranche 2 Lender with
respect to Tranche 2 Unpaid Drawings (including, in each case, interest
thereon) of such Tranche 2/3 Borrower shall be absolute and unconditional under
any and all circumstances and irrespective of any setoff, counterclaim or
defense to payment which such Tranche 2/3 Borrower may have or have had against
such Tranche 2 Lender or the Issuing Agent, including, without limitation, any
defense based upon the failure of any drawing under a Tranche 2 Letter of
Credit to conform to the terms of the Tranche 2 Letter of Credit or any
non-application or misapplication by the beneficiary of the proceeds of such
drawing; provided, however, that no Tranche 2/3 Borrower shall be
obligated to reimburse any Tranche 2 Lender for any wrongful payment made by
such Tranche 2 Lender under a Tranche 2 Letter of Credit as a result of acts or
omissions constituting willful misconduct or gross negligence on the 

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part of such Tranche 2 Lender (as determined by a
court of competent jurisdiction in a final and non-appealable decision).

Section
3B.04.  Increased Costs.  If after the Restatement Effective Date, a
Change in Law shall either (i) impose, modify or make applicable any reserve,
deposit, capital adequacy or similar requirement against letters of credit
issued by or participated in by such Tranche 2 Lender, or (ii) impose on such
Tranche 2 Lender any other conditions directly or indirectly affecting this
Agreement or any Tranche 2 Letter of Credit; and the result of any of the
foregoing is to increase the cost to such Tranche 2 Lender of issuing,
maintaining or participating in any Tranche 2 Letter of Credit, or to reduce
the amount of any sum received or receivable by such Tranche 2 Lender hereunder
or reduce the rate of return on its capital with respect to Tranche 2 Letters
of Credit, then, upon written demand to the respective Tranche 2/3 Borrower by
such Tranche 2 Lender (with a copy to the Administrative Agent), such Tranche
2/3 Borrower agrees to pay to such Tranche 2 Lender such additional amount or
amounts as will compensate such Tranche 2 Lender for such increased cost or
reduction.  A certificate submitted to
the respective Tranche 2/3 Borrower by such Tranche 2 Lender (with a copy to
the Administrative Agent), setting forth the basis for the determination of
such additional amount or amounts necessary to compensate such Tranche 2 Lender
as aforesaid shall be final and conclusive and binding on such Tranche 2/3
Borrower absent manifest error, although the failure to deliver any such
certificate shall not release or diminish any Tranche 2/3 Borrower’s
obligations to pay additional amounts pursuant to this Section 3B.04 upon
subsequent receipt of such certificate; provided that such Tranche 2/3
Borrower shall not be required to compensate such Tranche 2 Lender pursuant to
this Section 3B.04 for any increased costs or reductions incurred more than 90
days prior to the date that such Tranche 2 Lender notifies such Tranche 2/3
Borrower of the Change in Law giving rise to such increased costs or reductions
and of such Tranche 2 Lender’s intention to claim compensation therefor; provided,
further, that, if the Change in Law giving rise to such increased costs
or reductions is retroactive, then the 90-day period referred to above shall be
extended to include the period of retroactive effect thereof.

Section
3B.05.  Tranche 2 Letter of Credit
Expiration Extensions.  Each Tranche
2 Lender acknowledges that to the extent provided under the terms of any
Tranche 2 Letter of Credit, the expiration date of such Tranche 2 Letter of
Credit will be automatically extended for an additional year, without written
amendment, unless at least 30 days, or 60 days if so required by any Applicable
Regulatory Authority, prior to the expiration date of such Tranche 2 Letter of
Credit, a Notice of Non-Extension is given by the Issuing Agent to the
beneficiary of such Tranche 2 Letter of Credit in accordance with the terms of
the respective Tranche 2 Letter of Credit that the expiration date of such
Tranche 2 Letter of Credit will not be extended beyond its current expiration
date.  The Issuing Agent will give
Notices of Non-Extension as to any or all outstanding Tranche 2 Letters of
Credit if requested to do so by the Required Lenders pursuant to Article
VIII.  The Issuing Agent will give
Notices of Non-Extension as to all outstanding Tranche 2 Letters of Credit if
the Commitment Expiration Date has occurred. 
The Issuing Agent will send a copy of each Notice of Non-Extension to
the respective Tranche 2/3 Borrower concurrently with delivery thereof to the
respective beneficiary, unless prohibited by law from doing so.

Section
3B.06.  Changes to Stated Amount.  At any time when any Tranche 2 Letter of
Credit is outstanding, at the request of the respective Tranche 2/3 Borrower,
the Issuing 

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Agent will enter into an
amendment increasing or reducing the Stated Amount of such Tranche 2 Letter of
Credit, provided that (i) in no event shall the Stated Amount of any
Tranche 2 Letter of Credit be increased to an amount which would exceed the
applicable limitations set forth in Section 3B.01(b); (ii) the Stated Amount of
a Tranche 2 Letter of Credit may not be increased at any time if the conditions
precedent set forth in Section 5.02 are not satisfied at such time; and (iii)
the Stated Amount of a Tranche 2 Letter of Credit may not be increased at any
time after the date which is 30 days prior to the Commitment Expiration Date.

Section
3B.07.  Representations and Warranties
of Tranche 2 Lenders.  Each Tranche 2
Lender represents and warrants that each Tranche 2 Letter of Credit constitutes
a legal, valid and binding obligation of such Tranche 2 Lender enforceable in
accordance with its terms.

Section
3B.08.  Fronted Tranche 2 Letters of
Credit.  Notwithstanding the
foregoing in this Article IIIB:

(a)           Subject to and upon the terms and
conditions set forth herein, each Tranche 2/3 Borrower may request that any
Fronting Lender at any time and from time to time on or after the Restatement
Effective Date and prior to the date which is 30 days prior to the Commitment
Expiration Date, to issue for its own account a letter of credit designated as
a Tranche 2 Letter of Credit for the account of such Tranche 2/3 Borrower
subject to and upon the terms and conditions herein set forth.  Each Fronting Lender agrees to issue at any
time and from time to time on or after the Restatement Effective Date and prior
to the date which is 30 days prior to the Commitment Expiration Date one or
more irrevocable standby letters of credit designated as a Tranche 2 Letter of
Credit in such form as may be approved by such Fronting Lender (each such
letter of credit, a “Fronted Tranche 2 Letter of Credit” and,
collectively, the “Fronted Tranche 2 Letters of Credit”), provided
that no Fronted Tranche 2 Letter of Credit will be issued by any Fronting
Lender if after giving effect thereto (x) the Stated Amount thereof, when added
to the aggregate Stated Amount of all Fronted Letters of Credit then
outstanding, shall exceed $100,000,000, or (y) any provision set forth in
Section 3B.01 shall be violated as a result thereof.  Except as expressly provided in this Section
3B.08 or in Section 3B.09 or 3B.10, for all purposes of this Agreement and the
other Credit Documents, Fronted Tranche 2 Letters of Credit shall be deemed to
be Tranche 2 Letters of Credit.

(b)           Immediately upon the issuance by any
Fronting Lender of any Fronted Tranche 2 Letter of Credit, such Fronting Lender
shall be deemed to have sold and transferred to each Tranche 2 Lender other than
such Fronting Lender (each such Tranche 2 Lender in its capacity as a “participant”
under any Fronted Tranche 2 Letter of Credit, a “Fronting Tranche 2
Participant”), and each such Fronting Tranche 2 Participant shall be deemed
irrevocably and unconditionally to have purchased and received from such
Fronting Lender, without recourse or warranty, an undivided interest and
participation, to the extent of such Fronting Tranche 2 Participant’s Tranche 2
Percentage in such Fronted Tranche 2 Letter of Credit, each drawing made
thereunder and the obligations of each Tranche 2/3 Borrower under this
Agreement with respect thereto, and any security therefor or guaranty
pertaining thereto.  Upon any change in
the Tranche 2 Commitments or Tranche 2 Percentages of the Tranche 2 Lenders
pursuant to this Agreement, it is 

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hereby agreed that, with
respect to all then outstanding Fronted Tranche 2 Letters of Credit and Fronted
Tranche 2 Unpaid Drawings, there shall be an automatic adjustment to the
participations pursuant to this Section 3B.08 to reflect the new Tranche 2
Percentages resulting from such change or changes, as the case may be.

(c)           In determining whether to pay under
any Fronted Tranche 2 Letter of Credit, such Fronting Lender shall have no
obligation relative to the other Tranche 2 Lenders other than to confirm that
any documents required to be delivered under such Fronted Tranche 2 Letter of
Credit appear to have been delivered and that they appear to substantially
comply on their face with the requirements of such Fronted Tranche 2 Letter of
Credit.  Any action taken or omitted to
be taken by any Fronting Lender under or in connection with any Fronted Tranche
2 Letter of Credit shall not create for such Fronting Lender any resulting
liability to any Tranche 2/3 Borrower or any of its Affiliates or any Tranche 2
Lender unless such action is taken or omitted to be taken with gross negligence
or willful misconduct on the part of such Fronting Lender (as determined by a
court of competent jurisdiction).

(d)           In the event that any Fronting Lender
makes any payment under any Fronted Tranche 2 Letter of Credit and the
respective Tranche 2/3 Borrower shall not have reimbursed such amount in full
to such Fronting Lender pursuant to Section 3B.09, such Fronting Lender shall
promptly notify the Administrative Agent, which shall promptly notify each
Fronting Tranche 2 Participant, of such failure, and each Fronting Tranche 2
Participant shall promptly and unconditionally pay to such Fronting Lender the
amount of such Fronting Tranche 2 Participant’s Tranche 2 Percentage of such
unreimbursed payment in Dollars (or, in the case of an Alternate Currency
Letter of Credit, in the applicable Alternate Currency) and in immediately
available funds.  If, prior to 11:00 a.m.
(New York time) on any Business Day, the Administrative Agent so notifies any
Fronting Tranche 2 Participant required to fund a payment under a Fronted
Tranche 2 Letter of Credit, such Fronting Tranche 2 Participant shall make
available to such Fronting Lender in Dollars (or, in the case of an Alternate
Currency Letter of Credit, in the applicable Alternate Currency) and in
immediately available funds such Fronting Tranche 2 Participant’s Tranche 2
Percentage of the amount of such payment on such Business Day (or, if notice is
given after 11:00 a.m. (New York time) on any Business Day, on the next
Business Day).  If and to the extent such
Fronting Tranche 2 Participant shall not have so made its Tranche 2 Percentage
of the amount of such payment available to such Fronting Lender, such Fronting
Tranche 2 Participant agrees to pay to such Fronting Lender, forthwith on
demand such amount, together with interest thereon, for each day from such date
to but excluding the date such amount is paid to such Fronting Lender at the
greater of the Federal Funds Effective Rate and a rate determined by such
Fronting Lender in accordance with banking industry rules on interbank
compensation.  The failure of any
Fronting Tranche 2 Participant to make available to such Fronting Lender its
Tranche 2 Percentage of any payment under any Fronted Tranche 2 Letter of
Credit shall not relieve any other Fronting Tranche 2 Participant of its
obligation hereunder to make available to such Fronting Lender its Tranche 2
Percentage of any payment on the date required, as specified above, but no
Fronting Tranche 2 Participant shall be responsible for the failure of any
other Fronting Tranche 2 Participant to make 

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available to such
Fronting Lender such other Fronting Tranche 2 Participant’s Tranche 2 Percentage
of any such payment.

(e)           Whenever any Fronting Lender receives
any payment by any Tranche 2/3 Borrower as to which it has also received
payments from the Fronting Tranche 2 Participants pursuant to clause
(d) above, such Fronting Lender shall forward such payment to the
Administrative Agent, which in turn shall distribute to each Fronting Tranche 2
Participant which has paid its Tranche 2 Percentage thereof, in Dollars (or, in
the case of an Alternate Currency Letter of Credit, in the applicable Alternate
Currency) and in immediately available funds, an amount equal to such Fronting
Tranche 2 Participant’s share (based upon the amount funded by such Fronting
Tranche 2 Participant to the aggregate amount funded by all Fronting Tranche 2
Participants and retained by such Fronting Lender) of the principal amount of
such payment and interest thereon accruing after the purchase of the respective
participations.

(f)            Upon the request of any Fronting
Tranche 2 Participant, each Fronting Lender shall furnish to such Fronting
Tranche 2 Participant copies of any Fronted Tranche 2 Letter of Credit issued
by it and such other documentation as may reasonably be requested by such
Fronting Tranche 2 Participant.

(g)           The obligations of the Fronting
Tranche 2 Participants to make payments to each Fronting Lender with respect to
Fronted Tranche 2 Letters of Credit issued by it shall be irrevocable and not
subject to any qualification or exception whatsoever and shall be made in
accordance with the terms and conditions of this Agreement under all
circumstances, including, without limitation, any of the following
circumstances:

(i)            any lack of validity or
enforceability of this Agreement or any of the other Credit Documents or any
amendment, supplement or modification to any of the foregoing;

(ii)           the existence of any claim, setoff,
defense or other right which the Fronting Tranche 2 Participant or any of its
Affiliates may have at any time against a beneficiary named in a Fronted
Tranche 2 Letter of Credit, any transferee of any Fronted Tranche 2 Letter of
Credit (or any Person for whom any such transferee may be acting), the
Administrative Agent, any Fronting Lender, any Fronting Tranche 2 Participant,
any Tranche 2 Lender, or any other Person, whether in connection with this
Agreement, any Fronted Tranche 2 Letter of Credit, the transactions
contemplated herein or any unrelated transactions (including any underlying
transaction between any Tranche 2/3 Borrower or any of its Affiliates and the
beneficiary named in any such Fronted Tranche 2 Letter of Credit);

(iii)          any draft, certificate or any other
document presented under any Fronted Tranche 2 Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect;

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(iv)          the surrender or impairment of any
security for the performance or observance of any of the terms of any of the
Credit Documents;

(v)           the occurrence of any Default or
Event of Default; or

(vi)          any matter or event set forth in
Section 3B.03 or 3B.09.

(h)           Notwithstanding anything to the
contrary contained in this Agreement, the provisions of this Article IIIB shall
not be amended, modified or waived in a manner adverse to the rights or
obligations of any Fronting Lender without the consent of each Fronting Lender
affected thereby.

Section
3B.09.  Agreement to Repay Fronted
Tranche 2 Letter of Credit Drawings; Fronting Fee.  (a)  Each Tranche 2/3 Borrower
hereby agrees to reimburse the respective Fronting Lender for any payment or
disbursement made by such Fronting Lender under any Fronted Tranche 2 Letter of
Credit requested by such Tranche 2/3 Borrower (each such amount so paid, until
reimbursed by such Tranche 2/3 Borrower, a “Fronted Tranche 2 Unpaid Drawing”)
in the manner and subject to the terms of Section 3B.03.  The respective Fronting Lender shall give the
respective Tranche 2/3 Borrower and the Administrative Agent prompt notice of
any payment or disbursement made under any Fronted Tranche 2 Letter of Credit, provided
that the failure to give any such notice shall in no way affect, impair or
diminish such Tranche 2/3 Borrower’s obligations hereunder.

(b)           Any action taken or omitted to be
taken by any Fronting Lender under or in connection with any Fronted Tranche 2
Letter of Credit shall not create for such Fronting Lender any resulting
liability to any Tranche 2/3 Borrower or any of its Affiliates or any Tranche 2
Lender unless such action is taken or omitted to be taken with gross negligence
or willful misconduct on the part of such Fronting Lender (as determined by a
court of competent jurisdiction).

(c)           Each Tranche 2/3 Borrower agrees to
pay to each Fronting Lender, for its own account, a fronting fee in an amount
and on dates as shall have separately been agreed to by the Tranche 2/3
Borrowers and such Fronting Lender.

Section
3B.10.  Defined Terms.  For purposes of this Article IIIB and except
as expressly provided in Section 3B.08 or 3B.09, (a) all references to (i) the
Issuing Agent shall be deemed to include the Fronting Lender and (ii) Tranche 2
Letters of Credit shall be deemed to include the Fronted Tranche 2 Letters of
Credit and (b) all terms and conditions herein applicable to the Issuing Agent
and Tranche 2 Letters of Credit shall apply in all respects to the Fronting
Lender and Fronted Tranche 2 Letters of Credit.

Section
3B.11.  No Existing Tranche 2 Letters
of Credit.  It is hereby agreed and
acknowledged that there are no outstanding Tranche 2 Letters of Credit as of
the Restatement Effective Date.

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ARTICLE IV

Representations
and Warranties

Each Credit Party (solely as to itself and its
Subsidiaries) represents and warrants to the Lenders that:

Section 4.01.  Corporate
Status.  Each of the Parent Borrower
and each of its Subsidiaries (i) is a duly organized and validly existing
corporation or business trust or other entity in good standing under the laws
of the jurisdiction of its organization and has the corporate or other
organizational power and authority to own its property and assets and to
transact the business in which it is engaged and presently proposes to engage,
and (ii) has been duly qualified and is authorized to do business and is in
good standing in all jurisdictions where it is required to be so qualified,
except, in the case of this clause (ii), where the failure to be so qualified,
authorized or in good standing would not reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

Section 4.02.  Corporate Power
and Authority.  Each Credit Party has
the corporate power and authority to execute, deliver and carry out the terms
and provisions of the Credit Documents to which it is a party and has taken all
necessary corporate action to authorize the execution, delivery and performance
of such Credit Documents.  Each Credit
Party has duly executed and delivered each Credit Document to which it is a
party and each such Credit Document constitutes the legal, valid and binding
obligation of such Credit Party enforceable against such Credit Party in
accordance with its terms, except to the extent that enforceability thereof may
be limited by applicable bankruptcy, insolvency, moratorium or similar laws
affecting creditors’ rights generally and general principles of equity
regardless of whether enforcement is sought in a proceeding in equity or at
law.

Section 4.03.  No
Contravention of Laws, Agreements or Organizational Documents.  Neither the execution, delivery and
performance by any Credit Party of this Agreement or the other Credit Documents
to which it is a party nor compliance with the terms and provisions hereof or
thereof, nor the consummation of the transactions contemplated herein or
therein, (i) will contravene any applicable provision of any law, statute,
rule, regulation, order, writ, injunction or decree of any court or
governmental instrumentality, (ii) will conflict or be inconsistent with or
result in any breach of any of the terms, covenants, conditions or provisions
of, or constitute a default under, or result in the creation or imposition of (or
the obligation to create or impose) any Lien upon any of the property or assets
of any Credit Party or any of its Subsidiaries pursuant to the terms of, any
indenture, mortgage, deed of trust, loan agreement, credit agreement or any
other material instrument to which such Credit Party or any of its Subsidiaries
is a party or by which it or any of its property or assets are bound or to
which it may be subject or (iii) will violate any provision of the certificate
of incorporation, by-laws or other organizational documents of any Credit Party
or any of its Subsidiaries.

Section 4.04.  Litigation and
Contingent Liabilities.  There are no
actions, suits or proceedings pending or threatened in writing involving the
Parent Borrower or any of its Subsidiaries (including, without limitation, with
respect to this Agreement or any other Credit 

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Document) that have had, or would reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.

Section 4.05.  Use of
Proceeds; Margin Regulations. 
(a)  All proceeds of each Credit
Event shall be utilized for the general corporate and working capital purposes
of the Parent Borrower and its Subsidiaries.

(b)           Neither the making
of any Loan hereunder, the issuance of any Letter of Credit nor the use of the
proceeds thereof, will violate or be inconsistent with the provisions of
Regulation T, U or X and no part of the proceeds of any Credit Event will be
used to purchase or carry any Margin Stock or to extend credit for the purpose
of purchasing or carrying any Margin Stock.

Section 4.06.  Approvals.  Any order, consent, approval, license,
authorization, or validation of, or filing, recording or registration with, or
exemption by, any foreign or domestic governmental or public body or authority,
or any subdivision thereof, which is required to authorize or is required in
connection with (i) the execution, delivery and performance of any Credit
Document or (ii) the legality, validity, binding effect or enforceability of
any Credit Document, has been obtained.

Section 4.07.  Investment
Company Act.  Neither the Parent
Borrower nor any of its Subsidiaries is an “investment company” or a company “controlled”
by an “investment company,” within the meaning of the Investment Company Act of
1940, as amended.

Section 4.08.  True and
Complete Disclosure.  All factual
information (taken as a whole) heretofore or contemporaneously furnished by the
Parent Borrower or any of its Subsidiaries to the Administrative Agent or any
Lender in writing (including, without limitation, all information contained in
the Credit Documents) for purposes of or in connection with this Agreement or
any transaction contemplated herein is, and all other factual information
(taken as a whole with all other such information theretofore or
contemporaneously furnished) hereafter furnished by any such Persons in writing
to the Administrative Agent will be, true and accurate in all material respects
on the date as of which such information is dated and not incomplete by
omitting to state any material fact necessary to make such information (taken
as a whole with all other such information theretofore or contemporaneously
furnished) not misleading at such time in light of the circumstances under
which such information was provided.

Section 4.09.  Financial
Condition; Financial Statements.   (a) 
(i)  The consolidated balance
sheet of the Parent Borrower and its Subsidiaries for the fiscal year ended
December 31, 2005 and the related consolidated statements of income,
shareholders’ equity and cash flows, reported on by PricewaterhouseCoopers LLP,
copies of which have been delivered to each of the Lenders, and the unaudited
consolidated balance sheet of the Parent Borrower and its Subsidiaries for its
fiscal quarter ended June 30, 2006 and the related consolidated statements of
income, shareholders’ equity and cash flows, copies of which have been
delivered to each of the Lenders, fairly present in all material respects, in
each case in conformity with GAAP, consistently applied, the consolidated financial
position of the Parent Borrower and its Subsidiaries as of such dates and their
consolidated results of operations and cash flows for such 

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periods stated (subject, in the case of the aforementioned quarterly
financial statement, to normal year-end audit adjustments and the absence of
full footnote disclosure).

(ii)         The
summary unaudited consolidated balance sheet of ARL for the fiscal year ended
December 31, 2005 and the related summary unaudited consolidated statement of
income, copies of which have been delivered to each of the Lenders, and the
summary unaudited consolidated balance sheet of ARL for its fiscal quarter
ended June 30, 2006 and the related summary unaudited consolidated statement of
income, copies of which have been delivered to each of the Lenders, fairly
present in all material respects, the consolidated financial position of ARL
and its Subsidiaries as of such dates and their consolidated results of
operations for such periods stated (subject to normal year-end audit adjustments
and the absence of full footnote disclosure).

(iii)        The
summary unaudited financial information of Intermediate Holdings for the fiscal
year ended December 31, 2005, copies of which have been delivered to each of
the Lenders, and the summary unaudited financial information of Intermediate
Holdings for its fiscal quarter ended June 30, 2006, copies of which have been
delivered to each of the Lenders, fairly present in all material respects the
consolidated financial position of Intermediate Holdings and its Subsidiaries
as of such dates (subject to normal year-end audit adjustments and the absence
of full footnote disclosure).

(iv)       The
Statutory Statements of each Designated Subsidiary Borrower for the fiscal year
ended December 31, 2005 and for its fiscal quarter ended June 30, 2006 (other
than ARL and Arch Europe), copies of which have been delivered to each of the
Lenders, fairly present in all material respects the financial position of such
Designated Subsidiary Borrower as of such dates and such periods stated.

(b)           Since December 31,
2005, nothing has occurred which has had, or would reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect.

(c)           Except (i) for the
Loans and Letters of Credit, (ii) for letters of credit issued under the
Long-Term LC Facility, (iii) for the Existing Senior Notes, (iv) as set forth
in the unaudited consolidated balance sheet of the Parent Borrower for its
fiscal quarter ended June 30, 2006, (v) for liabilities set forth on Schedule 4.09(c)
and (vi) for liabilities incurred by the Parent Borrower and its Subsidiaries
in the ordinary course of business, on the Restatement Effective Date there are
no material liabilities of the Parent Borrower and its Subsidiaries.

Section 4.10.  Tax Returns and
Payments.  The Parent Borrower and
its Subsidiaries (i) have timely filed or caused to be timely filed with the
appropriate taxing authority (taking into account any applicable extension
within which to file) all material income and other material tax returns
(including any statements, forms and reports), domestic and foreign, required
to be filed by the Parent Borrower and its Subsidiaries, and (ii) have timely
paid or caused to have timely paid all material taxes payable by them which
have become due and assessments which have become due, except for those
contested in good faith and adequately disclosed and for which adequate
reserves have been established in accordance with GAAP.  There is no action, suit, proceeding,
investigation, audit or claim now pending or, to the best 

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knowledge of the Parent Borrower and its Subsidiaries, proposed or
threatened by any authority regarding any income taxes or any other taxes
relating to the Parent Borrower or any of its Subsidiaries that would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect.  Neither the
Parent Borrower nor any of its Subsidiaries has entered into an agreement or
waiver or been requested to enter into an agreement or waiver extending any
statute of limitations relating to the payment or collection of taxes of the
Parent Borrower or any of its Subsidiaries that would reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect.  No tax Liens have been filed and no claims
are pending or, to the best knowledge of the Parent Borrower or any of its
Subsidiaries, proposed or threatened with respect to any taxes, fees or other
charges for any taxable period that would reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.

Section 4.11.  Compliance with
ERISA.  (a)  Except as could not reasonably be expected to
result, either individually or in the aggregate, in a Material Adverse Effect,
the Parent Borrower and its Subsidiaries and ERISA Affiliates (i)  have fulfilled their respective obligations
under the minimum funding standards of ERISA and the Code with respect to each
Plan and are in compliance with the applicable provisions of ERISA and the
Code, and (ii) have not incurred any liability to the PBGC or any Plan or
Multiemployer Plan (other than to make contributions in the ordinary course of
business).

(b)           Except as could not
reasonably be expected to result, either individually or in the aggregate, in a
Material Adverse Effect, (i) each Foreign Pension Plan has been maintained in
compliance with its terms and with the requirements of any and all applicable
laws, statutes, rules, regulations and orders and has been maintained, where
required, in good standing with applicable regulatory authorities, (ii) all
contributions required to be made with respect to a Foreign Pension Plan have
been timely made, (iii) neither the Parent Borrower nor any of its Subsidiaries
has incurred any obligation in connection with the termination of, or
withdrawal from, any Foreign Pension Plan and (iv) the present value of the
accrued benefit liabilities (whether or not vested) under each Foreign Pension
Plan that is required to be funded, determined as of the end of the Parent
Borrower’s most recently ended fiscal year on the basis of actuarial
assumptions, each of which is reasonable, did not exceed the current value of
the assets of such Foreign Pension Plan allocable to such benefit liabilities.

Section 4.12.  Subsidiaries.  (a) 
Set forth on Schedule 4.12 is a complete and correct list of all of the
Subsidiaries of the Parent Borrower as of the Restatement Effective Date,
together with, for each such Subsidiary, (i) the jurisdiction of organization
of such Subsidiary, (ii) each Person holding direct ownership interests in such
Subsidiary and (iii) the percentage of ownership of such Subsidiary represented
by such ownership interests.  Except as
disclosed on Schedule 4.12, each of the Parent Borrower and its Subsidiaries
owns, free and clear of Liens, and has the unencumbered right to vote, all
outstanding ownership interests in each Person shown to be held by it on
Schedule 4.12.

(b)           As of the
Restatement Effective Date, there are no restrictions on the Parent Borrower or
any of its Subsidiaries which prohibit or otherwise restrict the transfer of
cash or other assets from any Subsidiary of the Parent Borrower to the Parent
Borrower, other than (i) prohibitions or restrictions existing under or by
reason of this Agreement or the other 

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Credit
Documents, (ii) prohibitions or restrictions existing under or by reason
of the Long-Term LC Facility, (iii) prohibitions or restrictions existing under
or by reason of the Existing Senior Notes (iv) prohibitions or
restrictions existing under or by reason of Legal Requirements,
(v) prohibitions or restrictions permissible under Section 7.03 and (vi)
other prohibitions or restrictions which, either individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect.

Section 4.13.  Indebtedness.  The Parent Borrower and its Subsidiaries do
not have any Indebtedness on the Restatement 
Effective Date other than (i) the Obligations, (ii) Indebtedness under
the Long-Term LC Facility, (iii) Indebtedness under the Existing Senior Notes
and (iv) Indebtedness listed on Schedule 4.13.

Section 4.14.  Compliance with
Statutes, etc.  The Parent Borrower
and each of its Subsidiaries are in compliance with all applicable statutes,
regulations, rules and orders of, and all applicable restrictions imposed by,
and have filed or otherwise provided all material reports, data, registrations,
filings, applications and other information required to be filed with or
otherwise provided to, all governmental bodies, domestic or foreign, in respect
of the conduct of its business and the ownership of its property (including
compliance with all applicable environmental laws), except where the failure to
comply or file or otherwise provide would not reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.  All required regulatory approvals are in full
force and effect on the date hereof, except where the failure of such approvals
to be in full force and effect would not reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

Section 4.15.  Insurance
Licenses.  Schedule 4.15 lists with
respect to each Regulated Insurance Company, as of the Restatement Effective
Date, all of the jurisdictions in which such Regulated Insurance Company holds
licenses (including, without limitation, licenses or certificates of authority
from Applicable Insurance Regulatory Authorities), permits or authorizations to
transact insurance and reinsurance business (collectively, the “Insurance
Licenses”), and indicates the type or types of insurance in which each such
Regulated Insurance Company is permitted to be engaged with respect to each
Insurance License therein listed.  There
is (i) no such Insurance License that is the subject of a proceeding for
suspension, revocation or limitation or any similar proceedings, (ii) no
sustainable basis for such a suspension, revocation or limitation, and (iii) no
such suspension, revocation or limitation threatened by any Applicable
Insurance Regulatory Authority, that, in each instance under (i), (ii) and
(iii) above, has had, or would reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.  No Regulated Insurance Company transacts any
insurance business, directly or indirectly, in any jurisdiction other than
those listed on Schedule 4.15, where such business requires any Insurance
License of an Applicable Insurance Regulatory Authority or such jurisdiction.

Section 4.16.  Insurance
Business.  All insurance policies issued
by any Regulated Insurance Company are, to the extent required under applicable
law, on forms approved by the insurance regulatory authorities of the
jurisdiction where issued or have been filed with and not objected to by such
authorities within the period provided for objection, except for those forms
with respect to which a failure to obtain such approval or make such a filing
without it being 

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objected to, would not reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

Section 4.17.  Security
Documents.  The Security Documents
create, as security for the Tranche 1 Obligations of each Designated Subsidiary
Borrower, valid and enforceable security interests in and Liens on all of the
Collateral, superior to and prior to the rights of all third persons and
subject to no other Liens.  No filings or
recordings are required in order to ensure the enforceability, perfection or
priority of the security interests created under the Security Documents, except
for filings or recordings which have been previously made.

Section 4.18.  No Section 32
Direction.  ARL has not received any
direction or other notification from the Bermuda Monetary Authority pursuant to
Section 32 of the Insurance Act, 1978 of Bermuda.

ARTICLE V

Conditions

Section 5.01.  Restatement
Effective Date.  The obligations of
the Lenders to make Loans and the Issuing Agent to issue Letters of Credit
hereunder shall not become effective until the date (the “Restatement
Effective Date”) on which each of the following conditions is satisfied (or
waived in accordance with Section 10.02):

(a)           On the Restatement Effective Date,
(i) each of the Credit Parties, the Administrative Agent and each of the
Lenders shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered the same to the Administrative Agent in
accordance with Section 10.01(a) or, in the case of the Lenders, shall have
given to the Administrative Agent telephonic (confirmed in writing), written or
facsimile transmission notice (actually received) in accordance with Section
10.01(a) that the same has been signed and mailed to the Administrative Agent;
and (ii) there shall have been delivered to the Administrative Agent for the
account of each Lender that has requested the same pursuant to Section 2.09(e)
or (f), as the case may be, the appropriate Note or Notes, executed by the
respective Tranche 2/3 Borrower, in each case, in the amount, maturity and as
otherwise provided herein.

(b)           On the Restatement Effective Date,
the Administrative Agent shall have received an opinion, in form and substance
reasonably satisfactory to the Administrative Agent, addressed to the
Administrative Agent and each of the Lenders and dated the Restatement
Effective Date, from (i) Cahill Gordon & Reindel LLP, special U.S. counsel
to the Credit Parties, which opinion shall cover the matters contained in
Exhibit G-1, (ii) Conyers, Dill & Pearman, special Bermuda counsel to the
Credit Parties, which opinion shall cover the matters covered in Exhibit G-2,
(iii) Inglish and Monaco, P.C., special Missouri counsel to AIC, which opinion
shall cover the matters covered in Exhibit G-3, (iv) Lamson, Dugan &
Murray, LLP, special Nebraska counsel to ARC and AESIC, which opinion shall cover
the matters covered in Exhibit G-4, (v) Quarles & Brady LLP, special
Wisconsin counsel to ASIC and WDCIC, which opinion shall cover the matters 

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covered in
Exhibit G-5 and (vi) Eversheds LLP special English and Welsh counsel to Arch
Europe, which opinion shall cover the matters covered in Exhibit G-6.

(c)           (i) On the Restatement Effective
Date, the Administrative Agent shall have received from each Credit Party a
certificate, dated the Restatement Effective Date, signed by the President, any
Vice President, Chief Executive Officer, Chief Financial Officer, Controller or
Chief Operating Officer of such Credit Party, and attested to by the Secretary
or any Assistant Secretary of such Credit Party, in the form of Exhibit D with
appropriate insertions and deletions, together with (x) copies of its
certificate of incorporation, by-laws or other organizational documents (or, if
such organizational documents and/or by-laws have not been amended, modified or
supplemented since the Original Effective Date, such certificate shall certify
that there have been no amendments, modifications or supplements to such
organizational documents since the Original Effective Date) and (y) the
resolutions relating to the Credit Documents which shall be satisfactory to the
Administrative Agent.

(ii)           On or prior to the Restatement
Effective Date, all corporate and legal proceedings and all instruments and
agreements in connection with the transactions contemplated by this Agreement
and the other Credit Documents shall be reasonably satisfactory in form and
substance to the Administrative Agent, and the Administrative Agent shall have
received all information and copies of all certificates, documents and papers,
including certificates of existence or good standing certificates, as applicable,
and any other records of corporate proceedings and governmental approvals, if
any, which the Administrative Agent reasonably may have requested in connection
therewith, such documents and papers where appropriate to be certified by
proper corporate or governmental authorities.

(d)           Since December 31, 2005, nothing
shall have occurred or become known to the Administrative Agent or the Required
Lenders which has had, or would reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

(e)           On the Restatement Effective Date, no
actions, suits or proceedings by any entity (private or governmental) shall be
pending against the Parent Borrower or any of its Subsidiaries (i) with respect
to this Agreement, any other Credit Document, the Transactions or any of the
transactions contemplated hereby or thereby or (ii) which has had, or would
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect.

(f)            On the Restatement Effective Date,
all governmental and third party approvals, permits and licenses required to be
obtained in connection with the Transactions on or prior to the Restatement
Effective Date shall have been obtained and remain in full force and effect.

(g)           On the Restatement Effective Date,
the Parent Borrower and its Subsidiaries shall have no Indebtedness except
(i) Obligations, (ii) Indebtedness under the Long-Term LC Facility, (iii)
Indebtedness under the Existing Senior Notes and (iv) Indebtedness set
forth on Schedule 4.13.

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(h)           On the Restatement Effective Date,
there shall exist no Default or Event of Default, and all representations and
warranties made by each Credit Party contained herein and in any other Credit
Document shall be true and correct in all material respects (it being
understood and agreed that any representation or warranty which by its terms is
made as of a specified date shall be required to be true and correct in all
material respects only as of such specified date).

(i)            On the Restatement Effective Date, each
Designated Subsidiary Borrower (other than WDCIC) shall have an A.M. Best
financial strength rating of at least “A-”.

(j)            On the Restatement Effective Date,
the Borrowers shall have paid the Administrative Agent and the Lenders all
fees, reasonable out-of-pocket expenses (including, without limitation,
reasonable legal fees and expenses of the Administrative Agent) and other
compensation contemplated by this Agreement and the other Credit Documents,
agreed upon by such parties to be paid on or prior to the Restatement Effective
Date.

(k)           On or prior to the Restatement
Effective Date, the Administrative Agent shall have received counterparts of
the Security Agreement executed by each Designated Subsidiary Borrower,
together with:

(i)            all documents and instruments,
including Uniform Commercial Code financing statements where applicable,
required by law in each applicable jurisdiction or reasonably requested by the
Administrative Agent to be filed, registered or recorded to create or perfect
the Liens intended to be created under the Security Agreement;

(ii)           results of a recent search of the
Uniform Commercial Code (or equivalent) filings made with respect to each
Designated Subsidiary Borrower in the jurisdictions contemplated in clause (i)
above (including, without limitation, Washington, D.C., and Bermuda) and in
such other jurisdictions in which Collateral is located on the Restatement
Effective Date which may be reasonably requested by the Administrative Agent,
and copies of the financing statements (or similar documents) disclosed by such
search and evidence reasonably satisfactory to the Administrative Agent that
the Liens indicated by such financing statements (or similar documents) are
permitted by the Security Agreement or have been released; and

(iii)          for each Collateral Account, an
Account Control Agreement with The Bank of New York executed by the respective
Designated Subsidiary Borrower, and each such Account Control Agreement shall
be in full force and effect;

and the Security Agreement shall be in full force and
effect.

(l)            On the Restatement Effective Date,
all loans outstanding under the Existing Credit Agreement shall have been
repaid in full, and all other amounts under the 

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Existing
Credit Agreement (other than indemnities not then due and payable) shall have
been paid in full.

(m)          On the Restatement Effective Date, any
Existing Lender that will not be a Lender under this Agreement on the
Restatement Effective Date shall have executed a Non-Continuing Lender
Agreement.

(n)           On the Restatement Effective Date,
the Administrative Agent shall have received a letter from the Service of
Process Agent, presently located at 111 Eighth Avenue, 13th Floor, New York, New York 10011, indicating
its consent to its appointment by the Parent Borrower and each Designated
Subsidiary Borrower as their agent to receive service of process as specified
in this Agreement shall be in full force and effect and shall apply to this
Agreement in all respects.

The
Administrative Agent shall notify the Borrowers and the Lenders of the
Restatement Effective Date, and such notice shall be conclusive and
binding.  Notwithstanding the foregoing,
the obligations of the Lenders to make Loans and the Issuing Agent to issue
Letters of Credit on behalf of the respective Lenders hereunder shall not
become effective unless each of the foregoing conditions is satisfied (or
waived pursuant to Section 10.02) at or prior to 5:00 p.m., New York City
time, on October 1, 2006 (and, in the event such conditions are not so
satisfied or waived, the Commitments shall terminate at such time).

Section 5.02.  Each Credit
Event.  The obligation of each Lender
to make each Loan and the Issuing Agent to issue each Letter of Credit is
subject to the satisfaction of the following conditions:

(a)           The
Restatement Effective Date shall have occurred.

(b)           (i)  There shall exist no Default or Event of
Default and (ii) all representations and warranties contained herein or in the
other Credit Documents shall be true and correct in all material respects with
the same effect as though such representations and warranties had been made on
the date of the making of such Loan or the issuance of such Letter of Credit
(it being understood and agreed that the representation and warranty contained
in Section 4.09(b) shall be required to be true and correct only as of the
Restatement Effective Date and any other representation and warranty which by
its terms is made as of a specified date shall be required to be true and
correct in all material respects only as of such specified date).

(c)           The Administrative
Agent shall have received a Borrowing Request meeting the requirements of
Section 2.03 with respect to each incurrence of Loans.

(d)           The Administrative
Agent shall have received a Letter of Credit Request meeting the requirements
of Section 3A.02 or 3B.02, as the case may be, with respect to each Letter of
Credit to be issued.

Each
incurrence of a Loan and each issuance of a Letter of Credit shall be deemed to
constitute a representation and warranty by the respective Borrower on the date
thereof as to the matters specified in paragraphs (a) and (b) of this Section
5.02.

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ARTICLE VI

Affirmative
Covenants

Until the Commitments
have expired or been terminated, no Notes or Letters of Credit are outstanding
(or, in the case of Letters of Credit, such Letters of Credit are either (i)
collateralized by cash and/or Cash Equivalents equal to not less than 100% of
the amounts outstanding or available for drawing in a manner satisfactory to
the Agents or (ii) supported by back-to-back letters of credit the terms,
conditions and issuer of which are satisfactory to the Agents), and the
principal of and interest on each Loan, all Tranche 1 Unpaid Drawings and
Tranche 2 Unpaid Drawings and all fees payable hereunder shall have been paid in
full, each Borrower covenants and agrees (solely as to itself and its
Subsidiaries) with the Lenders that:

Section 6.01.  Information
Covenants.  The Parent Borrower will
furnish to the Administrative Agent (for distribution to each Lender):

(a)           Annual Financial
Statements.  (i)  As soon as available and in any event within
90 days after the close of each fiscal year of the Parent Borrower, the
consolidated balance sheet of the Parent Borrower and its Subsidiaries as at
the end of such fiscal year and the related consolidated statements of income,
changes in shareholders’ equity and cash flows of the Parent Borrower and its
Subsidiaries for such fiscal year, setting forth in comparative form the
consolidated figures for the previous fiscal year, all in reasonable detail and
accompanied by a report thereon of PricewaterhouseCoopers LLP or other
independent public accountants of recognized national standing selected by the
Parent Borrower, which report shall state that such consolidated financial
statements present fairly in all material respects the consolidated financial
position of the Parent Borrower and its Subsidiaries as at the dates indicated
and their consolidated results of operations and cash flows for the periods
indicated in conformity with GAAP applied on a basis consistent with prior
years (except as otherwise specified in such report; provided any exceptions or
qualifications thereto must be acceptable to the Required Lenders) and that the
audit by such accountants in connection with such consolidated financial
statements has been made in accordance with generally accepted auditing
standards.

(ii)           As
soon as available and in any event within 90 days after the close of each
fiscal year of ARL, the summary consolidated balance sheet of ARL and its Subsidiaries
as at the end of such fiscal year and the related summary consolidated
statement of income of ARL and its Subsidiaries for such fiscal year, setting
forth in comparative form the consolidated figures for the previous fiscal
year, all in form and scope consistent in all material respects with the
financial statements of ARL previously delivered pursuant to Section
4.09(a)(ii) and certified by the chief financial officer or controller of ARL,
which certificate shall state that such consolidated financial statements
present fairly in all material respects the consolidated financial position of
ARL and its Subsidiaries as at the dates indicated (subject to normal year-end
audit adjustments and the absence of full footnote disclosure).

(iii)          As
soon as available and in any event within 90 days after the close of each
fiscal year of Intermediate Holdings, the summary consolidated financial
information of 

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Intermediate Holdings and
its Subsidiaries as at the end of and for such fiscal year, setting forth in
comparative form the consolidated figures for the previous fiscal year, all in
form and scope consistent in all material respects with the financial
information of Intermediate Holdings previously delivered pursuant to Section
4.09(a)(iii) and certified by the chief financial officer or controller of
Intermediate Holdings, which certificate shall state that such financial
information presents fairly in all material respects the consolidated financial
position of Intermediate Holdings and its Subsidiaries as at the dates
indicated (subject to normal year-end audit adjustments and the absence of full
footnote disclosure).

(iv)          As
soon as available and in any event within 90 days after the close of each
fiscal year of each Designated Subsidiary Borrower (or, in the case of ARL and
Arch Europe, such later dates as may be required by the Bermuda Companies Law
and the Companies Act 1985 (as amended) and the United Kingdom, respectively),
the Statutory Statements for each such Designated Subsidiary Borrower for such
fiscal year.

(b)           Quarterly
Financial Statements.  (i)  As soon as available and in any event within
60 days after the close of each of the first three quarterly accounting periods
in each fiscal year of the Parent Borrower, consolidated balance sheets of the
Parent Borrower and its Subsidiaries as at the end of such period and the
related consolidated statements of income, changes in shareholders’ equity and
cash flows of the Parent Borrower and its Subsidiaries for such period and (in
the case of the second and third quarterly periods) for the period from the
beginning of the current fiscal year to the end of such quarterly period,
setting forth in each case in comparative form the consolidated figures for the
corresponding periods of the previous fiscal year, all in reasonable detail and
certified by the chief financial officer of the Parent Borrower as presenting
fairly in all material respects, in accordance with GAAP (except as
specifically set forth therein; provided any exceptions or qualifications
thereto must be acceptable to the Administrative Agent) on a basis consistent
with such prior fiscal periods, the information contained therein, subject to
changes resulting from normal year-end audit adjustments and the absence of
full footnote disclosure.

(ii)      As soon as available and in any event
within 60 days after the close of each of the first three quarterly accounting
periods in each fiscal year of ARL, a summary consolidated balance sheet of ARL
and its Subsidiaries as at the end of such period and the related summary
consolidated statement of income of ARL and its Subsidiaries for such period
and (in the case of the second and third quarterly periods) for the period from
the beginning of the current fiscal year to the end of such quarterly period,
setting forth in each case in comparative form the consolidated figures for the
corresponding periods of the previous fiscal year, all in form and scope
consistent in all material respects with the financial statements of ARL
previously provided pursuant to Section 4.09(a)(ii) and certified by the chief
financial officer or controller of ARL, as presenting fairly in all material
respects, on a basis consistent with such prior fiscal periods, the information
contained therein, subject to changes resulting from normal year-end audit
adjustments and the absence of full footnote disclosure.

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(iii)     As soon as available and in any event
within 60 days after the close of each of the first three quarterly accounting
periods in each fiscal year of Intermediate Holdings, summary consolidated
financial information of Intermediate Holdings and its Subsidiaries as at the
end of such period and (in the case of the second and third quarterly periods)
for the period from the beginning of the current fiscal year to the end of such
quarterly period, setting forth in each case in comparative form the
consolidated figures for the corresponding periods of the previous fiscal year,
all in form and scope consistent in all material respects with the financial
information of Intermediate Holdings previously provided pursuant to Section
4.09(a)(iii) and certified by the chief financial officer or controller of
Intermediate Holdings as presenting fairly in all material respects on a basis
consistent with such prior fiscal periods, the information contained therein,
subject to changes resulting from normal year-end audit adjustments and the
absence of full footnote disclosure.

(iv)     As soon as available and in any event
within 60 days after the close of each of the first three quarterly accounting
periods in each fiscal year of each Designated Subsidiary Borrower (other than
ARL and Arch Europe), the Statutory Statements for each such Designated
Subsidiary Borrower for each such period.

(c)           Officer’s
Certificates.  At the time of the
delivery of the financial statements provided for in Sections 6.01(a) and
6.01(b), a certificate of the chief financial officer of the Parent Borrower to
the effect that no Default or Event of Default exists or, if any Default or
Event of Default does exist, specifying the nature and extent thereof, which
certificate shall set forth the calculations required to establish whether the
Parent Borrower and its Subsidiaries were in compliance with the provisions of
Sections 7.03, 7.09, 7.10 and 7.11 as at the end of such fiscal year or
quarter, as the case may be.

(d)           Notice of Default
or Litigation.  (x)  Within five Business Days after any Borrower
becomes aware of the occurrence of any Default or Event of Default and/or any
event or condition constituting, or which would reasonably be expected to have,
a Material Adverse Effect, a certificate of a Financial Officer of such
Borrower setting forth the details thereof and the actions which such Borrower
(or the Parent Borrower or any of its Subsidiaries) is taking or proposes to
take with respect thereto and (y) promptly after any Borrower knows of the
commencement thereof, notice of any litigation, dispute or proceeding involving
a claim against any Borrower and/or any Subsidiary which claim would reasonably
be expected to have a Material Adverse Effect.

(e)           Other Statements
and Reports.  Promptly upon the
mailing thereof to the security holders of the Parent Borrower generally,
copies of all financial statements, reports and proxy statements so mailed
(unless same is publicly available via the SEC’s “EDGAR” filing system).

(f)            SEC Filings.  Promptly upon the filing thereof, (i) copies
of all registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and annual, quarterly or
monthly reports which the Parent Borrower shall have filed with the SEC or any
national securities exchange (unless same is publicly available via the 

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SEC’s “EDGAR” filing system) or (ii) written notification of the filing
of a Form 10-Q or Form 10-K with the SEC.

(g)           Insurance Reports
and Filings.  (i)  Promptly after the filing thereof, a copy of
each Statutory Statement filed by each Regulated Insurance Company.

(ii)           Promptly following the delivery or
receipt, as the case may be, by any Regulated Insurance Company or any of their
respective Subsidiaries, copies of (a) each material registration, filing or
submission made by or on behalf of any Regulated Insurance Company with any
Applicable Insurance Regulatory Authority, except for policy form or rate
filings, (b) each material examination and/or audit report submitted to any
Regulated Insurance Company by any Applicable Insurance Regulatory Authority,
(c) all material information which the Lenders may from time to time request
with respect to the nature or status of any material deficiencies or violations
reflected in any examination report or other similar report, and (d) each
material report, order, direction, instruction, approval, authorization,
license or other notice which any Borrower or any Regulated Insurance Company
may at any time receive from any Applicable Insurance Regulatory
Authority.  For the purpose of this
clause (ii) only, determinations of “material” shall be made by the Borrowers
in good faith.

(iii)          As soon as available and in any event
within 120 days after the end of each fiscal year of the Parent Borrower (but
subject to the consent of the actuarial consulting firm referred to below), a
report by an independent actuarial consulting firm of recognized national standing
reviewing the adequacy of loss and loss adjustment expense reserves as at the
end of the last fiscal year of the Parent Borrower and its Subsidiaries on a
consolidated basis, determined in accordance with SAP and stating that the
Regulated Insurance Companies have maintained adequate reserves, it being
agreed that in each case such independent firm will be provided access to or
copies of all relevant valuations relating to the insurance business of each
such Regulated Insurance Company in the possession of or available to the
Parent Borrower or its Subsidiaries.

(iv)          Promptly following notification
thereof from a Governmental Authority, notification of the suspension,
limitation, termination or non-renewal of, or the taking of any other
materially adverse action in respect of, any Insurance License.

(h)           Borrowing Base
Certificate.  No later than the tenth
Business Day of each month, a Borrowing Base Certificate from each Designated
Subsidiary Borrower for whose account a Tranche 1 Letter of Credit has been
issued as of the last day of the immediately preceding month, executed by an
Authorized Officer of such Designated Subsidiary Borrower.  In the event that any Borrowing Base
Certificate reflects a Borrowing Base deficiency for any Designated Subsidiary Borrower
for whose account a Tranche 1 Letter of Credit has been issued, on the date
such Borrowing Base deficiency is cured, such Designated Subsidiary Borrower
shall issue a revised Borrowing Base Certificate reflecting such cure.

(i)            Section 32
Direction.  Promptly following
receipt thereof by ARL, notice of any direction or other notification received
by ARL from the Bermuda Monetary Authority pursuant to Section 32 of the
Insurance Act, 1978 of Bermuda.

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(j)            Other
Information.  With reasonable
promptness, such other information or existing documents (financial or
otherwise) as the Administrative Agent or any Lender may reasonably request
from time to time.

(k)           Delivery of
Information.  Each Credit Party and
each Lender hereby acknowledges and agrees that the Administrative Agent and/or
the Credit Parties may make available to the Lenders materials and/or
information provided by or on behalf of any Credit Party under this Agreement
or any other Credit Document by posting such materials and/or information on
IntraLinks or another similar electronic system reasonably acceptable to the
Administrative Agent and the Credit Parties (it being understood and agreed
that the posting of such materials and/or information on IntraLinks or another
similar electronic system shall not be deemed a violation of Section 10.12 of
this Agreement).

Section 6.02.  Books, Records
and Inspections.  Each Borrower will
(i) keep, and will cause each of its Subsidiaries to keep, proper books of
record and account in which full, true and correct entries in conformity with
GAAP or SAP, as applicable, shall be made of all dealings and transactions in
relation to its business and activities; and (ii) subject to binding
contractual confidentiality obligations of such Borrower and its Subsidiaries
to third parties and to Section 10.12, permit, and will cause each of its
Subsidiaries to permit, representatives of any Lender (at such Lender’s expense
prior to the occurrence of an Event of Default and at such Borrower’s expense
after an Event of Default has occurred and is continuing) to visit and inspect
any of their respective properties, to examine their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective officers, employees and independent public accountants, in
each case at such reasonable times and as often as may reasonably be
desired.  Each Borrower agrees to
cooperate and assist in such visits and inspections.

Section 6.03.  Insurance.  Each Borrower will maintain, and will cause
each of its Subsidiaries to maintain (either in the name of such Borrower or in
the Subsidiary’s own name) with financially sound and reputable insurance
companies, insurance on all their property in at least such amounts and against
at least such risks as are usually insured against in the same general area by
companies of established repute engaged in the same or similar businesses.

Section 6.04.  Payment of
Taxes.  Each Borrower will pay and
discharge, and will cause each of its Subsidiaries to pay and discharge, all
income taxes and all other material taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits, or upon any properties
belonging to it, in each case, on a timely basis prior to the date on which penalties
attach thereto, and all lawful claims which, if unpaid, might become a Lien or
charge upon any properties of such Borrower or any of its Subsidiaries; provided
that neither any Borrower nor any Subsidiary of any Borrower shall be required
to pay any such tax, assessment, charge, levy or claim which is being contested
in good faith and by proper proceedings if it has maintained adequate reserves
with respect thereto in accordance with GAAP.

Section 6.05.  Maintenance of
Existence.  Each Borrower will maintain,
and will cause each of its Subsidiaries to maintain, its existence, provided
that a Borrower shall not be required to maintain the existence of any of its
Subsidiaries (other than each Credit Party the existence of which will be
maintained at all times) if such Borrower shall determine in good faith 

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that the preservation thereof is no longer desirable in the conduct of
the business of such Borrower and its Subsidiaries taken as a whole.  Each Borrower will qualify and remain
qualified, and cause each of its Subsidiaries to qualify and remain qualified,
as a foreign corporation in each jurisdiction where such Borrower or such
Subsidiary, as the case may be, is required to be qualified, except in those
jurisdictions in which the failure to receive or retain such qualifications
would not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect.

Section 6.06.  Compliance with
Statutes, etc.  Each Borrower will,
and will cause each Subsidiary to, comply with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls) other than those the non-compliance with which would not reasonably
be expected to have, either individually or in the aggregate, a Material
Adverse Effect.

Section 6.07.  ERISA.  Promptly after any Borrower, any of its
Subsidiaries or, in the case of clauses (i) through (v) below, any of its ERISA
Affiliates knows or has reason to know that any of the events or conditions
specified below with respect to any Plan or Multiemployer Plan or Foreign
Pension Plan has occurred or exist, a certificate of the chief financial
officer of such Borrower setting forth details respecting such event or
condition and the action if any, that such Borrower, such Subsidiary or such
ERISA Affiliate proposes to take with respect thereto (and a copy of any report
or notice required to be filed with or given to PBGC or an applicable foreign
governmental agency by such Borrower, such Subsidiary or such ERISA Affiliate
with respect to such event or condition):

(i)            any reportable event, as defined in
subsections (c)(1), (2), (5) and (6), and subsection (d)(2) of Section 4043 of
ERISA and the regulations issued thereunder, with respect to a Plan;

(ii)           the filing under Section 4041(c) of
ERISA of a notice of intent to terminate any Plan under a distress termination
or the distress termination of any Plan;

(iii)          the institution by PBGC of proceedings
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by any Borrower, any of its
Subsidiaries or any of its ERISA Affiliates of a notice from a Multiemployer
Plan that such action has been taken by PBGC with respect to such Multiemployer
Plan which could reasonably be expected to result in a liability to such
Borrower or any of its Subsidiaries in excess of  $5,000,000;

(iv)          the receipt by any Borrower, any of
its Subsidiaries or any of its ERISA Affiliates of notice from a Multiemployer
Plan that such Borrower, any of its Subsidiaries or any of its ERISA Affiliates
has incurred withdrawal liability under Section 4201 of ERISA in excess of
$5,000,000 or that such Multiemployer Plan is in reorganization or insolvency
pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or
has terminated under Section 4041A of ERISA whereby a deficiency or additional 

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assessment is
levied or threatened to be levied in excess of $5,000,000 against such
Borrower, any of its Subsidiaries or any of its ERISA Affiliates;

(v)           the institution of a proceeding by a
fiduciary of any Plan or Multiemployer Plan against any Borrower, any of its
Subsidiaries or any of its ERISA Affiliates to enforce Section 515 or
4219(c)(5) of ERISA asserting liability in excess of $5,000,000, which
proceeding is not dismissed within 30 days; and

(vi)          that any material contribution
required to be made with respect to a Foreign Pension Plan has not been timely
made, or that any Borrower or any Subsidiary of such Borrower may incur any
material liability pursuant to any Foreign Pension Plan (other than to make
contributions in the ordinary course of business).

Section 6.08.  Maintenance of
Property.  Each Borrower shall, and
will cause each of its Subsidiaries to, maintain all of their properties and
assets in good condition, repair and working order, ordinary wear and tear
excepted, except where failure to maintain the same would not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.

Section 6.09.  Maintenance of
Licenses and Permits.  Each Borrower
will, and will cause each of its Subsidiaries to, maintain all permits,
licenses and consents as may be required for the conduct of its business by any
state, federal or local government agency or instrumentality, except where
failure to maintain the same would not reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

Section 6.10.  Financial
Strength Ratings.  Each Borrower
shall cause each Designated Subsidiary Borrower (other than WDCIC) to maintain
at all times a financial strength rating of at least “B++” from A.M. Best &
Co. (or its successor); provided that any Regulated Insurance Company
acquired or created after the Restatement Effective Date shall not be required
to comply with this Section 6.10 until the date occurring 180 days after the
date of such acquisition or creation.

Section 6.11.  End of Fiscal
Years; Fiscal Quarters.  Each
Borrower will cause (i) each of its, and each of its Subsidiaries’, fiscal
years to end on December 31 of each year and (ii) each of its, and each of its
Subsidiaries’, fiscal quarters to end on dates which are consistent with a
fiscal year end as described above, provided that the Borrowers shall
not be required to comply with the foregoing with respect to any Subsidiary of
any Borrower acquired after the Restatement Effective Date having a fiscal year
ending on a date other than December 31 at the time of such acquisition.

Section 6.12.  Borrowing Base
Requirement.  Subject to Sections
2.11(f) and (g), each Designated Subsidiary Borrower shall at all times cause
its respective Borrowing Base to equal or exceed the Tranche 1 Letter of Credit
Outstandings attributable to such Designated Subsidiary Borrower at such time.

Section 6.13.  Further Assurances.  Each Borrower shall promptly and duly execute
and deliver to the Administrative Agent
and/or the Collateral Agent such documents and assurances and take such
further action as the Administrative Agent
may from time to time 

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reasonably request in order to carry out more effectively the intent
and purpose of the Credit Documents and to establish, protect and perfect the
rights and remedies created or intended to be created in favor of the
Collateral Agent, the Administrative Agent or the Lenders pursuant to the Credit
Documents.

ARTICLE VII

Negative Covenants

Until
the Commitments have expired or terminated, no Notes or Letters of Credit are
outstanding (or, in the case of Letters of Credit, such Letters of Credit are
either (i) collateralized by cash and/or Cash Equivalents equal to not less
than 100% of the accounts outstanding or available for drawing in a manner
satisfactory to the Agents or (ii) supported by back-to-back letters of credit
the terms, conditions and issuer of which are satisfactory to the Agents), and
the principal of and interest on each Loan, all Tranche 1 Unpaid Drawings and
Tranche 2 Unpaid Drawings and all fees payable hereunder have been paid in
full, each Borrower covenants and agrees (solely as to itself and its
Subsidiaries) with the Lenders that:

Section 7.01.  Changes in
Business and Investments.  No
Borrower will, nor will it permit any of its Subsidiaries to, engage (directly
or indirectly) in any business other than businesses in which they are engaged
on the Restatement Effective Date and reasonable extensions thereof and other
businesses that are complementary or reasonably related thereto.

Section 7.02.  Consolidations,
Mergers, Sales of Assets and Acquisitions. 
(a)  No Borrower will, nor will it
permit any of its Subsidiaries to, consolidate or merge with or into any other
Person, provided that (i) the Parent Borrower may merge with another Person if
(x) the Parent Borrower is the corporation surviving such merger and (y)
immediately after giving effect to such merger, no Default or Event of Default
shall have occurred and be continuing, (ii) Intermediate Holdings may merge
with another Person if (x) Intermediate Holdings is the corporation surviving
such merger and (y) immediately after giving effect to such merger, no Default
or Event of Default shall have occurred and be continuing, and (iii)
Subsidiaries of any Borrower (other than Intermediate Holdings) may merge with
one another provided that if any such merger involves a Designated Subsidiary
Borrower, then the corporation surviving such merger must be a Designated
Subsidiary Borrower.

(b)        No Borrower will, nor
will it permit any of its Subsidiaries to, sell, convey, assign, lease, abandon
or otherwise transfer or dispose of, voluntarily or involuntarily (any of the
foregoing being referred to in this Section 7.02(b) as a “Disposition”
and any series of related Dispositions constituting but a single Disposition),
any of its properties or assets, tangible or intangible (including but not
limited to sale, assignment, discount or other disposition of accounts,
contract rights, chattel paper or general intangibles with or without
recourse), except:

(i)            any Disposition of used, worn out,
obsolete or surplus property of the Parent Borrower or any Subsidiary in the
ordinary course of business;

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(ii)           the license (as licensor) of
intellectual property so long as such license does not materially interfere
with the business of the Parent Borrower or any of its Subsidiaries;

(iii)          the Disposition of cash, cash
equivalents and investment securities;

(iv)          the release, surrender or waiver of
contract, tort or other claims of any kind as a result of the settlement of any
litigation or threatened litigation;

(v)           the granting or existence of Liens
(and foreclosure thereon) not prohibited by this Agreement;

(vi)          the lease or sublease of real property
so long as such lease or sublease does not materially interfere with the
business of the Parent Borrower or any of its Subsidiaries;

(vii)         Dividends not prohibited by Section
7.07;

(viii)        any ceding of insurance or reinsurance
in the ordinary course of business;

(ix)           any Disposition by the Parent
Borrower or any of its Subsidiaries of any Non-Core Asset (as defined in the Subscription
Agreement) or as set forth on Schedule 7.02(b);

(x)            Dispositions of properties or assets
having an aggregate fair value (as determined in good faith by the board of
directors of the Parent Borrower) of less than $1,000,000;

(xi)           Dispositions by the Parent Borrower
or any of its Subsidiaries of any of their respective properties or assets to
the Parent Borrower, to any Wholly-Owned Subsidiary of the Parent Borrower or
(except as to property or assets consisting of the capital stock of
Subsidiaries) to Alternative Re Holdings; and

(xii)          other Dispositions to the extent that
the fair market value of the assets the subject thereof (as determined in good
faith by the board of directors or senior management of the Parent Borrower),
when added to the fair market value of the assets the subject of any such other
Disposition or Dispositions under this clause (xii) previously consummated
during the same fiscal year of the Parent Borrower (as determined in good faith
by the board of directors or senior management of the Parent Borrower), does
not constitute more than 20% of the consolidated assets of the Parent Borrower
and its Subsidiaries as of the last day of the most recently ended fiscal year
of the Parent Borrower.

(c)           No Borrower will,
nor will it permit any of its Subsidiaries to, acquire all or substantially all
of the capital stock or assets of another Person unless at such time and
immediately after giving effect thereto no Default or Event of Default exists
or would result therefrom.

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Section 7.03.  Liens.  No Borrower will, nor will it permit any of
its Subsidiaries to, permit, create, assume, incur or suffer to exist any Lien
on any asset tangible or intangible now owned or hereafter acquired by it,
except:

(a)           Liens created pursuant to the Credit
Documents;

(b)           Liens existing on the Restatement
Effective Date and listed on Schedule 7.03;

(c)           Liens securing repurchase agreements
constituting a borrowing of funds by the Parent Borrower or any Subsidiary of
the Parent Borrower in the ordinary course of business for liquidity purposes
and in no event for a period exceeding 90 days in each case;

(d)           Liens arising pursuant to purchase
money mortgages, capital leases or security interests securing Indebtedness
representing the purchase price (or financing of the purchase price within 90
days after the respective purchase) of assets acquired after the Restatement
Effective Date;

(e)           Liens (x) on any asset of any Person
existing at the time such Person is merged or consolidated with or into the
Parent Borrower or any of its Subsidiaries and not created in contemplation of
such event or (y) securing Acquired Indebtedness so long as such Lien existed
prior to the contemplated acquisition, was not created in contemplation of such
acquisition and only relates to assets of the Person so acquired;

(f)            Liens securing obligations owed by
the Parent Borrower to any of its Subsidiaries or owed by any Subsidiary of the
Parent Borrower to the Parent Borrower or any other Subsidiary of the Parent
Borrower, in each case solely to the extent that such Liens are required by an
Applicable Insurance Regulatory Authority for such Person to maintain such
obligations;

(g)           Liens securing insurance obligations
of Subsidiaries of the Parent Borrower owed by any Subsidiary of the Parent
Borrower to the Parent Borrower or any other Subsidiary of the Parent Borrower,
in each case solely to the extent that such Liens are required or requested by
ratings agencies, clients or brokers for such Person to maintain such insurance
obligations;

(h)           Liens on investments and cash
balances of any Regulated Insurance Company securing obligations of such
Regulated Insurance Company in respect of trust or similar arrangements formed,
letters of credit issued or funds withheld balances established, in each case,
in the ordinary course of business for the benefit of cedents to secure reinsurance
recoverables owed to them by such Regulated Insurance Company;

(i)            inchoate Liens for taxes,
assessments or governmental charges or levies not yet due or Liens for taxes,
assessments or governmental charges or levies being contested in good faith and
by appropriate proceedings for which adequate reserves have been established in
accordance with GAAP;

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(j)            Liens in respect of property or
assets of the Parent Borrower or any of its Subsidiaries imposed by law, which
were incurred in the ordinary course of business and do not secure Indebtedness
for borrowed money, such as carriers’, warehousemen’s, materialmen’s and
mechanics’ liens and other similar Liens arising in the ordinary course of
business, and (x) which do not in the aggregate materially detract from the
value of the Parent Borrower’s or such Subsidiary’s property or assets or
materially impair the use thereof in the operation of the business of the
Parent Borrower or such Subsidiary or (y) which are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property or assets subject to any such
Lien;

(k)           Licenses, sublicenses, leases, or
subleases granted to other Persons not materially interfering with the conduct of
the business of the Parent Borrower or any of its Subsidiaries;

(l)            easements, rights-of-way,
restrictions, encroachments and other similar charges or encumbrances, and
minor title deficiencies, in each case not securing Indebtedness and not
materially interfering with the conduct of the business of the Parent Borrower
or any of its Subsidiaries;

(m)          Liens arising out of the existence of
judgments or awards not constituting an Event of Default under Section 8.07;

(n)           Liens (other than Liens imposed under
ERISA) incurred in the ordinary course of business in connection with workers
compensation claims, unemployment insurance and social security benefits and
Liens securing the performance of bids, tenders, leases and contracts in the
ordinary course of business, statutory obligations, surety bonds, performance
bonds and other obligations of a like nature incurred in the ordinary course of
business and consistent with past practice (exclusive of obligations in respect
of the payment for borrowed money);

(o)           bankers’ Liens, rights of setoff and
other similar Liens existing solely with respect to cash and cash equivalents
on deposit in one or more accounts maintained by the Parent Borrower or any of
its Subsidiaries, in each case granted in the ordinary course of business in
favor of the bank or banks with which such accounts are maintained;

(p)           Liens arising out of the refinancing,
extension, renewal or refunding of any Indebtedness secured by any Lien
permitted by any of the clauses of this Section 7.03, provided that such
Indebtedness is not increased and is not secured by any additional assets;

(q)           Liens in respect of property or
assets of any Subsidiary of the Parent Borrower securing Indebtedness of the
type described in clause (f) or (j) of the definition of “Permitted Subsidiary
Indebtedness”;

(r)            Liens in respect of property or
assets of any Subsidiary of the Parent Borrower securing Indebtedness of the
type described in clause (i) of the definition of “Permitted Subsidiary
Indebtedness”; provided that the aggregate amount of the 

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Indebtedness
secured by such Liens shall not, when added to the aggregate amount of all
outstanding obligations of the Parent Borrower secured by Liens incurred
pursuant to Section 7.03(s), exceed at any time 10% of Consolidated Net Worth
of the Parent Borrower at the time of incurrence of any new Liens under this
clause (r);

(s)           Liens arising in connection with
securities lending arrangements entered into by the Parent Borrower or any of
its Subsidiaries with financial institutions in the ordinary course of business
so long as any securities subject to any such securities lending arrangement do
not constitute collateral under any Security Document; and

(t)            in addition to the Liens described
in clauses (a) through (s) above, Liens securing obligations of the Parent
Borrower; provided that the aggregate amount of the obligations secured
by such Liens shall not, when added to the aggregate amount of outstanding
Indebtedness of Subsidiaries incurred pursuant to clause (k) of the definition
of “Permitted Subsidiary Indebtedness”, exceed at any time 10% of Consolidated
Net Worth of the Parent Borrower at the time of incurrence of any Liens under
this clause (t).

Section 7.04.  Indebtedness.  (a)  No
Borrower will, nor will it permit any of its Subsidiaries to, create, incur,
assume or permit to exist any Indebtedness, or agree, become or remain liable
(contingent or otherwise) to do any of the foregoing, except for the Loans and
other Indebtedness which is either pari passu with, or subordinated in right of
payment to, the Loans and the other Obligations.

(b)           No Borrower will
permit any of its Subsidiaries to create, incur, assume or permit to exist any
Indebtedness, or agree, become or remain liable (contingent or otherwise) to do
any of the foregoing, except for (i) the Obligations, (ii) Indebtedness under
the Long-Term LC Facility, (iii) Indebtedness under the Existing Senior Notes
and (iv) Permitted Subsidiary Indebtedness.

(c)           Intermediate
Holdings will not create, incur, assume or permit to exist any Indebtedness, or
agree, become or remain liable (contingent or otherwise) to do any of the
foregoing, except for (i) the Intermediate Holdings Guaranty, (ii) Indebtedness
owing to the Parent Borrower or any of its Subsidiaries (including, without
limitation, any such Indebtedness arising from capital commitments requested or
required by an Applicable Insurance Regulatory Authority) in an aggregate
principal amount not to exceed $50,000,000 at any time, (iii) other
Indebtedness listed on Schedule 7.04(c) and (iv) Indebtedness of the type
described in clause (g) of the definition of Permitted Subsidiary Indebtedness.

Section 7.05.  Issuance of
Stock  No Borrower will, nor will it
permit any of its Subsidiaries to, directly or indirectly issue, sell, assign,
pledge, or otherwise encumber or dispose of any shares of its preferred or
preference equity securities or options to acquire preferred or preference
equity securities, except the issuance of preferred or preference equity
securities, so long as (i) (x) no part of such preferred or preference equity
securities is mandatorily redeemable (whether on a scheduled basis or as a
result of the occurrence of any event or circumstance) prior to the first
anniversary of the Commitment Expiration Date or (y) all such preferred or
preference equity securities or options therefor are issued to and held by the
Parent Borrower and its Wholly-Owned Subsidiaries and (ii) such preferred or
preference equity securities do not 

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contain any financial performance related covenants or incurrence
covenants which restrict the operations of the issuer thereof; provided that
the Parent Borrower and its Subsidiaries may issue preferred stock as described
on Schedule 7.05.

Section 7.06.  Dissolution.  No Borrower will, nor will it permit any of
its Subsidiaries that is a Credit Party to, suffer or permit dissolution or
liquidation either in whole or in part, except through corporate reorganization
to the extent permitted by Section 7.02.

Section 7.07.  Restricted
Payments.  The Parent Borrower will
not declare or pay any dividends, purchase, redeem, retire, defease or
otherwise acquire for value any of its Equity Interests now or hereafter
outstanding, return any capital to its stockholders, partners or members (or
the equivalent Persons thereof) as such, make any distribution of assets,
Equity Interests, obligations or securities to its stockholders, partners or
members (or the equivalent Persons thereof) as such, or permit any of its
Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for
value any Equity Interests in the Parent Borrower or to sell any Equity
Interests therein (each of the foregoing a “Dividend” and, collectively,
“Dividends”) unless no Default or Event of Default shall have occurred
and be continuing at the time of such Dividend or would result therefrom.

Section 7.08.  Transactions
with Affiliates.  No Borrower will,
nor will it permit any of its Subsidiaries to, enter into or be a party to a
transaction with any Affiliate of such Borrower or such Subsidiary (which
Affiliate is not the Parent Borrower or a Subsidiary), except (i) transactions
with Affiliates on terms (x) no less favorable to the Parent Borrower or such
Subsidiary than those that could have been obtained in a comparable transaction
on an arm’s length basis from an unrelated Person or (y) approved by a majority
of the disinterested members of the board of directors of the Parent Borrower,
(ii) transactions and payments pursuant to agreements and arrangements
disclosed in, or listed as an exhibit to, the Parent Borrower’s annual report
on Form 10-K filed with the SEC on March 13, 2006 or any subsequent other
filing with the SEC through the Restatement Effective Date or any such
agreement or arrangement as thereafter amended, extended or replaced on terms
that are, in the aggregate, no less favorable to the Parent Borrower and its
Subsidiaries than the terms of such agreement on the Restatement Effective
Date, as the case may be, (iii) Dividends not prohibited by Section 7.07, (iv)
fees and compensation paid to and indemnities provided on behalf of officers
and directors of the Parent Borrower or any of its Subsidiaries as reasonably
determined in good faith by the board of directors or senior management of
Parent Borrower and (v) the issuance of common stock of the Parent Borrower.

Section 7.09.  Maximum Parent
Borrower Leverage Ratio.  The Parent
Borrower will not permit the Parent Borrower Leverage Ratio on the last day of
any fiscal quarter or fiscal year of the Parent Borrower to be greater than
0.35:1.00.

Section 7.10.  Minimum
Consolidated Tangible Net Worth. 
(a)  The Parent Borrower will not
permit its Consolidated Tangible Net Worth at any time to be less than, the sum
of (i) $1,950,000,000 plus (ii) 25% of the aggregate Net Cash Proceeds
received from any issuance of common or preferred equity interests of the
Parent Borrower consummated on or after the Restatement Effective Date plus
(ii) 25% of its quarterly Consolidated Net Income (if positive) for each fiscal
quarter ended after June 30, 2006 plus (iii) 25% of the aggregate Net 

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Cash Proceeds received from any issuance of common or preferred equity
interests of the Parent Borrower consummated on or after the Restatement
Effective Date.

(b)           Neither ARC, ARL nor
Intermediate Holdings will permit its respective Consolidated Tangible Net
Worth at any time to be less than (A) in the case of ARC, (i) $480,000,000 plus
(ii) 25% of its quarterly Consolidated Net Income (if positive) for each fiscal
quarter ended after June 30, 2006; (B) in the case of ARL, (i) $2,050,000,000 plus
(ii) 25% of its quarterly Consolidated Net Income (if positive) for each fiscal
quarter ended after June 30, 2006; and (C) in the case of Intermediate
Holdings, (i) $484,000,000 plus (ii) 25% of its quarterly Consolidated
Net Income (if positive) for each fiscal quarter ended after June 30, 2006.

Section 7.11.  Limitation on
Certain Restrictions on Subsidiaries. 
No Borrower will, nor will it permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or consensual restriction on the ability
of any such Subsidiary to (a) pay dividends or make any other distributions on
its capital stock or any other interest or participation in its profits owned
by such Borrower or any of its Subsidiaries, or pay any Indebtedness owed to
such Borrower or any of its Subsidiaries, (b) make loans or advances to such
Borrower or any of its Subsidiaries or (c) transfer any of its properties or
assets to such Borrower or any of its Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (i) applicable law,
(ii) the Long-Term LC Facility (and any replacements, renewals and extensions
thereof and any successor facilities, provided that the encumbrances and
restrictions contained in any such replacements, renewals or extensions or any
such successor facilities are not materially more disadvantageous to the
Lenders than is customary in comparable financings and such encumbrances and
restrictions will not materially affect any Borrower’s ability to make
principal or interest payments on the Loans or to reimburse Unpaid Drawings and
do not restrict the ability to grant any Lien contemplated or required by the
Agreement), (iii) the Existing Senior Notes (and any additional issuances of
notes, provided that the encumbrances and restrictions contained in any such
additional notes shall not be materially more disadvantageous to the Lenders
than is customary in comparable financings and such encumbrances and
restrictions will not materially affect any Borrower’s ability to make
principal or interest payments on the Loans or to reimburse Unpaid Drawings and
do not restrict the ability to grant any Lien contemplated or required by the
Agreement), (iv) the Shareholders Agreement, (v) this Agreement and the other
Credit Documents, (vi) customary provisions restricting subletting or
assignment of any lease governing any leasehold interest of such Borrower or
any of its Subsidiaries, (vii) customary provisions restricting assignment of
any licensing agreement (in which such Borrower or any of its Subsidiaries is
the licensee) or other contract (including leases) entered into by such
Borrower or any of its Subsidiaries in the ordinary course of business,
(viii) restrictions on the transfer of any asset pending the close of the
sale of such asset, (ix) restrictions on the transfer of any asset subject
to a Lien permitted by Section 7.03, (x) agreements entered into by a Regulated
Insurance Company with an Applicable Insurance Regulatory Authority or ratings
agency in the ordinary course of business, (xi) any instrument governing
Acquired Indebtedness, which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the Person or
the properties or assets of the Person so acquired, (xii) customary provisions
in partnership agreements, limited liability company organizational governance
documents, joint venture agreements and other similar agreements entered into
in the ordinary course of business that restrict the transfer of ownership
interests in such partnership, limited liability company, joint venture or
similar Person, 

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(xiii) restrictions on cash or other deposits or net worth imposed
by customers under contracts entered into in the ordinary course of business,
(xiv) pursuant to an agreement or instrument relating to any Permitted
Subsidiary Indebtedness of the type described in clause (e), (h) (i), or (k) of
the definition thereof if such encumbrance or restriction is not materially
more disadvantageous to the Lenders than is customary in comparable financings
and such encumbrance or restriction will not materially affect such Borrower’s
ability to make principal or interest payments on the Loans or to reimburse
Unpaid Drawings and (xv) any encumbrances or restrictions imposed by any
amendments or refinancings of the contracts, instruments or obligations
referred to in clause (xi) above, provided that such amendments or
refinancings are no more materially restrictive with respect to such
encumbrances and restrictions that those prior to such amendment or
refinancing.

Section 7.12.  Private Act.  No Borrower will become subject to a Private
Act.

ARTICLE VIII

Events of Default

If
any of the following events (“Events of Default”) shall occur:

Section 8.01.  Payments.  Any Borrower shall (a) default in the payment
when due of any principal of any Loan, any Tranche 1 Unpaid Drawing or any
Tranche 2 Unpaid Drawing, (b) default, and such default shall continue for
three or more Business Days, in the payment when due of any interest on any
Loan or Unpaid Drawing or any fees payable pursuant to the Credit Documents or
(c) default in the prompt payment following notice or demand in respect of any
other amounts owing hereunder or under any other Credit Document; or

Section 8.02.  Representations,
etc.  Any representation, warranty or
material statement made or deemed made pursuant to the last sentence of Section
5.02 by any Borrower herein or in any other Credit Document or in any
certificate or material statement delivered or required to be delivered
pursuant hereto or thereto shall prove to be untrue in any material respect on
the date as of which made or deemed made; or

Section 8.03.  Covenants.  Any Borrower shall (a) default in the due
performance or observance by it of any term, covenant or agreement contained in
Section 6.01(d), 6.02(ii), 6.05 (but only with respect to the first sentence
thereof), 6.10 or Article VII, or (b) default in the due performance or
observance by it of any term, covenant or agreement (other than those referred
to in Section 8.01 or clause (a) of this Section 8.03) contained in this
Agreement and such default shall continue unremedied for a period of at least
45 days after written notice to such Borrower from the Administrative Agent or
the Required Lenders; or

Section 8.04.  Default under
other Agreements.  (a)  The Parent Borrower or any of its
Subsidiaries shall (i) default in any payment with respect to Indebtedness
(other than the Obligations) in excess of $50,000,000 individually or in the
aggregate, for the Parent Borrower and its Subsidiaries, beyond the period of
grace, if any, provided in the instrument or agreement under which such
Indebtedness was created or (ii) default in the observance or performance of
any agreement or condition relating to any such Indebtedness or contained in
any instrument or 

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agreement evidencing, securing or relating thereto, or any other event
shall occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to cause
(determined without regard to whether any notice of acceleration, or any lapse
of time prior to the effectiveness of any notice of acceleration, is required),
any such Indebtedness to become due prior to its stated maturity; or
(b) Indebtedness of the Parent Borrower or its Subsidiaries in excess of
$50,000,000 shall be declared to be due and payable other than in accordance
with the terms of such Indebtedness or required to be prepaid, other than by a
regularly scheduled required prepayment or as a mandatory prepayment (unless
such required prepayment or mandatory prepayment results from a default
thereunder or an event of the type that constitutes an Event of Default), prior
to the stated maturity thereof; or

Section 8.05.  Bankruptcy,
etc.  The Parent Borrower or any of
its Subsidiaries (other than Insignificant Subsidiaries) shall commence a
voluntary case concerning itself under Title 11 of the United States Code
entitled “Bankruptcy,” as now or hereafter in effect, or any successor thereto
(the “Bankruptcy Code”); or an involuntary case is commenced against the
Parent Borrower or any of its Subsidiaries (other than Insignificant
Subsidiaries) and the petition is not controverted within 10 days, or is not
dismissed within 60 days, after commencement of the case; or a custodian (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Parent Borrower or any of its
Subsidiaries (other than Insignificant Subsidiaries); or the Parent Borrower or
any of its Subsidiaries (other than Insignificant Subsidiaries) commences
(including by way of applying for or consenting to the appointment of, or the
taking of possession by, a rehabilitator, receiver, custodian, trustee,
conservator or liquidator (collectively, a “conservator”) or, for the
purposes of U.K. law, an administrator or administrative receiver, of itself or
all or any substantial portion of its property) any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency, liquidation, rehabilitation, supervision,
conservatorship or similar law of any jurisdiction, the Bermuda Companies Law
or U.K. Insolvency Act whether now or hereafter in effect relating to the
Parent Borrower or any of its Subsidiaries (other than Insignificant
Subsidiaries); or any such proceeding is commenced against (a) any Regulated
Insurance Company (other than any Regulated Insurance Company that is an
Insignificant Subsidiary) which is engaged in the business of underwriting
insurance and/or reinsurance in the United States, or (b) the Parent Borrower
or any of its Subsidiaries (other than Insignificant Subsidiaries or any
Regulated Insurance Company described in the immediately preceding clause (a))
to the extent such proceeding is consented to by such Person, and in the case of
either clause (a) or (b) remains undismissed for a period of 60 days; or the
Parent Borrower or any of its Subsidiaries (other than Insignificant
Subsidiaries) is adjudicated insolvent or bankrupt; or any order of relief or
other order approving any such case or proceeding is entered; or (x) any
Regulated Insurance Company (other than any Regulated Insurance Company that is
an Insignificant Subsidiary) which is engaged in the business of underwriting
insurance and/or reinsurance in the United States suffers any appointment of
any conservator or the like for it or any substantial part of its property, or
(y) the Parent Borrower or any of its Subsidiaries (other than Insignificant
Subsidiaries or any Regulated Insurance Company described in the immediately preceding
clause (x)) consents to any appointment of any conservator or the like for it
or any substantial part of its property which continues undischarged or
unstayed for a period of 60 days; or the Parent Borrower or any of its
Subsidiaries (other than Insignificant Subsidiaries) makes a general assignment
for the benefit of creditors; or any corporate action is taken by the 

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Parent Borrower or any of its Subsidiaries (other than Insignificant
Subsidiaries) for the purpose of effecting any of the foregoing; or

Section 8.06.  ERISA.  (i)  An
event or condition specified in Section 6.07 shall occur or exist with respect
to any Plan or Multiemployer Plan or Foreign Pension Plan, (ii) any Borrower,
any of its Subsidiaries or any of its ERISA Affiliates shall fail to pay when
due any amount which they shall have become liable to pay to the PBGC or to a
Plan or a Multiemployer Plan under Title IV of ERISA, or (iii) a condition
shall exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Plan must be terminated, and as a result of such event,
failure or condition, together with all such other events, failures or
conditions, any Borrower, any of its Subsidiaries or any of its ERISA
Affiliates shall be reasonably likely in the opinion of the general counsel of
such Borrower to incur a liability to a Plan, a Multiemployer Plan, a Foreign
Pension Plan or PBGC (or any combination of the foregoing) which could
reasonably be expected to have, either individually or in the aggregate, a Material
Adverse Effect; or

Section 8.07.  Judgments.  One or more judgments or decrees shall be
entered against the Parent Borrower or any of its Subsidiaries involving a
liability, net of undisputed insurance and reinsurance, of $50,000,000 or more
in the case of any one such judgment or decree or in the aggregate for all such
judgments and decrees for the Parent Borrower and its Subsidiaries and any such
judgments or decrees shall not have been vacated, discharged, satisfied, stayed
or bonded pending appeal within 60 days from the entry thereof; or

Section 8.08.  Insurance
Licenses.  Any one or more Insurance
Licenses of the Parent Borrower or any of its Subsidiaries shall be suspended,
limited or terminated or shall not be renewed, or any other action shall be
taken by any Governmental Authority, and such action would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect; or

Section 8.09.  Guaranties.  (a) 
The Intermediate Holdings Guaranty shall terminate or cease, in whole or
part, to be a legally valid and binding obligation of the Guarantor, if the
Guarantor, or any Person acting for or on behalf of the Guarantor, shall
contest such validity or binding nature of the Intermediate Holdings Guaranty,
or any other Person shall assert any of the foregoing; or

(b)  the Parent Borrower Guaranty shall terminate
or cease, in whole or part, to be a legally valid and binding obligation of the
Parent Borrower, if the Parent Borrower, or any Person acting for or on behalf
of the Parent Borrower, shall contest such validity or binding nature of the
Parent Borrower Guaranty, or any other Person shall assert any of the
foregoing; or

Section 8.10.  Security
Documents.  Any Security Document
shall cease to be in full force and effect, or shall cease to give the
Collateral Agent the Liens, rights, powers and privileges purported to be
created thereby (including, without limitation, a first priority security
interest in, and Lien on, all of the Collateral subject thereto, in favor of
the Collateral Agent, superior to and prior to the rights of all third Persons
and subject to no other Liens); or any Designated Subsidiary Borrower party to
any Security Documents or any other pledgor thereunder shall default in any
material respect in the due performance or observance of any 

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term, covenant or agreement on its part to be performed or observed
pursuant to any Security Document; or

Section 8.11.  Change of
Control.  A Change in Control shall
occur; or

Section 8.12.  Section 32
Direction.  ARL shall receive any
direction or other notification from the Bermuda Monetary Authority pursuant to
Section 32 of the Insurance Act, 1978 of Bermuda; then, and in any such event,
and at any time thereafter, if any Event of Default shall then be continuing,
the Administrative Agent shall, upon the written request of the Required
Lenders, by written notice to the Parent Borrower, take any or all of the
following actions, without prejudice to the rights of the Administrative Agent
or any Lender to enforce its claims against any Borrower, except as otherwise
specifically provided for in this Agreement (provided that if an Event of
Default specified in Section 8.05 shall occur with respect to any Borrower, the
result which would occur upon the giving of written notice by the
Administrative Agent as specified in clauses (i) and (ii) below shall occur
automatically without the giving of any such notice):  (i) declare the Commitments (or the unused
portion thereof) terminated, whereupon the Commitment of each Lender (or such
unused portion) shall forthwith terminate immediately and any Facility Fees and
any Utilization Fees shall forthwith become due and payable without any other
notice of any kind, (ii) declare the principal of, and any accrued interest in
respect of, all Loans and all other Obligations owing hereunder and under the
other Credit Documents to be, whereupon the same shall become, forthwith due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by each Borrower, (iii) terminate any Letter of
Credit or give a Notice of Non-Extension in respect thereof if permitted in
accordance with its terms, (iv) direct the applicable Borrower to pay (and the
applicable Borrower hereby agrees upon receipt of such notice, or upon the
occurrence of any Event of Default specified in Section 8.05, to pay) to the
Administrative Agent an amount of cash to be held as security for the
respective Borrower’s reimbursement obligations in respect of all Letters of
Credit then outstanding which were issued for the account of such Borrower,
equal to the aggregate Stated Amount of all such Letters of Credit at such
time, and/or (v)  direct the Collateral Agent to enforce any or all of the
Liens and security interests created pursuant to the Security Documents and/or
exercise any of the rights and remedies provided therein.  Notwithstanding the foregoing, the
Administrative Agent shall have available to it all other remedies at law or equity,
and shall exercise any one or all of them at the request of the Required
Lenders.

ARTICLE IX

The Administrative Agent

Section 9.01.  Appointment.  Each of the Lenders hereby irrevocably
appoints (i) JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank)
as Administrative Agent to act as specified herein and in the other Credit
Documents and authorizes the Administrative Agent to take such actions on its
behalf and to exercise such powers as are delegated to the Administrative Agent
by the terms hereof and in the other Credit Documents, 

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together with such actions and powers as are reasonably incidental
thereto and (ii) The Bank of New York as Collateral Agent to act as specified
herein and in the other Credit Documents and authorizes the Collateral Agent to
take such actions on its behalf and to exercise such powers as are delegated to
the Collateral Agent by the terms hereof and in the other Credit Documents,
together with such actions and powers as are reasonably incidental thereto.

Section 9.02.  Administrative
Agent in its Individual Capacity. 
Each bank serving as an Agent hereunder shall have the same rights and
powers in its capacity as a Lender as any other Lender and may exercise the
same as though it were not the an Agent, and such bank and its Affiliates may
accept deposits from, lend money to and generally engage in any kind of
business with any Borrower or any Subsidiary or other Affiliate thereof as if
it were not an Agent hereunder.

Section 9.03.  Exculpatory
Provisions.  No Agent shall have any
duties or obligations except those expressly set forth herein.  Without limiting the generality of the
foregoing, (a) no Agent shall be subject to any fiduciary or other implied
duties, regardless of whether a Default or an Event of Default has occurred and
is continuing, (b) no Agent shall have any duty to take any discretionary
action or exercise any discretionary powers, except discretionary rights and
powers expressly contemplated hereby that such Agent is required to exercise in
writing as directed by the Required Lenders (or such other number or percentage
of the Lenders as shall be necessary under the circumstances as provided in
Section 10.02), and (c) except as expressly set forth herein, no Agent shall
have any duty to disclose, and shall not be liable for the failure to disclose,
any information relating to any Borrower or any of its Subsidiaries that is
communicated to or obtained by the bank serving as an Agent or any of its
Affiliates in any capacity.  No Agent
shall be liable for any action taken or not taken by it with the consent or at
the request of the Required Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided in
Section 10.02) or in the absence of its own gross negligence or willful
misconduct.  No Agent shall be deemed to
have knowledge of any Default or Event of Default unless and until written
notice thereof is given to such Agent by the Borrowers or a Lender, and no
Agent shall be responsible for or have any duty to ascertain or inquire into (i) any
statement, warranty or representation made in or in connection with this
Agreement, (ii) the contents of any certificate, report or other document
delivered hereunder or in connection herewith, (iii) the performance or
observance of any of the covenants, agreements or other terms or conditions set
forth herein, (iv) the validity, enforceability, effectiveness or
genuineness of this Agreement or any other agreement, instrument or document,
or (v) the satisfaction of any condition set forth in Article V or
elsewhere herein, other than to confirm receipt of items expressly required to
be delivered to such Agent.

Section 9.04.  Reliance.  Each Agent shall be entitled to rely upon,
and shall not incur any liability for relying upon, any notice, request, certificate,
consent, statement, instrument, document or other writing believed by it to be
genuine and to have been signed or sent by the proper Person.  Each Agent also may rely upon any statement
made to it orally or by telephone and believed by it to be made by the proper
Person, and shall not incur any liability for relying thereon.  Each Agent may consult with legal counsel
(who may be counsel for the Borrowers), independent accountants and other
experts selected by it, and shall not be liable for any action taken or not
taken by it in accordance with the advice of any such counsel, accountants or
experts.

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Section 9.05.  Delegation of
Duties.  Each Agent may perform any
and all its duties and exercise its rights and powers by or through any one or
more sub-agents appointed by such Agent. 
Each Agent and any such sub-agent may perform any and all its duties and
exercise its rights and powers through their respective Related Parties.  The exculpatory provisions of the preceding
paragraphs shall apply to any such sub-agent and to the Related Parties of any
such Agent and any such sub-agent, and shall apply to their respective
activities in connection with the syndication of the credit facilities provided
for herein as well as activities as Agent.

Section 9.06.  Resignation.  (a) 
Subject to the appointment and acceptance of a successor Administrative
Agent as provided in this paragraph, the Administrative Agent may resign at any
time by notifying the Lenders and the Borrowers in accordance with Section
10.01.  Upon any such resignation, the
Required Lenders shall have the right to appoint a successor administrative
agent, with the consent of the Borrowers (not to be unreasonably withheld or
delayed), provided that no such consent shall be required at any time when a
Default or an Event of Default exists. 
If no successor shall have been so appointed by the Required Lenders and
shall have accepted such appointment within 30 days after the retiring
Administrative Agent gives notice of its resignation, then the retiring
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent which shall be a bank with an office in New York, New
York, or an Affiliate of any such bank. 
Upon the acceptance of its appointment as Administrative Agent hereunder
by a successor, such successor shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Administrative Agent, and
the retiring Administrative Agent shall be discharged from its duties and
obligations hereunder.  The fees payable
by the Borrowers to a successor Administrative Agent shall be the same as those
payable to its predecessor unless otherwise agreed between the Borrowers and
such successor.  After the Administrative
Agent’s resignation hereunder, the provisions of this Article and
Section 10.03 shall continue in effect for the benefit of such retiring
Administrative Agent, its sub-agents and their respective Related Parties
in respect of any actions taken or omitted to be taken by any of them while it
was acting as Administrative Agent.

(b)           Subject to the appointment and
acceptance of a successor Collateral Agent as provided in this paragraph, the
Collateral Agent may resign at any time by notifying the Lenders and the
Borrowers in accordance with Section 10.01. 
Upon any such resignation, the Required Lenders shall have the right to
appoint a successor collateral agent, with the consent of the Borrowers (not to
be unreasonably withheld or delayed), provided that no such consent shall be
required at any time when a Default or an Event of Default exists.  If no successor shall have been so appointed
by the Required Lenders and shall have accepted such appointment within
30 days after the retiring Collateral Agent gives notice of its
resignation, then the Administrative Agent shall, on behalf of the Lenders,
appoint a successor Collateral Agent which shall be a bank with an office in
New York, New York, or an Affiliate of any such bank.  Upon the acceptance of its appointment as
Collateral Agent hereunder by a successor, such successor shall succeed to and
become vested with all the rights, powers, privileges and duties of the
retiring Collateral Agent, and the retiring Collateral Agent shall be
discharged from its duties and obligations hereunder.  Fees, if any, payable by the Borrowers to a
successor Collateral Agent shall be agreed upon between the Borrowers and such
successor.  After the Collateral Agent’s
resignation hereunder, the provisions of this Article and Section 10.03
shall continue in effect for the benefit of such retiring Collateral Agent, its
sub-agents and their respective Related Parties in respect of any actions
taken or omitted to be taken by any of them while it was acting as Collateral
Agent.

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Section
9.07.  Non-Reliance.  Each Lender acknowledges that it has,
independently and without reliance upon the any Agent or any other Lender and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it will,
independently and without reliance upon any Agent or any other Lender and based
on such documents and information as it shall from time to time deem
appropriate, continue to make its own decisions in taking or not taking action
under or based upon this Agreement, any related agreement or any document
furnished hereunder or thereunder.

Section
9.08.  Documentation Agents.  Notwithstanding  any other provision of this Agreement or any
provision of any other Credit Document, each of the Documentation Agents are
named as such for recognition purposes only, and in their respective capacities
as such shall have no powers, duties, responsibilities or liabilities with
respect to this Agreement or the other Credit Documents or the transactions
contemplated hereby and thereby.  Without
limitation of the foregoing, none of the Documentation Agents shall, solely by
reason of this Agreement or any other Credit Documents, have any fiduciary
relationship with any Lender or any other Person.

ARTICLE X

Miscellaneous

Section
10.01.  Notices.  (a) 
Except in the case of notices and other communications expressly
permitted to be given by telephone (and subject to paragraph (b) below), all
notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:

(i)                                     if
to the Parent Borrower, to it at Arch Capital Group Ltd., Wessex House, 4th Floor, 45 Reid Street, Hamilton HM 12 Bermuda,
Attention of Chief Financial Officer (Telecopy No. 441-278-9255);

(ii)                                  if
to ARL, to it at Arch Reinsurance Ltd., Wessex House, 3rd Floor, 45 Reid Street, Hamilton HM 12 Bermuda,
Attention of Controller (Telecopy No. 441-278-9230);

(iii)                               if
to ARC, to it at Arch Reinsurance Company, 55 Madison Avenue, Morristown, New
Jersey, 07962, Attention of Controller (Telecopy No. 973-889-6467);

(iv)                              if
to Intermediate Holdings, to it at Arch Capital Group (U.S.) Inc., One Liberty
Plaza, New York, New York, 10006, Attention of Chief Financial Officer
(Telecopy No. 646-563-5727);

(v)                                 if
to AIC, ASIC, AESIC and WDCIC, to Arch Insurance Company, Arch Specialty
Insurance Company, Arch Excess & Surplus Insurance Company and Western
Diversified Casualty Insurance Company, respectively, at One Liberty Plaza,
53rd Floor, New York, New York, 10006, Attention of Controller (Telecopy No.
646-563-5727);

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(vi)                              if
to Arch Europe, to it at Arch Insurance Company (Europe) Limited, 2nd Floor North, Crosby Court, 38 Bishopsgate,
London EC2N 4AF, United Kingdom, Attention of Chief Financial Officer (Telecopy
No. +44-20-7562-3101);

(vii)                           if
to the Administrative Agent, to (x) JPMorgan Chase Bank, N.A., Loan and Agency
Services Group, 1111 Fannin Street, Houston, Texas 77002, Attention of Melissa
Rivas (Telecopy No. (713) 750-2223), with a copy to JPMorgan Chase Bank, N.A.,
270 Park Avenue, Fourth Floor, New York 10017, Attention of Heather Lindstrom
(Telecopy No. (212) 270-7449); and

(viii)                        if
to any other Lender, to it at its address (or telecopy number) set forth in its
Administrative Questionnaire.

(b)                                 Notices
and other communications to the Lenders hereunder may be delivered or furnished
by electronic communications pursuant to procedures approved by the
Administrative Agent; provided that the foregoing shall not apply to notices
pursuant to (x) Article II unless otherwise agreed by the Administrative Agent
and the applicable Lender or (y) Section 6.01(d)(x).  The Administrative Agent or the Borrowers
may, in its discretion, agree to accept notices and other communications to it
hereunder by electronic communications pursuant to procedures approved by it;
provided that approval of such procedures may be limited to particular notices
or communications.

(c)                                  Any
party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto.  All notices and other communications given to
any party hereto in accordance with the provisions of this Agreement shall be
deemed to have been given on the date of receipt.

Section
10.02.  Waivers; Amendments.  (a)  No
failure or delay by the Administrative Agent or any Lender in exercising any
right or power hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power.  The rights and remedies of the Administrative
Agent and the Lenders hereunder are cumulative and are not exclusive of any
rights or remedies that they would otherwise have.  No waiver of any provision of this Agreement
or consent to any departure by any Borrower therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) of this
Section, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given.  Without limiting the generality of the
foregoing, the making of a Loan or issuance of a Letter of Credit shall not be
construed as a waiver of any Default or Event of Default, regardless of whether
the Administrative Agent, the Issuing Agent, any Fronting Lender or any Lender
may have had notice or knowledge of such Default at the time.

(b)                                 Neither
this Agreement nor any other Credit Document nor any provision hereof or
thereof may be waived, amended or modified except pursuant to an agreement or
agreements in writing entered into by each Borrower and the Required Lenders or
by each Borrower and the Administrative Agent with the consent of the Required
Lenders; provided that no such agreement shall (i) increase  the Commitment of any Lender without the
written consent

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of such Lender, (ii) reduce the principal
amount of any Loan or the amount of any Tranche 1 Unpaid Drawing or Tranche 2
Unpaid Drawing or reduce the rate of interest thereon, or reduce any fees
payable hereunder, without the written consent of each Lender affected thereby,
(iii) postpone the scheduled date of payment of the principal amount of
any Loan or the amount of any Tranche 1 Unpaid Drawing or Tranche 2 Unpaid
Drawing or any interest thereon, or any fees payable hereunder, or reduce the
amount of, waive or excuse any such payment, or postpone the scheduled date of
expiration of any Commitment, without the written consent of each Lender
affected thereby, (iv) change Section 2.17(b) or (c) in a manner that would
alter the pro rata sharing of payments required thereby, without the written
consent of each Lender, (v) change any of the provisions of this Section or the
definition of “Required Lenders” or “Majority Tranche 1 Lenders” or any other
provision hereof specifying the number or percentage of Lenders required to
waive, amend or modify any rights hereunder or make any determination or grant
any consent hereunder, without the written consent of each Lender, (vi) release
all or substantially all of the security provided by the Designated Subsidiary
Borrowers to secure the Tranche 1 Obligations, without the written consent of
each Tranche 1 Lender, (vii) modify the definitions in Section 1.01 of “Advance
Rates,” “Borrowing Base” or “Eligible Securities” without the consent of the
Agents and any additional Lender required to constitute the Majority Tranche 1
Lenders, (viii) modify, change, waive, discharge or terminate any provision of
any Security Document without the consent of the Majority Tranche 1 Lenders,
(ix) release Intermediate Holdings from the Intermediate Holdings Guaranty
without the consent of all Lenders or (x) release the Parent Borrower from the
Parent Borrower Guaranty without the consent of all Lenders; provided, further,
that no such agreement shall amend, modify or otherwise affect the rights or
duties of the Administrative Agent, any Fronting Lender or the Issuing Agent
hereunder without the prior written consent of the Administrative Agent, such
Fronting Lender or the Issuing Agent, as the case may be.

Section
10.03.  Expenses; Indemnity; Damage
Waiver.  (a)  Each Borrower shall pay, severally in
accordance with its respective Facility-wide Liability Percentage and not
jointly, (i) all reasonable out-of-pocket expenses incurred by the
Administrative Agent and its Affiliates, including the reasonable fees, charges
and disbursements of counsel for the Administrative Agent, in connection with
the syndication of the credit facility provided for herein, the preparation,
negotiation and administration of this Agreement and the other Credit Documents
or any amendments, modifications or waivers of the provisions hereof or thereof
(whether or not the transactions contemplated hereby or thereby shall be
consummated), and (ii) all out-of-pocket expenses incurred by the
Administrative Agent, the Collateral Agent, the Custodian, the Issuing Agent,
any Fronting Lender, or any Lender, including the fees, charges and
disbursements of any counsel for the Administrative Agent or any Lender, in
connection with the enforcement or protection of its rights in connection with
this Agreement and/or other Credit Documents, including its rights under this
Section, or in connection with the Loans and Letters of Credit made hereunder,
including all such out-of-pocket expenses incurred during  any workout, restructuring or negotiations in
respect of such Loans or other Obligations.

(b)                                 The
Parent Borrower shall indemnify the Administrative Agent, the Collateral Agent,
the Custodian, the Issuing Agent, each Fronting Lender, and each Lender, and
each Related Party of any of the foregoing Persons (each such Person being
called an “Indemnitee”) against, and hold each Indemnitee harmless from,
any and all losses, claims, damages, liabilities and related expenses,
including the fees, charges and disbursements of any

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counsel for any Indemnitee, incurred by or
asserted against any Indemnitee arising out of, in connection with, or as a
result of (i) the execution or delivery of this Agreement and/or any other
Credit Document, or any agreement or instrument contemplated hereby or thereby,
the performance by the parties hereto or thereto of their respective
obligations hereunder or thereunder or any other transactions contemplated
hereby or thereby, (ii) any Loan, Letter of Credit or the use of the
proceeds therefrom, (iii) any actual or alleged presence or release of
Hazardous Materials on or from any property owned or operated by the Parent
Borrower or any of its Subsidiaries, or any Environmental Liability related in
any way to the Parent Borrower or any of its Subsidiaries, or (iv) any actual
or prospective claim, litigation, investigation or proceeding relating to any
of the foregoing, whether based on contract, tort or any other theory and
regardless of whether any Indemnitee is a party thereto; provided that
such indemnity shall not, as to any Indemnitee or any Related Party of such
Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and non-appealable judgment to have resulted from the
gross negligence or willful misconduct of such Indemnitee or any Related Party
of such Indemnitee.  Notwithstanding the
foregoing, for the sake of clarity, the parties hereto acknowledge and agree
that the obligations of the Parent Borrower under this Section 10.03(b) shall
not include the payment of principal or interest on the Loans, any Unpaid
Drawing in respect of any Letter of Credit, or any amounts payable pursuant to
Section 2.11, 2.12, 2.14, 2.15, 2.16 or 10.03(a) of this Agreement.

(c)                                  To
the extent that any Borrower fails to pay any amount required to be paid by it
to the Administrative Agent, the Collateral Agent, the Custodian, any Fronting
Lender or the Issuing Agent, under paragraph (a) or (b) of this Section, each
Lender severally agrees to pay to the Administrative Agent, the Collateral
Agent, the Custodian, such Fronting Lender, or the Issuing Agent, as the case
may be, such Lender’s Applicable Percentage (determined as of the time that the
applicable unreimbursed expense or indemnity payment is sought) of such unpaid
amount; provided that the unreimbursed expense or indemnified loss,
claim, damage, liability or related expense, as the case may be, was incurred
by or asserted against the Administrative Agent, the Collateral Agent, the
Custodian, such Fronting Lender or the Issuing Agent, as the case may be, in
its capacity as such.

(d)                                 To
the extent permitted by applicable law, no Borrower shall assert, and each
Borrower hereby waives, any claim against any Indemnitee, on any theory of
liability, for special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement or any other Credit Document or any agreement or instrument
contemplated hereby or thereby, any Loan, any Letter of Credit  or the use of the proceeds thereof.

(e)                                  All
amounts due under this Section shall be payable promptly after written demand
therefor.

Section
10.04.  Successors and Assigns.  (a) 
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns
permitted hereby except that (i) no Borrower may assign or otherwise transfer
any of its rights or obligations hereunder without the prior written consent of
each Lender (and any attempted assignment or transfer by such Borrower without
such consent shall be null and void)

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and (ii) no Lender may assign or otherwise
transfer its rights or obligations hereunder except in accordance with this
Section.  Nothing in this Agreement,
expressed or implied, shall be construed to confer upon any Person (other than
the parties hereto, their respective successors and assigns permitted hereby,
Participants (to the extent provided in paragraph (c) of this Section) and, to
the extent expressly contemplated hereby, the Related Parties of each of the
Administrative Agent and the Lenders) any legal or equitable right, remedy or
claim under or by reason of this Agreement.

(b)         (i)  Subject to the conditions set forth in
paragraph (b)(ii) below, any Lender may assign to one or more banks, investment
funds or other institutions that make or hold commercial loans in the ordinary
course of their businesses (so long as such bank, fund or institution is an NAIC
approved bank or institution) all or a portion of its rights and obligations
under this Agreement (including all or a portion of its Commitment and the
Loans at the time owing to it) with the prior written consent (such consent not
to be unreasonably withheld) of:

(A)  the Parent Borrower, provided that no
consent of the Parent Borrower shall be required for an assignment to a Lender,
an Affiliate of a Lender, an Approved Fund or, if an Event of Default has
occurred and is continuing, any other assignee;

(B)  the Administrative Agent, provided
that no consent of the Administrative Agent shall be required for an assignment
of any Commitment to an assignee that is a Lender with a Commitment immediately
prior to giving effect to such assignment; and

(C)  the Issuing Agent, provided that no
consent of the Issuing Agent shall be required for an assignment of any
Commitment to an assignee that is a Lender with a Commitment immediately prior
to giving effect to such assignment.

(ii)                                  Assignments
shall be subject to the following additional conditions:

(A)                              except
in the case of an assignment to a Lender or an Affiliate of a Lender or an
assignment of the entire remaining amount of the assigning Lender’s Commitment
or Loans of any Tranche, the amount of the Commitment or Loans of the assigning
Lender subject to each such assignment (determined as of the date the
Assignment and Assumption with respect to such assignment is delivered to the
Administrative Agent) shall not be less than $5,000,000 unless each of the Parent
Borrower and the Administrative Agent otherwise consent, provided that
no such consent of the Parent Borrower shall be required if an Event of Default
under Section 8.01, 8.02 or 8.05 has occurred and is continuing;

(B)                                each
partial assignment shall be made as an assignment of a proportionate part of
all the assigning Lender’s rights and obligations under this Agreement, provided
that this clause shall not be construed to prohibit the assignment of a
proportionate part of all the assigning Lender’s rights and obligations in
respect of one Tranche of Commitments or Loans;

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(C)                                the
parties to each assignment shall execute and deliver to the Administrative
Agent an Assignment and Assumption, together with a processing and recordation
fee of $3,500; and

(D)                               the
assignee, if it shall not be a Lender, shall deliver to the Administrative
Agent an Administrative Questionnaire.

For the purposes of this Section 10.04(b), the term “Approved
Fund” has the following meaning:

“Approved Fund” means any Person (other than a
natural person) that is engaged in making, purchasing, holding or investing in
bank loans and similar extensions of credit in the ordinary course of its
business and that is administered or managed by (a) a Lender, (b) an Affiliate
of a Lender or (c) an entity or an Affiliate of an entity that administers or
manages a Lender.

(i)                                     Subject
to acceptance and recording thereof pursuant to paragraph (b)(iv) of this
Section, from and after the effective date specified in each Assignment and
Assumption the assignee thereunder shall be a party hereto and, to the extent
of the interest assigned by such Assignment and Assumption, have the rights and
obligations of a Lender under this Agreement (provided that
any liability of any Borrower to such assignee under Section 2.14, 2.15 or 2.16
shall be limited to the amount, if any, that would have been payable thereunder
by such Borrower in the absence of such assignment, except to the extent any
such amounts are attributable to a Change in Law), and the assigning Lender thereunder
shall, to the extent of the interest assigned by such Assignment and
Assumption, be released from its obligations under this Agreement (and, in the
case of an Assignment and Assumption covering all of the assigning Lender’s
rights and obligations under this Agreement, such Lender shall cease to be a
party hereto but shall continue to be entitled to the benefits of
Sections 2.14, 2.15, 2.16 and 10.03). 
Any assignment or transfer by a Lender of rights or obligations under
this Agreement that does not comply with this Section 10.04 shall be treated
for purposes of this Agreement as a sale by such Lender of a participation in
such rights and obligations in accordance with paragraph (c) of this Section.

(ii)                                  The
Administrative Agent, acting for this purpose as an agent of the Borrowers,
shall maintain at one of its offices a copy of each Assignment and Assumption
delivered to it and a register for the recordation of the names and addresses
of the Lenders, and the Commitment of, and principal amount of the Loans and
other Obligations and owing to, each Lender pursuant to the terms hereof from
time to time (the “Register”). 
The entries in the Register shall be conclusive, and the Borrowers, the
Administrative Agent and the Lenders may treat each Person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for
inspection by the Borrowers, and any Lender, at any reasonable time and from
time to time upon reasonable prior notice.

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(iii)                               Upon
its receipt of a duly completed Assignment and Assumption executed by an
assigning Lender and an assignee, the assignee’s completed Administrative
Questionnaire (unless the assignee shall already be a Lender hereunder), the
processing and recordation fee referred to in paragraph (b) of this
Section and any written consent to such assignment required by paragraph (b) of
this Section, the Administrative Agent shall accept such Assignment and
Assumption and record the information contained therein in the Register; provided
that no such assignment shall become effective until all then outstanding
Tranche 1 Letters of Credit and/or Tranche 2 Letters of Credit, as the case may
be, shall be returned by each respective beneficiary to the Issuing Agent
either for cancellation and/or to be exchanged for new or amended Letters of
Credit to reflect such assignment (it being understood that to the extent the
respective beneficiaries do not consent to such assignment, such assignment
cannot occur).  No assignment shall be
effective for purposes of this Agreement unless it has been recorded in the
Register as provided in this paragraph.

(c)                                  (i)  Any
Lender may, without the consent of any Borrower or the Administrative Agent,
sell participations to one or more banks or other entities (a “Participant”)
in all or a portion of such Lender’s rights and obligations under this
Agreement (including all or a portion of its Commitment and the Loans owing to
it); provided that (A) such Lender’s obligations under this
Agreement shall remain unchanged, (B) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations
and (C) the Borrowers, the Administrative Agent and the other Lenders
shall continue to deal solely and directly with such Lender in connection with
such Lender’s rights and obligations under this Agreement.  Any agreement or instrument pursuant to which
a Lender sells such a participation shall provide that such Lender shall retain
the sole right to enforce this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement; provided that
such agreement or instrument may provide that such Lender will not, without the
consent of the Participant, agree to any amendment, modification or waiver
described in the first proviso to Section 10.02(b) that affects such
Participant.  Subject to paragraph
(c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled
to the benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it
were a Lender and had acquired its interest by assignment pursuant to paragraph
(b) of this Section.  To the extent
permitted by law, each Participant also shall be entitled to the benefits of
Section 10.08 as though it were a Lender, provided such Participant agrees
to be subject to Section 2.17(c) as though it were a Lender.

(ii)                                  A
Participant shall not be entitled to receive any greater payment under Section
2.14 or 2.16 than the applicable Lender would have been entitled to receive
with respect to the participation sold to such Participant, unless the sale of
the participation to such Participant is made with the Parent Borrower’s prior
written consent and the entitlement to greater payment results solely from a
Change in Law.  A Participant that would
be a Foreign Lender if it were a Lender shall not be entitled to the benefits
of Section 2.16 unless the Parent Borrower is notified of the participation
sold to such Participant and such Participant agrees, for the benefit of the
Borrowers, to comply with Section 2.16(e) as though it were a Lender.

(d)                                 Any
Lender may at any time pledge or assign a security interest in all or any
portion of its rights under this Agreement to secure obligations of such
Lender, including without limitation any pledge or assignment to secure
obligations to a Federal Reserve Bank, and

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this Section shall not apply to any such
pledge or assignment of a security interest; provided that no such
pledge or assignment of a security interest shall release a Lender from any of
its obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party hereto.

(e)                                  Notwithstanding
anything to the contrary contained herein, any Lender (a “Granting Lender”)
may grant to a special purpose funding vehicle (an, “SPC”) of such
Granting Lender, identified as such in writing from time to time by the
Granting Lender to the Administrative Agent and the Parent Borrower, the option
to provide to the applicable Borrower all or any part of any Loan that such
Granting Lender would otherwise be obligated to make to such Borrower pursuant
to Section 2.01, provided that (i) nothing herein shall constitute a
commitment to make any Loan by any SPC and (ii) if an SPC elects not to
exercise such option or otherwise fails to provide all or any part of such
Loan, the Granting Lender shall be obligated to make such Loan pursuant to the
terms hereof.  The making of a Loan by an
SPC hereunder shall utilize the Commitment of the Granting Lender to the same
extent, and as if, such Loan were made by the Granting Lender.  Each party hereto hereby agrees that (x) no
SPC shall be liable for any payment under this Agreement for which a Lender
would otherwise be liable and (y) the Granting Lender for any SPC shall be (and
hereby agrees that it is) liable for any payment under this Agreement for which
the SPC would be liable in the absence of preceding clause (x).  In furtherance of the foregoing, each party
hereto hereby agrees that, prior to the date that is one year and one day after
the payment in full of all outstanding senior indebtedness of any SPC, it will
not institute against, or join any other person in instituting against, such
SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or similar proceedings under the laws of the United States or any
State thereof.  In addition,
notwithstanding anything to the contrary contained in this Section 10.04 any
SPC may (i) with notice to, but without the prior written consent of, the
Parent Borrower or the Administrative Agent and without paying any processing
fee therefor, assign all or a portion of its interests in any Loans to its
Granting Lender or to any financial institutions (if consented to by the Parent
Borrower and the Administrative Agent) providing liquidity and/or credit
facilities to or for the account of such SPC to fund the Loans made by such SPC
or to support the securities (if any) issued by such SPC to fund such Loans and
(ii) disclose on a confidential basis any non-public information relating to
its Loans to any rating agency, commercial paper dealer or provider of a
surety, guarantee or credit or liquidity enhancement to such SPC.

Section
10.05.  Survival.  All covenants, agreements, representations
and warranties made by each Credit Party herein and in the certificates or
other instruments delivered in connection with or pursuant to this Agreement
shall be considered to have been relied upon by the other parties hereto and
shall survive the execution and delivery of this Agreement and the making of
any Loans and issuance of Letters of Credit regardless of any investigation
made by any such other party or on its behalf and notwithstanding that the
Administrative Agent or any Lender may have had notice or knowledge of any
Default or incorrect representation or warranty at the time any credit is
extended hereunder, and shall continue in full force and effect as long as any
Letter of Credit is outstanding, the principal of or any accrued interest on
any Loan or any fee or any other amount payable under this Agreement is
outstanding and unpaid and so long as the Total Commitments have not expired or
terminated.  The provisions of Sections
2.14, 2.15, 2.16 and 10.03 and Article IX shall survive and remain in full
force and effect regardless of the consummation of the transactions
contemplated hereby, the repayment of the Loans, the

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expiration or termination of the Total
Commitments or the termination of this Agreement or any provision hereof.

Section
10.06.  Counterparts; Integration;
Effectiveness.  This Agreement may be
executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which
when taken together shall constitute a single contract.  This Agreement and any separate letter
agreements with respect to fees payable to the Administrative Agent constitute
the entire contract among the parties relating to the subject matter hereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof. 
Except as provided in Section 5.01, this Agreement shall become
effective when it shall have been executed by the Administrative Agent and when
the Administrative Agent shall have received counterparts hereof which, when
taken together, bear the signatures of each of the other parties hereto, and
thereafter shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. 
Delivery of an executed counterpart of a signature page of this
Agreement by telecopy shall be effective as delivery of a manually executed
counterpart of this Agreement.

Section
10.07.  Severability.  Any provision of this Agreement held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

Section
10.08.  Right of Setoff.  If an Event of Default shall have occurred
and be continuing, each Lender and each of its Affiliates is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other obligations at any time owing
by such Lender or Affiliate to or for the credit or the account of any Credit
Party against any of and all the obligations of such Credit Party now or
hereafter existing under this Agreement held by such Lender, irrespective of
whether or not such Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. 
The rights of each Lender under this Section are in addition to other
rights and remedies (including other rights of setoff) which such Lender may
have.

Section
10.09.  Governing Law; Jurisdiction;
Consent to Service of Process. 
(a)  This Agreement shall be
construed in accordance with and governed by the law of the State of New York
(without giving regard to any conflict of laws principles thereof).

(b)                                 Each
party hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of the Supreme Court of the State of
New York sitting in New York County and of the United States District
Court of the Southern District of New York, and any appellate court from any
thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such
New York State or, to the extent permitted by law, in such Federal
court.  Each of the parties hereto agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other

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jurisdictions by suit on the judgment or in
any other manner provided by law. 
Nothing in this Agreement shall affect any right that the Administrative
Agent, or any Lender may otherwise have to bring any action or proceeding
relating to this Agreement against any Credit Party or its properties in the
courts of any jurisdiction.

(c)                                  Each
party hereto hereby irrevocably and unconditionally waives, to the fullest
extent it may legally and effectively do so, any objection which it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement in any court referred to in paragraph (b)
of this Section.  Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.

(d)                                 Each
party to this Agreement irrevocably consents to service of process in the manner
provided for notices in Section 10.01. 
Nothing in this Agreement will affect the right of any party to this
Agreement to serve process in any other manner permitted by law.

(e)                                  Each
Borrower hereby irrevocably designates, appoints and empowers the Service of
Process Agent as its designee, appointee and agent to receive, accept and
acknowledge for and on its behalf, and in respect of its property, service of
any and all legal process, summons, notices and documents which may be served
in any action or proceeding arising under or as a result of this Agreement or
any other Credit Document.  If for any
reason such designee, appointee and agent shall cease to be available to act as
such, each Borrower agrees to designate a new designee, appointee and agent in
New York City on the terms and for the purposes of this provision reasonably
satisfactory to the Administrative Agent under this Agreement.

Section
10.10.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

Section
10.11.  Headings.  Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of
this Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.

Section
10.12.  Confidentiality.  Each of the Administrative Agent and each of
the Lenders agrees to maintain the confidentiality of the Information (as
defined below), except that Information may be disclosed (a) to its and
its Affiliates’ directors, officers, employees and

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agents, including accountants, legal counsel
and other advisors (it being understood that (i) the Persons to whom such
disclosure is made will be informed of the confidential nature of such
Information and instructed to keep such Information confidential in accordance
with the terms of this Agreement and (ii) that the Administrative Agent and
each Lender shall be responsible for any breach of this Section 10.12 by any of
its and its Affiliates’ directors, officers, employees and agents, including
accountants, legal counsel and other advisors), (b) to the extent
requested by any regulatory authority or self-regulatory body, (c) to the
extent required by applicable laws or regulations or by any subpoena or similar
legal process, (d) to any other party to this Agreement, (e) in connection with
the exercise of any remedies hereunder or any suit, action or proceeding
relating to this Agreement or the enforcement of rights hereunder, (f) subject
to an agreement containing provisions substantially the same as those of this
Section, to (i) any assignee of or Participant in, or any prospective assignee
of or Participant in, any of its rights or obligations under this Agreement or
(ii) any actual or prospective counterparty (or its advisors) to any swap or
derivative transaction relating to any Credit Party and its obligations, (g)
with the consent of the Parent Borrower or (h) to the extent such
Information (i) becomes publicly available other than as a result of a
breach of this Section or (ii) becomes available to the Administrative Agent
or any Lender on a nonconfidential basis from a source other than the Credit
Parties.  For the purposes of this
Section, “Information” means all information received from any Credit
Party relating to the Parent Borrower or any Subsidiary of the Parent Borrower
or their respective businesses, other than any such information that is
available to the Administrative Agent or any Lender on a nonconfidential basis
prior to disclosure by any Credit Party. 
Any Person required to maintain the confidentiality of Information as provided
in this Section shall be considered to have complied with its obligation to do
so if such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information or, in the case of any Lender, such Lender has treated
such Information in a manner consistent with banking industry standards for the
treatment of confidential information. 
Notwithstanding anything herein to the contrary, each party to this
Agreement (and any employee, representative or other agent of each such party)
may disclose to any and all persons, without limitation of any kind, the U.S.
federal income tax treatment and the U.S. federal income tax structure of the
transactions contemplated hereby and all materials of any kind (including
opinions or other tax analyses) that are provided to it relating to such tax
treatment and tax structure.  However, no
disclosure of any information relating to such tax treatment or tax structure
may be made to the extent nondisclosure is reasonably necessary in order to
comply with applicable securities laws. 
The provisions of this Section 10.12 shall survive the termination of
the Total Commitments and repayment of the Loans and other Obligations
hereunder.

Section
10.13.  Interest Rate Limitation.  Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan, together
with all fees, charges and other amounts which are treated as interest on such
Loan under applicable law (collectively the “Charges”), shall exceed the
maximum lawful rate (the “Maximum Rate”) which may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan in
accordance with applicable law, the rate of interest payable in respect of such
Loan hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges
that would have been payable in respect of such Loan but were not payable as a result
of the operation of this Section shall be cumulated and the interest and
Charges payable to such Lender in respect of other Loans or periods shall be

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increased (but not above the Maximum Rate
therefor) until such cumulated amount, together with interest thereon at the
Federal Funds Effective Rate to the date of repayment, shall have been received
by such Lender.

Section
10.14.  Judgment Currency.  (a) 
Each Borrower’s obligations hereunder and under the other Credit
Documents to make payments in Dollars or in the applicable Alternate Currency
as provided for herein, (in any such case, the “Obligation Currency”)
shall not be discharged or satisfied by any tender or recovery pursuant to any
judgment expressed in or converted into any currency other than the Obligation
Currency, except to the extent that such tender or recovery results in the
effective receipt by the Administrative Agent, the Issuing Agent, the
respective Fronting Lender or the respective Lender of the full amount of the
Obligation Currency expressed to be payable to the Administrative Agent, the
Issuing Agent, such Fronting Lender or such Lender under this Agreement or the
other Credit Documents.  If, for the
purpose of obtaining or enforcing judgment against any Credit Party in any
court or in any jurisdiction, it becomes necessary to convert into or from any
currency other than the Obligation Currency (such other currency being
hereinafter referred to as the “Judgment Currency”) an amount due in the
Obligation Currency, the conversion shall be made based on the respective spot
exchange rate as quoted by the Administrative Agent as of 11:00 a.m. (London
time) on the Business Day immediately preceding the day on which the judgment
is given (such Business Day being hereinafter referred to as the “Judgment
Currency Conversion Date”).

(b)                                 If
there is a change in the rate of exchange prevailing between the Judgment
Currency Conversion Date and the date of actual payment of the amount due, each
Credit Party covenants and agrees to pay, or cause to be paid, such additional
amounts, if any (but in any event not a lesser amount) as may be necessary to
ensure that the amount paid in the Judgment Currency, when converted at the
rate of exchange prevailing on the date of payment, will produce the amount of
the Obligation Currency which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial award at the rate of
exchange prevailing on the Judgment Currency Conversion Date.

(c)                                  For
purposes of determining any rate of exchange for this Section, such amounts
shall include any premium and costs payable in connection with the purchase of
the Obligation Currency.

Section
10.15.  Calculations.  For purposes of this Agreement, the Dollar
Equivalent of each Alternate Currency Loan and the Dollar Equivalent of the
Stated Amount of each Alternate Currency Letter of Credit shall be calculated
on the date when any such Loan is made, such Letter of Credit is issued, on the
first Business Day of each month thereafter and, upon at least two Business
Days prior notice to the Borrowers, at such other times as reasonably
designated by the Administrative Agent. 
Such Dollar Equivalent shall remain in effect until the same is
recalculated by the Administrative Agent as provided above and notice of such
recalculation is received by the Borrowers, it being understood that until such
notice of such recalculation is received, the Dollar Equivalent shall be that
Dollar Equivalent as last reported to the Borrowers by the Administrative Agent.  The Administrative Agent shall promptly
notify the Borrowers and the Lenders of each such determination of the Dollar
Equivalent.

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Section
10.16.  USA Patriot Act.  Each Lender hereby notifies each Borrower
that, pursuant to the requirements of the USA Patriot Act (Title III of Pub. L.
107-56 (signed into law October 26, 2001)) (the “Patriot Act”), it is
required to obtain, verify and record information that identifies each
Borrower, which information includes the name and address of each Borrower and
other information that will allow such Lender to identify each Borrower in
accordance with the Patriot Act.

Section 10.17. Euro. (a) If at any time that an
Alternate Currency Loan or Alternate Currency Letter of Credit denominated in
Pounds Sterling is outstanding, the Pounds Sterling is replaced as the lawful
currency of the United Kingdom by the Euro so that all payments are to be made
in the United Kingdom in Euros and not in Pounds Sterling, then such Alternate
Currency Loan or Alternate Currency Letter of Credit shall be automatically
converted into an Alternate Currency Loan or Alternate Currency Letter of
Credit denominated in Euros in a principal amount equal to the amount of Euros
into which the principal amount of such Alternate Currency Loan or Alternate
Currency Letter of Credit would be converted pursuant to the EMU Legislation
and thereafter no further Alternate Currency Loans or Alternate Currency
Letters of Credit will be available in Pounds Sterling, with the basis of
accrual of interest, notice requirements and payment offices with respect to
such converted Alternate Currency Loan or Alternate Currency Letter of Credit
to be consistent with the convention and practices in the Euro-zone interbank
market for Euro denominated loans.

(b) In each case, to the
maximum extent permitted under applicable law, the applicable Borrowers shall
from time to time, at the request of any Lender, pay to such lender the amount
of any losses, damages, liabilities, claims, reduction in yield, additional
expense, increased cost, reduction in any amount payable, reduction in the
effective return of its capital, the decrease or delay in the payment of
interest or any other return foregone by such Lender or its affiliates with
respect to an Alternate Currency Loan or Alternate Currency Letter of Credit
affected by this Section 10.17 as a result of the tax or currency exchange
resulting from the introduction, changeover to or operation of the Euro in any
applicable nation or eurocurrency market.

ARTICLE XI

Intermediate Holdings Guaranty

Section
11.01.  The Guaranty.  In order to induce the Lenders to enter into
this Agreement and to extend credit hereunder and in recognition of the direct
benefits to be received by Intermediate Holdings from the proceeds of the Loans
to be incurred by the Guaranteed Parties and the issuance of the Letters of
Credit for the account of the Guaranteed Parties, Intermediate Holdings hereby
agrees with the Guaranteed Creditors as follows:  Intermediate Holdings hereby unconditionally
and irrevocably guarantees, as primary obligor and not merely as surety, the
full and prompt payment when due, whether upon maturity, acceleration or
otherwise, of any and all of the Guaranteed Obligations of each Guaranteed
Party to the Guaranteed Creditors.  If
any or all of the Guaranteed Obligations of any Guaranteed Party to the
Guaranteed Creditors becomes due and payable hereunder, Intermediate Holdings
unconditionally promises to pay such indebtedness to the Guaranteed Creditors,
or order, on demand, together with any and all expenses which may be incurred
by the Guaranteed Creditors

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in collecting any of the Guaranteed
Obligations.  This Intermediate Holdings
Guaranty is a guaranty of payment and not of collection.  If a claim is ever made upon any Guaranteed Creditor
for repayment or recovery of any amount or amounts received in payment or on
account of any of the Guaranteed Obligations and any of the aforesaid payees
repays all or part of said amount by reason of (i) any judgment, decree or
order of any court or administrative body having jurisdiction over such payee
or any of its property or (ii) any settlement or compromise of any such claim
effected by such payee with any such claimant, then and in such event
Intermediate Holdings agrees that any such judgment, decree, order, settlement
or compromise shall be binding upon Intermediate Holdings, notwithstanding any
revocation of this Intermediate Holdings Guaranty or any other instrument
evidencing any liability of any Guaranteed Party, and Intermediate Holdings
shall be and remain liable to the aforesaid payees hereunder for the amount so
repaid or recovered to the same extent as if such amount had never originally
been received by any such payee.

Section
11.02.  Bankruptcy.  Additionally, Intermediate Holdings
unconditionally and irrevocably guarantees the payment of any and all of the
Guaranteed Obligations of each Guaranteed Party hereunder to the Guaranteed
Creditors whether or not due or payable by any Guaranteed Party upon the
occurrence of any of the events specified in Section 8.05 with respect to such
Guaranteed Party, and unconditionally promises to pay such indebtedness to the
Guaranteed Creditors, or order, on demand, in lawful money of the United
States.

Section
11.03.  Nature of Liability.  The liability of Intermediate Holdings
hereunder is exclusive and independent of any security for or other guaranty of
the Guaranteed Obligations of any Guaranteed Party whether executed by
Intermediate Holdings, any other guarantor or by any other party, and the
liability of Intermediate Holdings hereunder is not affected or impaired by (a)
any direction as to application of payment by each Guaranteed Party or by any
other party (other than a direction by the Guaranteed Creditor receiving such
payment), or (b) any other continuing or other guaranty, undertaking or maximum
liability of a guarantor or of any other party as to the Guaranteed Obligations
of each Guaranteed Party, or (c) any payment on or in reduction of any such
other guaranty or undertaking, or (d) any dissolution, termination or increase,
decrease or change in personnel by any Guaranteed Party, or (e) any payment
made to the Guaranteed Creditors on the Guaranteed Obligations which any such
Guaranteed Creditor repays to any Guaranteed Party pursuant to court order in
any bankruptcy, reorganization, arrangement, moratorium or other debtor relief
proceeding, and Intermediate Holdings waives any right to the deferral or
modification of its obligations hereunder by reason of any such proceeding or
(f) any action or inaction of the type described in Section 11.05.  Notwithstanding anything to the contrary
contained herein, any guaranty provided under this Agreement or any other
Credit Document will continue to be effective or be reinstated, as the case may
be, if at any time any payment of any Guaranteed Obligation is rescinded or
must otherwise be returned by the Guaranteed Creditors upon the insolvency,
bankruptcy or reorganization of any Guaranteed Party or otherwise, all as
though such payment had not been made.

Section
11.04.  Independent Obligation.  The obligations of Intermediate Holdings
under this Article XI are independent of the obligations of any other
guarantor, any other party or any Guaranteed Party, and a separate action or
actions may be brought and prosecuted against Intermediate Holdings whether or
not action is brought against any other guarantor, any other party or any
Guaranteed Party and whether or not any other guarantor, any

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other party or any Guaranteed Party be joined
in any such action or actions. 
Intermediate Holdings waives, to the full extent permitted by law, the
benefit of any statute of limitations affecting its liability under this
Article XI or the enforcement thereof. 
Any payment by any Guaranteed Party or other circumstance which operates
to toll any statute of limitations as to any Guaranteed Party shall operate to
toll the statute of limitations as to Intermediate Holdings.

Section
11.05.  Authorization.  The obligations of Intermediate Holdings
under this Article XI shall be unconditional and absolute and, without limiting
the generality of the foregoing, shall not be released, discharged or otherwise
affected by any action taken by any Guaranteed Creditor to:

(a)                                  change
the manner, place or terms of payment of, and/or change or extend the time of
payment of, renew, increase, accelerate or alter, any of the Guaranteed
Obligations (including any increase or decrease in the rate of interest
thereon), any security therefor, or any liability incurred directly or
indirectly in respect thereof, and the Guaranty herein made shall apply to the
Guaranteed Obligations as so changed, extended, renewed or altered;

(b)                                 take
and hold security for the payment of the Guaranteed Obligations and sell,
exchange, release, impair, surrender, realize upon or otherwise deal with in
any manner and in any order any property by whomsoever at any time pledged or
mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any
liabilities (including any of those hereunder) incurred directly or indirectly
in respect thereof or hereof, and/or any offset there against;

(c)                                  exercise
or refrain from exercising any rights against any Guaranteed Party or others or
otherwise act or refrain from acting;

(d)                                 release
or substitute any one or more endorsers, guarantors, any Guaranteed Party or
other obligors;

(e)                                  settle
or compromise any of the Guaranteed Obligations, any security therefor or any
liability (including any of those hereunder) incurred directly or indirectly in
respect thereof or hereof, and may subordinate the payment of all or any part
thereof to the payment of any liability (whether due or not) of any Guaranteed
Party to its creditors other than the Guaranteed Creditors;

(f)                                    apply
any sums by whomsoever paid or howsoever realized to any liability or
liabilities of any Guaranteed Party to the Guaranteed Creditors regardless of
what liability or liabilities of any Guaranteed Party remain unpaid;

(g)                                 consent
to or waive any breach of, or any act, omission or default under, this
Agreement or any other Credit Document or any of the instruments or agreements
referred to herein or therein, or otherwise amend, modify or supplement this
Agreement, any other Credit Document or any of such other instruments or
agreements; and/or

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(h)                                 take
any other action which would, under otherwise applicable principles of common
law, give rise to a legal or equitable discharge of Intermediate Holdings from
its liabilities under this Intermediate Holdings Guaranty.

Section
11.06.  Reliance.  It is not necessary for the Guaranteed
Creditors to inquire into the capacity or powers of any Guaranteed Party or the
officers, directors, partners or agents acting or purporting to act on their
behalf, and any Guaranteed Obligations made or created in reliance upon the professed
exercise of such powers shall be guaranteed hereunder.

Section
11.07.  Subordination.  Any indebtedness of any Guaranteed Party now
or hereafter owing to Intermediate Holdings is hereby subordinated to
Guaranteed Obligations of any Guaranteed Party owing to the Guaranteed
Creditors; and if the Administrative Agent so requests at a time when an Event
of Default exists, no Guaranteed Party shall make, or be permitted to make, any
payment to Intermediate Holdings in respect of such indebtedness owed to Intermediate
Holdings, but without affecting or impairing in any manner the liability of
Intermediate Holdings under the other provisions of this Intermediate Holdings
Guaranty.  Prior to the transfer by
Intermediate Holdings of any note or negotiable instrument evidencing any of
the indebtedness of any Guaranteed Party to Intermediate Holdings, Intermediate
Holdings shall mark such note or negotiable instrument with a legend that the
same is subject to this subordination. 
Without limiting the generality of the foregoing, Intermediate Holdings
hereby agrees with the Guaranteed Creditors that it will not exercise any right
of subrogation which it may at any time otherwise have as a result of this
Intermediate Holdings Guaranty (whether contractual, under Section 509 of the
Bankruptcy Code or otherwise) until all Guaranteed Obligations have been
irrevocably paid in full in cash.

Section
11.08.  Waiver.  (a) 
Intermediate Holdings waives any right (except as shall be required by
applicable statute and cannot be waived) to require any Guaranteed Creditor to
(i) proceed against each Guaranteed Party, any other guarantor or any other
party, (ii) proceed against or exhaust any security held from any Guaranteed
Party, any other guarantor or any other party or (iii) pursue any other remedy
in any Guaranteed Creditor’s power whatsoever. 
Intermediate Holdings waives any defense based on or arising out of any
defense of any Guaranteed Party, any other guarantor or any other party, other
than payment in full of the Guaranteed Obligations, based on or arising out of
the disability of each Guaranteed Party, any other guarantor or any other
party, or the unenforceability of the Guaranteed Obligations or any part
thereof from any cause, or the cessation from any cause of the liability of any
Guaranteed Party other than payment in full of the Guaranteed Obligations.  The Guaranteed Creditors may, at their
election, foreclose on any security held by the Administrative Agent or any
other Guaranteed Creditor by one or more judicial or nonjudicial sales, whether
or not every aspect of any such sale is commercially reasonable (to the extent
such sale is permitted by applicable law), or exercise any other right or
remedy the Guaranteed Creditors may have against any Guaranteed Party or any
other party, or any security, without affecting or impairing in any way the
liability of the Intermediate Holdings hereunder except to the extent the
Guaranteed Obligations have been paid. 
Intermediate Holdings waives any defense arising out of any such
election by the Guaranteed Creditors, even though such election operates to
impair or extinguish any right of reimbursement or subrogation or other right
or remedy of Intermediate Holdings against any Guaranteed Party or any other
party or any security.

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(b)                                 Intermediate
Holdings waives all presentments, demands for performance, protests and
notices, including, without limitation, notices of nonperformance, notices of
protest, notices of dishonor, notices of acceptance of this Intermediate
Holdings Guaranty, and notices of the existence, creation or incurring of new
or additional Guaranteed Obligations. 
Intermediate Holdings assumes all responsibility for being and keeping
itself informed of each Guaranteed Party’s financial condition and assets, and
of all other circumstances bearing upon the risk of nonpayment of the
Guaranteed Obligations and the nature, scope and extent of the risks which
Intermediate Holdings assumes and incurs hereunder, and agrees that the
Guaranteed Creditors shall have no duty to advise the Intermediate Holdings of
information known to them regarding such circumstances or risks.

ARTICLE XII

Parent Borrower Guaranty

Section
12.01.  The Guaranty.  In order to induce the Lenders to enter into
this Agreement and to extend credit hereunder and in recognition of the direct
benefits to be received by Parent Borrower from the proceeds of the Loans to be
incurred by Arch Europe and the issuance of the Letters of Credit for the
account of Arch Europe, the Parent Borrower hereby agrees with the Guaranteed
Creditors as follows:  the Parent
Borrower hereby unconditionally and irrevocably guarantees, as primary obligor
and not merely as surety, the full and prompt payment when due, whether upon
maturity, acceleration or otherwise, of any and all of the Guaranteed
Obligations of Arch Europe to the Guaranteed Creditors.  If any or all of the Guaranteed Obligations
of Arch Europe to the Guaranteed Creditors becomes due and payable hereunder,
the Parent Borrower unconditionally promises to pay such indebtedness to the
Guaranteed Creditors, or order, on demand, together with any and all expenses
which may be incurred by the Guaranteed Creditors in collecting any of the
Guaranteed Obligations.  This Parent
Borrower Guaranty is a guaranty of payment and not of collection.  If a claim is ever made upon any Guaranteed
Creditor for repayment or recovery of any amount or amounts received in payment
or on account of any of the Guaranteed Obligations and any of the aforesaid
payees repays all or part of said amount by reason of (i) any judgment, decree
or order of any court or administrative body having jurisdiction over such
payee or any of its property or (ii) any settlement or compromise of any such
claim effected by such payee with any such claimant, then and in such event the
Parent Borrower agrees that any such judgment, decree, order, settlement or
compromise shall be binding upon the Parent Borrower, notwithstanding any
revocation of this Parent Borrower Guaranty or any other instrument evidencing
any liability of Arch Europe, and the Parent Borrower shall be and remain
liable to the aforesaid payees hereunder for the amount so repaid or recovered
to the same extent as if such amount had never originally been received by any
such payee.

Section
12.02.  Bankruptcy.  Additionally, the Parent Borrower
unconditionally and irrevocably guarantees the payment of any and all of the
Guaranteed Obligations of Arch Europe hereunder to the Guaranteed Creditors
whether or not due or payable by Arch Europe upon the occurrence of any of the
events specified in Section 8.05 with respect to Arch Europe, and
unconditionally promises to pay such indebtedness to the Guaranteed Creditors,
or order, on demand, in lawful money of the United States.

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Section
12.03.  Nature of Liability.  The liability of the Parent Borrower
hereunder is exclusive and independent of any security for or other guaranty of
the Guaranteed Obligations of Arch Europe whether executed by Parent Borrower,
any other guarantor or by any other party, and the liability of the Parent
Borrower hereunder is not affected or impaired by (a) any direction as to
application of payment by Arch Europe or by any other party (other than a
direction by the Guaranteed Creditor receiving such payment), or (b) any other
continuing or other guaranty, undertaking or maximum liability of a guarantor
or of any other party as to the Guaranteed Obligations of Arch Europe, or (c)
any payment on or in reduction of any such other guaranty or undertaking, or
(d) any dissolution, termination or increase, decrease or change in personnel
by Arch Europe, or (e) any action or inaction of the type described in Section
12.05.  Notwithstanding anything to the
contrary contained herein, any guaranty provided under this Agreement or any
other Credit Document will continue to be effective or be reinstated, as the
case may be, if at any time any payment of any Guaranteed Obligation is
rescinded or must otherwise be returned by the Guaranteed Creditors upon the
insolvency, bankruptcy or reorganization of Arch Europe or otherwise, all as
though such payment had not been made.

Section
12.04.  Independent Obligation.  The obligations of the Parent Borrower under
this Article XII are independent of the obligations of any other guarantor, any
other party or Arch Europe, and a separate action or actions may be brought and
prosecuted against the Parent Borrower whether or not action is brought against
any other guarantor, any other party or Arch Europe and whether or not any
other guarantor, any other party or any Guaranteed Party be joined in any such
action or actions.  The Parent Borrower
waives, to the full extent permitted by law, the benefit of any statute of
limitations affecting its liability under this Article XII or the enforcement
thereof.  Any payment by Arch Europe or
other circumstance which operates to toll any statute of limitations as to Arch
Europe shall operate to toll the statute of limitations as to the Parent
Borrower.

Section
12.05.  Authorization.  The obligations of the Parent Borrower under
this Article XII shall be unconditional and absolute and, without limiting the
generality of the foregoing, shall not be released, discharged or otherwise
affected by any action taken by any Guaranteed Creditor to:

(a)                                  change the manner, place or terms of payment
of, and/or change or extend the time of payment of, renew, increase, accelerate
or alter, any of the Guaranteed Obligations (including any increase or decrease
in the rate of interest thereon), any security therefor, or any liability
incurred directly or indirectly in respect thereof, and the Guaranty herein
made shall apply to the Guaranteed Obligations as so changed, extended, renewed
or altered;

(b)                                 take and hold security for the payment of the
Guaranteed Obligations and sell, exchange, release, impair, surrender, realize
upon or otherwise deal with in any manner and in any order any property by
whomsoever at any time pledged or mortgaged to secure, or howsoever securing,
the Guaranteed Obligations or any liabilities (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and/or any offset
there against;

(c)                                  exercise or refrain from exercising any
rights against Arch Europe or others or otherwise act or refrain from acting;

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(d)                                 release or substitute any one or more
endorsers, guarantors, Arch Europe or other obligors;

(e)                                  settle or compromise any of the Guaranteed
Obligations, any security therefor or any liability (including any of those
hereunder) incurred directly or indirectly in respect thereof or hereof, and
may subordinate the payment of all or any part thereof to the payment of any
liability (whether due or not) of Arch Europe to its creditors other than the
Guaranteed Creditors;

(f)                                    apply any sums by whomsoever paid or
howsoever realized to any liability or liabilities of Arch Europe to the
Guaranteed Creditors regardless of what liability or liabilities of Arch Europe
remain unpaid;

(g)                                 consent to or waive any breach of, or any
act, omission or default under, this Agreement or any other Credit Document or
any of the instruments or agreements referred to herein or therein, or
otherwise amend, modify or supplement this Agreement, any other Credit Document
or any of such other instruments or agreements; and/or

(h)                                 take any other action which would, under
otherwise applicable principles of common law, give rise to a legal or
equitable discharge of the Parent Borrower from its liabilities under this
Parent Borrower Guaranty.

Section
12.06.  Reliance.  It is not necessary for the Guaranteed
Creditors to inquire into the capacity or powers of Arch Europe or the
officers, directors, partners or agents acting or purporting to act on their
behalf, and any Guaranteed Obligations made or created in reliance upon the
professed exercise of such powers shall be guaranteed hereunder.

Section
12.07.  Subordination .  Any indebtedness of Arch Europe  now or hereafter owing to the Parent Borrower
is hereby subordinated to Guaranteed Obligations of Arch Europe owing to the
Guaranteed Creditors; and if the Administrative Agent so requests at a time
when an Event of Default exists, Arch Europe shall not make, or be permitted to
make, any payment to the Parent Borrower in respect of such indebtedness owed
to the Parent Borrower, but without affecting or impairing in any manner the
liability of the Parent Borrower under the other provisions of this Parent
Borrower Guaranty.  Prior to the transfer
by the Parent Borrower of any note or negotiable instrument evidencing any of
the indebtedness of Arch Europe to the Parent Borrower, the Parent Borrower
shall mark such note or negotiable instrument with a legend that the same is
subject to this subordination.  Without
limiting the generality of the foregoing, the Parent Borrower hereby agrees with
the Guaranteed Creditors that it will not exercise any right of subrogation
which it may at any time otherwise have as a result of this Parent Borrower
Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or
otherwise) until all Guaranteed Obligations have been irrevocably paid in full
in cash.

Section
12.08.  Waiver.     (a) 
The Parent Borrower waives any right (except as shall be required by
applicable statute and cannot be waived) to require any Guaranteed Creditor to
(i) proceed against Arch Europe, any other guarantor or any other party, (ii)
proceed against or exhaust any security held from Arch Europe, any other
guarantor or any other party or (iii) pursue any other remedy in any Guaranteed
Creditor’s power whatsoever.  The Parent
Borrower

 124
 

 

waives any defense based on or arising out of
any defense of Arch Europe, any other guarantor or any other party, other than
payment in full of the Guaranteed Obligations, based on or arising out of the
disability of Arch Europe, any other guarantor or any other party, or the unenforceability
of the Guaranteed Obligations or any part thereof from any cause, or the
cessation from any cause of the liability of Arch Europe other than payment in
full of the Guaranteed Obligations.  The
Guaranteed Creditors may, at their election, foreclose on any security held by
the Administrative Agent or any other Guaranteed Creditor by one or more
judicial or nonjudicial sales, whether or not every aspect of any such sale is
commercially reasonable (to the extent such sale is permitted by applicable law),
or exercise any other right or remedy the Guaranteed Creditors may have against
Arch Europe or any other party, or any security, without affecting or impairing
in any way the liability of the Parent Borrower hereunder except to the extent
the Guaranteed Obligations have been paid. 
The Parent Borrower waives any defense arising out of any such election
by the Guaranteed Creditors, even though such election operates to impair or
extinguish any right of reimbursement or subrogation or other right or remedy
of the Parent Borrower against Arch Europe or any other party or any security.

(b)                                 The Parent Borrower waives all presentments,
demands for performance, protests and notices, including, without limitation,
notices of nonperformance, notices of protest, notices of dishonor, notices of
acceptance of this Parent Borrower Guaranty, and notices of the existence,
creation or incurring of new or additional Guaranteed Obligations.  The Parent Borrower assumes all responsibility
for being and keeping itself informed of Arch Europe’s financial condition and
assets, and of all other circumstances bearing upon the risk of nonpayment of
the Guaranteed Obligations and the nature, scope and extent of the risks which
the Parent Borrower assumes and incurs hereunder, and agrees that the
Guaranteed Creditors shall have no duty to advise the Parent Borrower of
information known to them regarding such circumstances or risks.

(c)                                  The Parent Borrower warrants and agrees that
each of the waivers set forth above in this Article XII is made with full
knowledge of its significance and consequences, and such waivers shall be
effective to the maximum extent permitted by law.

Section
12.09.  Payments.  All payments made by the Parent Borrower
hereunder will be made without setoff, counterclaim or other defense and on the
same basis as payments are made by Arch Europe under Section 2.16 of the Credit
Agreement.

*          *          *

 125

 

IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed by their respective authorized officers as
of the day and year first above written.

	
  Address:

  	
   

  	
   

  	
   

  
	
  Wessex House, 4th floor

  	
  ARCH CAPITAL GROUP LTD.

  
	
  45 Reid Street

  	
   

  	
   

  	
   

  
	
  Hamilton, HM 12
  Bermuda

  	
   

  	
   

  	
   

  
	
  Attention:  John D. Vollaro

  	
  By:

  	
  /s/ Constantine Iordanou

  	
   

  
	
  Telephone:  (441) 278-9253

  	
   

  	
  Title: 
  President & Chief Executive Officer

  	
   

  
	
  Facsimile:  (441) 278-9255

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  One Liberty
  Plaza

  	
  ARCH CAPITAL
  GROUP (U.S.) INC.

  
	
  New York, NY

  	
   

  	
   

  	
   

  
	
  Attention:  Fred Eichler

  	
   

  	
   

  	
   

  
	
  Telephone:  (646) 746-8235

  	
  By:

  	
     /s/ Fred S. Eichler

  	
   

  
	
  Facsimile:  (646) 563-5727

  	
   

  	
  Title:  Senior Vice President & Chief Financial
  Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Wessex House

  	
  ARCH REINSURANCE
  LTD.

  
	
  45 Reid Street, 3rd Floor

  	
   

  	
   

  	
   

  
	
  Hamilton, HM 12 Bermuda

  	
   

  	
   

  	
   

  
	
  Attn:  Michelle Seymour

  	
  By:

  	
     /s/ Michelle Seymour

  	
   

  
	
  Telephone:  (441) 278-9250

  	
   

  	
  Title:  Controller

  	
   

  
	
  Facsimile:  (441) 278-9230

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  55 Madison Avenue,

  	
  ARCH REINSURANCE
  COMPANY

  
	
  P.O. Box 1988

  	
   

  	
   

  	
   

  
	
  Morristown, NJ  07962

  	
   

  	
   

  	
   

  
	
  Attn: Barry Golub

  	
  By:

  	
    /s/ John F. Rathgeber

  	
   

  
	
  Telephone: (973) 889-6467

  	
   

  	
  Title:  President & Chief Executive Officer

  	
   

  
	
  Facsimile:  (973) 898-9570

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  One Liberty Plaza

  	
  ARCH INSURANCE COMPANY

  
	
  New York, NY  10006

  	
   

  	
   

  	
   

  
	
  Attn:  Fred Eichler

  	
   

  	
   

  	
   

  
	
  Telephone:  (646) 746-8235

  	
  By:

  	
  /s/ Fred S. Eichler

  	
   

  
	
  Facsimile:  (646) 563-5727

  	
   

  	
  Title: Senior Vice President & Chief Financial
  Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  One Liberty Plaza

  	
  WESTERN DIVERSIFIED CASUALTY

  	
   

  
	
  New York, NY  10006

  	
  INSURANCE COMPANY

  
	
  Attn:  Fred Eichler

  	
   

  	
   

  
	
  Telephone:  (646) 746-8235

  	
   

  	
   

  	
   

  
	
  Facsimile:  (646) 563-5727

  	
  By:

  	
     /s/ Fred S. Eichler

  	
   

  
	
   

  	
   

  	
  Title:  Senior Vice President & Chief Financial
  Officer

  	
   

  
					

 

 

 

	
  One Liberty Plaza

  	
  ARCH SPECIALTY INSURANCE COMPANY

  
	
  New York, NY  10006

  	
   

  	
   

  	
   

  
	
  Attn:  Fred Eichler

  	
   

  	
   

  	
   

  
	
  Telephone:  (646) 746-8235

  	
  By:

  	
     /s/ Fred S. Eichler

  	
   

  
	
  Facsimile:  (646) 563-5727

  	
   

  	
  Title:  Senior Vice President & Chief Financial

  Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  One Liberty Plaza

  	
  ARCH EXCESS & SURPLUS INSURANCE

  	
   

  
	
  New York, NY  10006

  	
  COMPANY

  
	
  Attn:  Fred Eichler

  	
   

  	
   

  	
   

  
	
  Telephone:  (646) 746-8235

  	
   

  	
   

  	
   

  
	
  Facsimile:  (646) 563-5727

  	
  By:

  	
     /s/ Fred S. Eichler

  	
   

  
	
   

  	
   

  	
  Title:  Senior Vice President & Chief Financial

  Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2nd Floor North,
  Crosby Court

  	
  ARCH INSURANCE COMPANY (EUROPE)

  	
   

  
	
  38 Bishopsgate

  	
  LIMITED

  
	
  London EC2N 4AF

  	
   

  	
   

  	
   

  
	
  United Kingdom

  	
   

  	
   

  	
   

  
	
  Attn:  Paul Robotham

  	
  By:

  	
     /s/ Paul Robotham

  	
   

  
	
  Telephone:  +44-20-7562-3181

  	
   

  	
  Title:  Chief Financial Officer

  	
   

  
	
  Facsimile:  +44-20-7562-3101

  	
   

  	
   

  	
   

  
						

 

 

 

	
  

  	
  JPMORGAN CHASE BANK, N.A., Individually

  and as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Heather Lindstrom

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  BANK OF AMERICA,
  N.A., Individually and as

  Syndication Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Debra Basier

  	
   

  
	
   

  	
   

  	
  Title: Senior
  Vice President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  THE BANK OF NEW
  YORK, Individually and as

  Collateral Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Christine Singer

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  WACHOVIA BANK
  N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Grainne M. Pergolini

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ING BANK N.V.,
  LONDON BRANCH

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  N. J. Marchant

  	
   

  
	
   

  	
   

  	
  Title: Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  M. Sharman

  	
   

  
	
   

  	
   

  	
  Title: Managing
  Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  HSBC BANK USA,
  NATIONAL

  ASSOCIATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Daniel G. Serrao

  	
   

  
	
   

  	
   

  	
  Title: Senior
  Vice President

  	
   

  

 

 

	
  

  	
  BARCLAYS BANK
  PLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Roger Cosby

  	
   

  
	
   

  	
   

  	
  Title: Manager —
  Global Loans

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  CITIBANK, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Michael A. Taylor

  	
   

  
	
   

  	
   

  	
  Title: Managing
  Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  CALYON, NEW YORK
  BRANCH

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Sebastian Rocco

  	
   

  
	
   

  	
   

  	
  Title: Managing
  Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Charlie Kornberger

  	
   

  
	
   

  	
   

  	
  Title: Managing
  Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ROYAL BANK OF
  SCOTLAND PLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Maria Amaral-LeBlanc

  	
   

  
	
   

  	
   

  	
  Title: Senior
  Vice President

  	
   

  

 

 2
 

 

 

	
  

  	
  LLOYDS TSB BANK
  PLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Jason Eperon

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Matthew S. R. Tuck

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  US BANK NATIONAL
  ASSOCIATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Ziad W. Amra

  	
   

  
	
   

  	
   

  	
  Title: Assistant
  Vice President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  CHANG HWA
  COMMERCIAL BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Jim C.Y. Chen

  	
   

  
	
   

  	
   

  	
  Title: Vice
  President & General Manager

  

 

 3

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