Document:

Exhibit 10.1

 

SECOND AMENDMENT TO

SECOND AMENDED AND RESTATED LOAN
AND SECURITY AGREEMENT

 

This SECOND AMENDMENT TO SECOND AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT (this “Agreement”) is dated as
of October 29, 2004, and is entered into by and among BEACON SALES
ACQUISITION, INC. (“Borrower”) and the Domestic Subsidiary
Guarantors which are signatories hereto (together with Borrower, “Obligors”); GENERAL ELECTRIC CAPITAL CORPORATION, for itself as a
Lender, as L/C Issuer and as Agent; and the Lenders which are signatories
hereto.

 

WHEREAS,
Agent, Lenders and Obligors are parties to a certain Second Amended and
Restated Loan and Security Agreement dated as of March 12, 2004 (as such
agreement has been or may hereafter be from time to time amended, supplemented
or otherwise modified, the “Loan Agreement”); and

 

WHEREAS, the
parties desire to amend the Loan Agreement as hereinafter set forth;

 

NOW THEREFORE,
in consideration of the mutual conditions and agreements set forth in the Loan
Agreement and this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

 

1.                                      Definitions. Capitalized terms used in this Agreement,
unless otherwise defined herein, shall have the meaning ascribed to such terms
in the Loan Agreement.

 

2.                                      Amendment to Loan Agreement.

 

2.1                                 Paragraph (B) of the Financial Covenants Rider to the Loan
Agreement is hereby amended t read as follows:

 

B.                                     Capital Expenditure Limits. The aggregate amount of all Capital
Expenditures, Capital Leases with respect to fixed assets of Borrower and its
Subsidiaries (which shall be considered to be expended in full on the date such
Capital Lease is entered into) and other contracts with respect to fixed assets
initially capitalized on Borrower’s or any Subsidiary’s balance sheet prepared
in accordance with GAAP (which shall be considered to be expended in full on
the date such contract is entered into) (excluding, in each case, expenditures
for trade-ins and replacement of assets to the extent funded with casualty
insurance proceeds and excluding the purchase price allocated to fixed assets
acquired in connection with a Permitted Acquisition) will not exceed
$12,000,000 in any Fiscal Year. Fifty percent (50%) of the amount set forth
above not made in any Fiscal Year may be carried over for one year only to the
next Fiscal Year; provided, however, any carried-over amount will
be deemed used only after all otherwise permitted amounts for that Fiscal Year
have been used.

 

 

3.                                      Conditions.     The effectiveness of this Agreement is
subject to the following conditions precedent (unless specifically waived in
writing by Agent and Requisite Lenders):

 

3.1                                 Obligors, Agent and Requisite Lenders shall
have executed and delivered this Agreement.

 

3.2                                 Beacon Canada, Canadian Facility Agent and
Canadian Facility Lenders shall have entered into an amendment to the Canadian
Facility Credit Agreement in form and substance satisfactory to Agent, together
with a reaffirmation by Beacon Canada of its obligations under the Loan
Documents to which it is a party.

 

4.                                      Representations and
Warranties.  To induce Agent and Lenders to enter into
this Agreement, Obligors represent and warrant to Agent and Lenders:

 

(a)                                  that the Loan Parties have all requisite
organizational power and authority to enter into, and carry out the
transactions contemplated by, this Agreement and all other agreement and
documents executed in connection therewith to which such Loan Parties are parties.

 

(b)                                 that the execution, delivery and performance
of this Agreement and all other agreements and documents executed in connection
therewith have been duly authorized by all requisite action on the part of the
Loan Parties which are parties thereto and that this Agreement has been duly
executed and delivered by Borrower;

 

(c)                                  that each of the representations and
warranties set forth in Section 4 of the Loan Agreement (other than
those which, by their terms, specifically are made as of certain date prior to
the date hereof) are true and correct in all material respects as of the date
hereof; and

 

(d)                                 that, after giving effect to this Agreement,
no Default or Event of Default has occurred and is continuing.

 

5.                                      Severability.     Any provision of this Agreement held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.

 

6.                                      Counterparts.     This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
taken together shall be one and the same instrument.

 

7.                                      Ratification.     Except as expressly set forth herein, the
terms and provisions set forth in this Agreement shall not be deemed to be a
modification or waiver of any term or condition of the Loan Agreement. The
terms and provisions of the Loan Agreement, as amended hereby, and the other
Loan Documents are ratified and confirmed and shall continue in full force and
effect and all Collateral encumbered by any of the Loan Documents will continue
to secure, to the fullest extent possible, the payment and performance of all
Obligations under or in respect of the Loan Agreement or any of the other Loan
Documents.

 

2

 

IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed under seal and delivered by their respective
duly authorized officers on the date first written above.

 

	
   

  	
  BEACON SALES ACQUISITION, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  QUALITY ROOFING SUPPLY 

  COMPANY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BEACON CANADA, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BEST DISTRIBUTING CO.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE ROOF CENTER, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  WEST
  END LUMBER COMPANY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
								

 

 

 

	
   

  	
  GENERAL ELECTRIC CAPITAL

  CORPORATION, as
  Agent, an L/C Issuer and a

  Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  John M. Steidue

  	
   

  
	
   

  	
  Its Authorized

  
	
   

  	
  Signatory:

  	
  John M. Steidue

  	
   

  
					

 

 

 

	
   

  	
  FLEET
  CAPITAL
  CORPORATION,

  as Syndication Agent, and
  as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Jason Riley

  	
   

  
	
   

  	
  Title:

  	
  VP

  	
   

  
						

 

 

 

	
   

  	
  LASALLE
  BANK NATIONAL

  ASSOCIATION, a
  national banking

  association, as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Andrew Heinz

  	
   

  
	
   

  	
  Title:

  	
  VICE
  PRESIDENT

  	
   

  
						

 

 

	
   

  	
  WASHINGTON MUTUAL BANK, as
  a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Deborah
  Saffie

  	
   

  
	
   

  	
  Title:

  	
  Vice
  President

  	
   

  
						

 

 

CONSENT AND REAFFIRMATION (HOLDINGS)

 

The undersigned hereby (i) acknowledges receipt of a copy of the
foregoing Second Amendment to Loan and Security Agreement; (ii) consents to
Obligors’ execution and delivery thereof; and (iii) affirms that nothing
contained therein shall modify in any respect whatsoever its guaranty of the
obligations of Borrower to Agent and Lenders pursuant to the terms of that
certain Guaranty dated as of March 12, 2004 (the “Holdings Guaranty”) and
reaffirms that the Holdings Guaranty is and shall continue to remain in full
force and effect and that each Loan Document to which it is a party or
otherwise bound and all Collateral encumbered thereby will continue to guaranty
or secure, as the case may be, to the fullest extent possible, the payment and
performance of all obligations under or in respect of the Holdings Guaranty and
such other Loan Documents. Although the undersigned has been informed of the
matters set forth herein and has acknowledged and consented to same, the
undersigned understands that Agent and Lenders have no obligation to inform it
of such matters in the future or to seek its acknowledgment or consent to
future agreements or waivers, and nothing herein shall create such a duty.

 

IN WITNESS WHEREOF, the undersigned has executed this Consent and
Reaffirmation on and as of the date of such Agreement.

 

	
   

  	
  BEACON ROOFING SUPPLY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  David R. Grace

  	
   

  
	
   

  	
  Name:

  	
   David R. Grace

  	
   

  
	
   

  	
  Title:

  	
  CFOExhibit
4.1

 

THE SECURITIES OFFERED
HEREIN HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE “1933 ACT”) AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR
TO U.S. PERSONS (AS THAT TERMS IS DEFINED IN THE 1933 ACT) UNLESS THE
SECURITIES ARE REGISTERED UNDER THE 1933 ACT, OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE 1933 ACT IS AVAILABLE. THIS SUBSCRIPTION IS
EXECUTED IN RELIANCE UPON THE EXEMPTIONS PROVIDED BY RULE 506 OF REGULATION D
UNDER THE 1933 ACT.

 

SUBSCRIPTION

 

THIS SUBSCRIPTION (the “Subscription”)
has been executed by the undersigned in connection with the offering of up to
8,000 shares of Series C Convertible Preferred Stock, par value $0.001
(hereinafter referred to as the “Preferred Stock”), of Cano Petroleum, Inc., a
corporation organized under the laws of the State of Delaware (hereinafter
referred to as the “Issuer”).  There is
no minimum offering.  The Preferred Stock
being subscribed for pursuant to this Subscription has not been registered under
the 1933 Act.  In addition to such other
terms as are set forth in this Subscription, the terms on which the Preferred
Stock may be converted into shares of the Issuer’s common stock (the “Common
Stock”) and the other terms of the Preferred Stock are set forth in the
Certificate of Designation for the Preferred Stock attached hereto as Annex I
(the “Certificate of Designation”). The offer of the Preferred Stock and, if
this Subscription is accepted by the Issuer, the sale of Preferred Stock, is
being made in reliance upon Rule 506 of Regulation D promulgated under the 1933
Act. (All dollar amounts in this Subscription are expressed in U.S. Dollars).

 

	
   

  	
  The
  undersigned Subscriber:

  
	
   

  	
   

  
	
   

  	
  NAME:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ADDRESS:

  	
   

  	
   

  

 

 

if applicable, a
[Corporate][Partnership][Trust] organized under the laws of                                               ,

(hereinafter referred to as the “Subscriber”) hereby
represents and warrants to, and agrees with the Issuer as follows:

 

 

ARTICLE 1

SUBSCRIPTION

 

Subscription

 

1.1                                 The undersigned Subscriber, as principal,
hereby subscribes to purchase 750 shares of Preferred Stock (the “Preferred
Shares”), having a purchase price of $1,000 per Preferred Share, at an
aggregate purchase price of $750,000.00 (the “Subscription Price”).

 

Minimum Subscription

 

1.2                                 A minimum number of 100 Preferred Shares must be purchased by the
Subscriber.

 

 

Method of
Payment

 

1.3                                 The Subscriber shall pay the Subscription
Price by delivering good funds in United States Dollars by way of wire transfer
of funds to the Issuer and concurrent with the execution and delivery of this
Subscription.  The wire transfer
instructions are:

 

Wires from Correspondent Banks Worldwide:

 

	
  Beneficiary
  Bank:

  	
   

  	
  TexasBank

  
	
   

  	
   

  	
  300 West Seventh Street

  
	
   

  	
   

  	
  Fort Worth, TX 76102

  
	
   

  	
   

  	
  Tel: 817-850-0051

  
	
  Beneficiary:

  	
   

  	
  Cano
  Petroleum, Inc.

  
	
  ABA
  Routing#:

  	
   

  	
  111902000

  
	
  Account
  Number:

  	
   

  	
  2630009476

  

 

On or before December 31, 2004 the Issuer shall take
up the Subscription Funds (the “Closing Date”) and issue to the Subscriber a
certificate or certificates representing the Preferred Shares (the “Certificates”)
pursuant to Article 6 hereof.  In the
event that the Closing Date does not occur on or before December 31, 2004, the
Issuer shall forthwith return the whole amount of the Subscription Funds to the
Subscriber without interest.  The
Subscriber acknowledges that the subscription for Preferred Shares hereunder
may be rejected in whole or in part by the Issuer in its sole discretion.

 

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE
SUBSCRIBER

 

Representations and Warranties

 

2.1                                 The Subscriber represents and warrants in
all material respects to the Issuer, with the intent that the Issuer will rely
thereon in accepting this Subscription, that:

 

(a)                                  Experience.  The
Subscriber is sufficiently experienced in financial and business matters to be
capable of evaluating the merits and risks of its investments, and to make an
informed decision relating thereto, and to protect its own interests in
connection with the purchase of the Preferred Shares;

 

(b)                                 Own Account. 
The Subscriber is purchasing the Preferred Shares and the shares of
Common Stock to be issued upon conversion of the Preferred Shares (the “Common
Shares”, and together with the Preferred Shares, the “Securities”) as principal
for its own account.  The Subscriber is
purchasing the Securities for investment purposes only and not with an intent
or view towards further sale thereof, and has not pre-arranged any sale with
any other subscriber;

 

(c)                                  Not Underwriter. 
The Subscriber is not an underwriter, or dealer in, the Securities, and
the Subscriber is not participating, pursuant to a contractual agreement, in a
distribution of the Securities;

 

(d)                                 Importance of Representations. 
The Subscriber understands that the Securities are being offered and
sold to it in reliance on an exemption from the registration requirements of

 

2

 

the 1933 Act, and that the Issuer is relying upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Subscriber set forth herein in order
to determine the applicability of such exemptions and the suitability of the
Subscriber to acquire the Securities;

 

(e)                                  No Registration. 
The Preferred Shares have not been registered under the 1933 Act and may
not be transferred, sold, assigned, hypothecated or otherwise disposed of
unless such transaction is the subject of a registration statement filed with
and declared effective by the Securities and Exchange Commission (the “SEC”) or
unless an exemption from the registration requirements under the 1933 Act, such
as Rule 144, is available.  The Purchaser
represents and warrants and hereby agrees that all offers and sales of the
Securities shall be made only pursuant to such registration or to such
exemption from registration;

 

(f)                                    Risk.  The
Subscriber acknowledges that the purchase of the Securities involves a high
degree of risk, is aware of the risks and further acknowledges that it can bear
the economic risk of the Securities, including the total loss of its
investment;

 

(g)                                 Current Information. 
The Subscriber has been furnished with or has acquired copies of all
requested information concerning the Issuer, including a copies of reports
filed by the Issuer pursuant to the United States Securities Exchange Act of
1934, as amended (the “1934 Act”);

 

(h)                                 Independent Investigation. 
The Subscriber, in making the decision to subscribe for the Preferred
Shares, has relied upon independent investigations made by it and its purchaser
representatives, if any, and the Subscriber and such representatives, if any,
have, prior to making this Subscription, been given access and the opportunity
to examine all material contracts and documents relating to this offering and
an opportunity to ask questions of, and to receive answers from, the Issuer or
any person acting on its behalf concerning the terms and conditions of this
offering.  The Subscriber and its
advisors, if any, have been furnished with access to all materials relating to
the business, finances and operation of the Issuer and materials relating to
the offer and sale of the Preferred Shares which have been requested.  The Subscriber and its advisors, if any, have
received complete and satisfactory answers to any such inquiries;

 

(i)                                     No Written or Oral Representations. 
No person has made to the Subscriber any written or oral representations

 

(i)                                                             that any person
will resell or repurchase the Securities,

 

(ii)                                                          that any person
will refund the purchase price of the Securities, or

 

(iii)                                                       as to the future
price or value of the Securities;

 

(j)                                     No Recommendation or Endorsement. 
The Subscriber understands that no federal or state agency has passed on
or made any recommendation or endorsement of the Securities;

 

(k)                                  Partnership, Corporation or Trust. 
If the Subscriber is a partnership, corporation or trust, the person
executing this Subscription on its behalf represents and warrants that

 

3

 

(i)                                     he or she has made due inquiry to determine
the truthfulness of the representations and warranties made pursuant to this
Subscription, and

 

(ii)                                  he or she is duly authorized (and if the
undersigned is a trust, by the trust agreement) to make this investment and to
enter into and execute this Subscription on behalf of such entity;

 

(l)                                     Non-Affiliate Status. 
The Subscriber is not an affiliate of the Issuer nor is any affiliate of
the Subscriber an affiliate of the Issuer. In the event that the Subscriber is
or becomes an affiliate of the Issuer the Subscriber acknowledges that the
Securities held by it will be subject to additional resale restrictions under
the 1933 Act;

 

(m)                               Other Subscribers. 
The Subscriber acknowledges that Preferred Shares may be issued to other
purchasers under this offering concurrently with the Closing;

 

(n)                                 No Advertisement or General Solicitation. 
The sale of the Preferred Shares has not been advertised through any
article, notice or other communication published in any newspaper, magazine, or
similar media or broadcast over television or radio; or through any seminar or
meeting whose attendees have been invited by any general solicitation or
general advertising;

 

(o)                                 Accredited Investor. 
The Subscriber is (i) an “accredited investor” as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason
of Rule 501(a)(3), (ii) experienced in making investments of the kind described
in this Agreement and the related documents, (iii) able, by reason of the
business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its Affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Subscription,
and to evaluate the merits and risks of an investment in the Securities, and
(iv) able to afford the entire loss of its investment in the Securities.;

 

(p)                                 Hedging Transactions. 
The Subscriber acknowledges and agrees that all offers and sales of the
Securities, as applicable, by the Subscriber shall be made only pursuant to
registration of the securities under the 1933 Act, or pursuant to an available
exemption from the registration requirements of the 1933 Act.;

 

(q)                                 Sole Beneficial Owner. 
Upon consummation of the transactions contemplated by this Subscription,
the Subscriber will be the sole beneficial owner of the Preferred Shares issued
to it pursuant to this Subscription, and the Subscriber has not pre-arranged
any sale with any person or persons in the United States;

 

(r)                                    No Short Position. 
The Subscriber will not, directly or indirectly, or through one or more
intermediaries, maintain any short position in the
Securities during the applicable distribution compliance period;

 

(s)                                  Legend.  The
Subscriber understands and acknowledges that the Issuer will not allow any
transfer or other disposition of the Securities unless the proposed transfer
may be effected without any violation of the 1933 Act
or any applicable state securities law. 
The Certificate(s), as well as any certificate representing the Common
Shares, shall bear the following legend in addition to any other legend
required under this Subscription:

 

4

 

THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

 

Non-Merger and Survival

 

2.2                                 The representations and warranties of the
Subscriber contained herein will be true at the date of execution of this
Subscription by the Subscriber and as of the Closing Date in all material respects
as though such representations and warranties were made as of such times and
shall survive the Closing Date and the delivery of the Certificates.

 

Indemnity

 

2.3                                 The Subscriber agrees to indemnify and
hold harmless the Issuer from and against any and all claims, demands, actions,
suits, proceedings, assessments, judgments, damages, costs, losses and
expenses, including attorney’s fees incurred in contesting any such claim and
any payment made in good faith in settlement of any claim (subject to the right
of the Subscriber to defend any such claim), resulting from the breach of any
representation or warranty of such party under this Subscription.

 

 

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF THE ISSUER

 

3.1                                 The Issuer, upon taking up and accepting
this Subscription, represents and warrants in all material respects to the
Subscriber, with the intent that the Subscriber will rely thereon in making
this Subscription, that:

 

(a)                                Legality.  The Issuer
has the requisite corporate power and authority to accept this Subscription and
to issue, sell and deliver the Preferred Shares; this Subscription and the
issuance, sale and delivery of the Preferred Shares hereunder and the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action by the Issuer; this Subscription and the Preferred
Shares have been duly and validly executed and delivered by and on behalf of
the Issuer, and are valid and binding agreements of the Issuer, enforceable in
accordance with their respective terms, except as enforceability may be limited
by general equitable principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium, or other laws affecting creditors’ rights
generally;

 

(b)                               Terms of Preferred Stock. 
The terms of Preferred Stock shall be as set forth in the Certificate of
Designation delivered to the Subscriber as Annex I hereto;

 

(c)                                Transfer Restrictions. 
Upon the conversion of the Preferred Shares pursuant to this
Subscription and the Certificate of Designation, and provided that a
registration statement in respect of the Common Shares is in effect as required
under all applicable securities laws, such Common Shares shall be freely
transferable on the books and records of the Issuer, provided that the sale is made
to a bona-fide purchaser and that the prospectus delivery requirements are met.
In the event conversion is effected prior to the

 

5

 

effectiveness of a registration statement, or in compliance with Rule 144,
the certificates representing the Common Shares shall bear the legend stated in
Article 2 hereof;

 

(d)                               Listed Company Status. 
The Issuer is required to make current filings with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act,
the Common Stock is presently quoted on the NASD “Bulletin Board” and the
Issuer has received no notice, either oral or written, with respect to its
continued eligibility for such listing;

 

(e)                                Proper Organization. 
The Issuer is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and is duly
qualified as a foreign corporation in all jurisdictions where the failure to be
so qualified would have a materially adverse effect on its business, taken as
whole;

 

(f)                                  No Legal Proceedings. 
There is no action, suit or proceeding before or by any court or any
governmental agency or body, domestic or foreign, now pending or to the
knowledge of the Issuer, threatened, against or affecting the Issuer, or any of
its properties or assets, which might result in any material adverse change in
the condition (financial or otherwise) or in the earnings, business affairs or
business prospects of the Issuer, or which might materially and adversely
affect the properties or assets thereof;

 

(g)                               Non-Default. 
The Issuer is not in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it or its property may be bound; and

 

(h)                               Non-Contravention.  The execution and delivery of this
Subscription and the consummation of the issuance of the Preferred Shares and
the transactions contemplated by this Agreement do not and will not conflict
with or result in a breach by the Issuer of any of the terms or provisions of,
or constitute a
default under, the Articles of Incorporation or Bylaws of the Issuer, or any
indenture, mortgage, deed of trust, or other material agreement or instrument
to which the Issuer is a party or by which it or any of its properties or
assets are bound, or any existing applicable decree, judgment or order of any
court, Federal or State regulatory body, administrative agency or other
domestic governmental body having jurisdiction over the Issuer or any of its
properties or assets.  

 

Non-Merger and Survival

 

3.2                                 The representations and warranties of the
Issuer contained herein will be true at the date of execution of this
Subscription by the Issuer and as of the Closing Date in all material respects
as though such representations and warranties were made as of such times and
shall survive the Closing Date and the delivery of the Certificates.

 

Indemnity

 

3.3                                 The Issuer agrees to indemnify and save harmless
the Subscriber from and against any and all claims, demands, actions, suits,
proceedings, assessments, judgments, damages, costs, losses and expenses,
including attorney’s fees incurred in contesting any such claim and any payment
made in good faith in settlement of any claim (subject to the right of the
Issuer to defend any such claim), resulting from the breach of any
representation, warranty or covenant of such party under this Subscription.

 

6

 

ARTICLE 4

COVENANTS OF THE ISSUER

 

Covenants
of the Issuer

 

4.1                                 The Issuer covenants and agrees with the
Subscriber that:

 

(a)                                  Reserved Common Stock. 
For so long as any Preferred Shares held by the Subscriber shall remain
outstanding, the Issuer covenants and agrees with the Subscriber that it will
at all times fully reserve from its authorized but unissued Common Stock such
sufficient numbers of shares of Common Stock to permit the conversion in full
of the Preferred Shares;

 

(b)                                 Filings.  The Issuer
will make all necessary filings in connection with the sale of the Preferred
Shares as required by the laws and regulations of all appropriate
jurisdictions;

 

(c)                                  Section 13 Compliance. 
The Issuer shall, from and after the Closing Date, use its best efforts
to comply with the requirements of Section 13 of the 1934 Act and maintain the
quotation of the Common Stock on the NASD “Bulletin Board” or other quotation
medium which is equal to or senior to the NASD “Bulletin Board”;

 

(d)                                 Rule 144 Opinion. 
The Issuer will, upon written request by the Subscriber, take such steps
as are necessary to cause its counsel to issue an opinion to the Issuer’s
transfer agent allowing the Subscriber to offer and sell any Common Shares
issued upon conversion of the Preferred Shares in reliance on the applicable
provisions of Rule 144 provided that the holding period and other requirements
of such Rule 144 are met.  The costs of
obtaining such an opinion shall be borne by the Issuer; and

 

(e)                                  Use of Proceeds. 
The Issuer will apply the Subscription Price,
together will all other subscription funds received from other subscribers
under this offering, substantially in accordance with the use of proceeds
attached hereto as Annex II, the terms of which are incorporated by reference
herein, and for no other purposes.

 

Survival

 

4.2                                 The covenants set forth in this Article 4
shall survive the Closing for the benefit of the Subscriber.

 

 

ARTICLE
5

DEMAND
REGISTRATION RIGHTS

 

Registration Statement

 

4.1                                 Upon
receipt of a written request by the Subscriber, the Issuer shall use its best
efforts to file a registration statement on Form SB-2 (or similar form) under
the 1933 Act and under any applicable Blue Sky laws registering the resale of
Common Shares to be issued upon conversion of the Preferred Shares and shall
use its best efforts to cause such registration statement to be declared
effective by the Commission at the earliest practicable date, all at the Issuer’s
sole cost and expense.  Such best efforts shall include promptly
responding to all comments received by the staff of the SEC, and promptly
preparing and filing amendments to such registration statement which are
responsive to the comments received from the staff of the SEC, and in no event
later than twenty-one (21) days from receipt by the

 

7

 

Issuer of the
comments of the staff of the SEC. 
Such registration statement shall name the Subscriber as a selling shareholder
and shall provide for the sale of the Common Shares by the Subscriber from time
to time directly to purchasers or in the over-the-counter market or through or
to securities brokers or dealers that may receive compensation in the form of
discounts, concessions, or commissions.  The Issuer shall provide the
Subscriber with such number of copies of the prospectus as shall be reasonably
requested to facilitate the sale of the Common Shares.  None of the
foregoing shall in any way limit the Subscriber’s rights to sell the Common
Shares in reliance on an exemption from the registration requirements under the
1933 Act in connection with a particular transaction. In the event that any
other subscribers for Preferred Stock exercise the registration rights provided
to them, the Issuer shall also register the resale of the Common Shares to be
issued upon conversion of the Preferred Shares subscribed for herein in such
registration statement.

 

Currency of Registration
Statement

 

4.2                                 The
Issuer shall use its best efforts to maintain the currency of the registration
statement filed with the SEC and under all applicable Blue Sky laws in respect
of the Securities for 12 months from the Closing Date.

 

8

 

Indemnification of
Subscriber by Issuer

 

4.3                                 To
the extent permitted by law, the Issuer will indemnify the Subscriber, within
the meaning of Section 15 of the 1933 Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Subscription
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the 1933 Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or treated, to the extent such expenses, claims, losses,
damages or liabilities arise out of or are based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Issuer of the 1933 Act or any rule or regulation
promulgated under the 1933 Act applicable to the Issuer in connection with any
such registration, qualification or compliance, and the Issuer will reimburse
the Subscriber, each of its officers and directors and partners, and each
person controlling the Subscriber, each such underwriter and each person who
controls any such underwriter, for any legal and any other expense reasonably
incurred in connection with investigation, preparing or defending any such
claim, loss, damage, liability or action, provided, however, that the indemnity
contained herein shall not apply to amounts paid in settlement of any claim,
loss, damage, liability or expense if settlement is effected without the
consent of the Issuer (which consent shall not unreasonably be withheld);
provided, further, that the Issuer will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Issuer by the Subscriber, such controlling person or such
underwriter specifically for use therein. 
Notwithstanding the foregoing, insofar as the foregoing indemnity
relates to any such untrue statement (or alleged untrue statement) or omission
(or alleged omission) made in the preliminary prospectus but eliminated or
remedied in the amended prospectus on file with the SEC at the time the
registration statement becomes effective or in the final prospectus filed with
the SEC pursuant to Rule 424(b) of the SEC, the indemnity agreement herein
shall not inure to the benefit of any underwriter or (if there is no
underwriter) the Subscriber if a copy of the final prospectus filed pursuant to
Rule 424(b) was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the 1933 Act.

 

Indemnification of Issuer
by Subscriber

 

4.4                                 To
the extent permitted by law, the Subscriber will indemnify the Issuer, each of
its directors and officers, affiliates, counsel, advisors, employees and, each
underwriter, if any, of the Issuer’s securities covered by such a registration
statement, each person who controls the Issuer or such underwriter within the
meaning of Section 15 of the 1933 Act, and each other person selling the Issuer’s
securities covered by such registration statement, each of such person’s
officers and directors and each person controlling such persons within the
meaning of Section 15 of the 1933 Act, against all claims, losses, damages and
liabilities (or actions in respect thereof), including attorneys fees and
costs, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein or necessary to make the statements therein not
misleading or any other violation by the Subscriber of any rule or regulation
promulgated under the 1933 Act applicable to the Subscriber and relating to
action or inaction required of the Subscriber in connection with any such
registration, qualification or compliance, and will reimburse the Issuer, such
other person, such directors, officers, persons, underwriters or control
persons for any legal or other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that

 

9

 

the indemnity contained herein shall not apply to amounts paid in
settlement of any claim, loss, damage, liability or expense if settlement is
effected without the consent of the Subscriber (which consent shall not be
unreasonably withheld). Notwithstanding the foregoing, the liability of the
Subscriber under this subsection (b) shall be limited in an amount equal to the
net proceeds from the sale of the shares sold by the Subscriber, unless such
liability arises out of or is based on wilful conduct by the Subscriber.

 

Removal of Legend

 

4.5                                 After
the registration statement referenced in Section 4.1 is declared effective by
the SEC, the Subscriber may deliver to the Issuer the certificate representing
the Common Shares issued to the Subscriber and the Issuer will, within three
days after receipt by the Issuer of the foregoing, issue a new certificate
representing and in exchange for the aforementioned certificate, which new
certificate shall be legended as follows:

 

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THE SECURITIES MAY BE SOLD PURSUANT TO THE REGISTRATION
STATEMENT PROVIDED THAT (I) THE REGISTRATION STATEMENT IS CURRENT AND
EFFECTIVE, (II) THE HOLDER COMPLIES WITH THE PROSPECTUS DELIVERY REQUIREMENTS
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND (III) THE SALE IS IN
COMPLIANCE WITH THE PLAN OF DISTRIBUTION SET FORTH IN THE PROSPECTUS. THE
TRANSFER OF SUCH SECURITIES IS RESTRICTED AS SET FORTH IN A SUBSCRIPTION
AGREEMENT BETWEEN THE ISSUER AND THE HOLDER, A COPY OF WHICH MAY BE OBTAINED
FROM THE ISSUER.

 

 

ARTICLE
6

ISSUANCE
OF CERTIFICATES

 

On or
immediately following the Closing Date, the Issuer will prepare and issue one
or more Certificates for the Preferred Stock registered in such name or names
as specified by the Subscriber and cause the same to be delivered to the
Subscriber pursuant to the delivery instructions provided by the Subscriber.

 

 

ARTICLE 7

CLOSING

 

Closing shall be effected
through the acceptance of this Subscription by the Issuer, the taking up of the
Subscription Funds by the Issuer, and the delivery of certificates evidencing
the Preferred Stock to the Subscriber (or the Subscriber’s Representative) by
the Issuer.

 

10

 

ARTICLE 8

GENERAL PROVISIONS

 

Governing
Law

 

8.1                                 This
Subscription shall be governed by and construed under the law of the State of
Delaware without regard to its choice of law provision.  Any disputes arising out of, in connection
with, or with respect to this Subscription, the subject matter hereof, the
performance or non-performance of any obligation hereunder, or any of the
transactions contemplated hereby shall be adjudicated in a Court of competent
civil jurisdiction sitting in the City of Wilmington, Delaware and nowhere
else.

 

Successors and Assigns

 

8.2                                 This Subscription shall inure to the
benefit of and be binding on the respective successors and assigns of the
parties hereto.

 

Execution by Counterparts and Facsimile

 

8.3                                 This Subscription may be executed in
counterparts and by facsimile, each of which when executed by any party will be
deemed to be an original and all of which counterparts will together constitute
one and the same Subscription.

 

 

[Remainder of page intentionally left blank.]

 

11

 

SIGNATURE PAGE FOR INDIVIDUAL SUBSCRIBER

 

IN WITNESS WHEREOF, the undersigned
represents that the foregoing statements are true and that he or she has
executed this Subscription on this          day
of                           ,
2004.

 

 

	
   

  	
   

  	
   

  	
   

  
	
  Printed Name

  	
  Signature

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Printed Name

  	
  Signature

  	
   

  
	
   

  	
   

  	
   

  
	
  Agreed to
  this          day of                          ,
  2004:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  CANO
  PETROLEUM, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Print Name:

  	
   

  	
   

  
										

 

This is page
12 to the Subscription by the above subscriber to Cano Petroleum, Inc. dated as
stated above.

 

 

SIGNATURE
PAGE FOR ENTITIES

 

IN WITNESS WHEREOF, the undersigned
represents that the foregoing statements are true and that it caused this
Subscription to be duly executed on its behalf on this           day
of                          ,
2004.

 

 

	
   

  	
   

  	
   

  	
   

  
	
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  Printed
  Title

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Agreed to
  this          day of                          ,
  2004:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  CANO
  PETROLEUM, INC. 

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Per:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Print Name: 

  	
   

  	
   

  	
   

  
							

 

 

This is page
12 to the Subscription by the above subscriber to Cano Petroleum, Inc. dated as
stated above.

 

 

	
  Full
  Name and Address of Subscriber for Registration Purposes:

  
	
   

  
	
  NAME:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ADDRESS:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  TEL.NO.:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FAX NO.:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  EMAIL
  ADDRESS:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  CONTACT
  NAME:

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  Delivery
  Instructions (if different from Registration Name):

  	
   

  
	
   

  	
   

  
	
  NAME:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ADDRESS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  TEL.NO.:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  FAX NO.:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
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  NAME:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  SPECIAL
  INSTRUCTIONS:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
												

 

This is page
13 to the Subscription by the above subscriber to Cano Petroleum, Inc.

 

 

ANNEX I

 

CERTIFICATE OF DESIGNATION

 

S. Jeffrey Johnson certifies that he is the President
and James W. Baumgardner certifies that he is the Secretary of Cano Petroleum,
Inc., a Delaware corporation (hereinafter referred to as the “Company”) and
that, pursuant to the Company’s Certificate of Incorporation, as amended, and
Section 151 of the General Business Corporation Law of the State of Delaware,
the Board of Directors of the Company adopted the following resolutions on                                  ,
2004, and that none of the shares of Series C Convertible Preferred Stock
referred to in this Certificate of Designation have been issued.

 

Creation of Series C
Convertible Preferred Stock

 

1.                                       There is hereby created a series of preferred
stock consisting of 8,000 shares and designated as the Series C Convertible
Preferred Stock (“Preferred Stock”), having the voting powers, preferences,
relative, participating, limitations, qualifications, optional and other
special rights and the qualifications, limitations and restrictions thereof
that are set forth below.

 

Conversion
Provisions

 

2.                           The holders
of Preferred Stock shall have conversion rights as follows (the “Conversion
Rights”):

 

Conversion

 

(a)                                  Right to Convert.  Subject to paragraph (k) hereof, from and
after the day on which the Company receives payment in full for Preferred Stock
from and issues Preferred Stock to a particular holder of Preferred Stock (the “Issuance
Date”), all Preferred Stock held by that holder shall be convertible at the
option of the holder into such number of shares of common stock of the Company
(“Common Stock”) as is calculated by the “Conversion Rate” (as hereinafter
defined).  Subject to adjustment as set
forth herein, the Conversion Rate shall be 266 shares of Common Stock for each
one share of Preferred Stock.

 

(b)                                 Ratchet
Provision. 
In the event that the Company issues any shares of its Common Stock
during the seven hundred and thirty (730) calendar days following the Issuance
Date at a price of less than $3.75 per share of Common Stock, the Conversion
Rate shall be that number of shares of Common Stock equal to $1,000 divided by
the price per share at which the Company issued Common Stock.

 

(c)                                  Non-Performance
Provision. 
In the event that the Company fails to meet the Performance Milestones
(as those terms are defined in the Management Stock Pool Stock Agreement
between the Company and certain directors, officers and employees of the
Company dated May 28, 2004 (the Management Stock Pool Agreement”), or in the
event that the terms of the Management Stock Pool Agreement are amended with
the effect of reducing or eliminating the Performance Milestones, the
Conversion Rate shall be the greater of: (i) 266 shares of Common Stock for
each one share of Preferred Stock; or (ii) that number of shares of Common
Stock equal to $1,000 divided by seventy-five per cent (75%) of the average
Market Price (as hereinafter defined) for the five trading days immediately
prior to the Conversion Date (as hereinafter defined).

 

(d)                                 Market
Price. 
Market Price for a particular date shall be the closing bid price of the
shares of Common Stock on such date, as reported by the National Association of
Securities Dealers Automated Quotation System (“NASDAQ”) or

 

 

the
American Stock Exchange (“AMEX”), or the closing bid price in the
over-the-counter market if other than NASDAQ or AMEX.

 

(e)                                  No
Fractional Shares. 
No fractional shares of Common Stock shall be issued upon conversion of
the Preferred Stock, and in lieu thereof the number of shares of Common Stock
to be issued for each share of Preferred Stock converted shall be rounded down
to the nearest whole number of shares of Common Stock.  Such number of whole shares of Common Stock
to be issued upon the conversion of one share of Preferred Stock shall be
multiplied by the number of shares of Preferred Stock submitted for conversion
pursuant to the Notice of Conversion (defined below) to determine the total
number of shares of Common Stock to be issued in connection with any one particular
conversion.

 

(f)                                    Method of Conversion.  In order to convert Preferred Stock into
shares of Common Stock, a holder of Preferred Stock shall

 

(A)      complete, execute
and deliver to the Company the conversion certificate attached hereto as
Exhibit A (the “Notice of Conversion”), and

 

(B)        surrender the
certificate or certificates representing the Preferred Stock being converted
(the “Converted Certificate”) to the Company.

 

Subject
to paragraph 2(h) hereof, the Notice of Conversion shall be effective and in
full force and effect for a particular date if delivered to the Company prior
to 5:00 pm, eastern standard time, by facsimile transmission or otherwise,
provided that particular date is a business day, and provided that the original
Notice of Conversion and the Converted Certificate are delivered to and
received by the Company within two (2) business days thereafter and that
particular date shall be referred to herein as the “Conversion Date”.  The person or persons entitled to receive the
shares of Common Stock to be issued upon conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock as of
the Conversion Date. If the original Notice of Conversion and the Converted
Certificate are not delivered to and received by the Company within two (2)
business days following the Conversion Date, the Notice of Conversion shall
become null and void as if it were never given and the Company shall, within
two (2) business days thereafter, return to the holder by overnight courier any
Converted Certificate that may have been submitted in connection with any such
conversion. In the event that any Converted Certificate submitted represents a
number of shares of Preferred Stock that is greater than the number of such
shares that is being converted pursuant to the Notice of Conversion delivered
in connection therewith, the Company shall deliver a certificate representing
the remaining number of shares of Preferred Stock not converted.

 

(g)                                 Absolute
Obligation to issue Common Stock.  Upon receipt of a Notice of Conversion, the
Company shall absolutely and unconditionally be obligated to cause a
certificate or certificates representing the number of shares of Common Stock
to which a converting holder of Preferred Stock shall be entitled as provided
herein, which shares shall constitute fully paid and non-assessable shares of
Common Stock and shall be issued to, delivered by overnight courier to, and
received by such holder by the third (3rd) business day following
the Conversion Date. Such delivery shall be made at such address as such holder
may designate therefor in its Notice of Conversion or in its written
instructions submitted together therewith.

 

(h)                                 Minimum
Conversion. 
No less than 10 shares of Preferred Stock may be converted at any one
time by a particular holder, unless the holder then holds less than 10 shares
and converts all such shares held by it at that time.

 

2

 

Adjustments to Conversion Rate

 

(i)                                     Reclassification, Exchange and Substitution.  If the Common Stock to be
issued on conversion of the Preferred Stock shall be changed into the same or a
different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification, reverse stock split or forward stock
split or stock dividend or otherwise (other than a subdivision or combination
of shares provided for above), the holders of the Preferred Stock shall, upon
its conversion be entitled to receive, in lieu of the Common Stock which the
holders would have become entitled to receive but for such change, a number of
shares of such other class or classes of stock that would have been subject to
receipt by the holders if they had exercised their rights of conversion of the
Preferred Stock immediately before that changes.

 

(j)                                     Reorganizations, Mergers, Consolidations or Sale of Assets.  If at any time there shall
be a capital reorganization of the Company’s common stock (other than a
subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Section 2) or merger of the Company into another corporation,
or the sale of the substantially all of Company’s properties and assets to any
other person, then, as a part of such reorganization, merger or sale, lawful
provision shall be made so that the holders of the Preferred Stock receive the
number of shares of stock or other securities or property of the Company, or of
the successor corporation resulting from such merger, to which holders of the
Common Stock deliverable upon conversion of the Preferred Stock would have been
entitled on such capital reorganization, merger or sale as if the Preferred
Stock had been converted immediately before that capital reorganization, merger
or sale to the end that the provisions of this paragraph (including adjustment
of the Conversion Rate then in effect and the number of shares purchasable upon
conversion of the Preferred Stock) shall be applicable after that event as
nearly equivalently as may be practicable.

 

(k)                                  No
Impairment. 
The Company will not, by amendment of its Articles of Incorporation or
through any reorganization, recapitalization, transfer of assets, merger,
dissolution, or any other voluntary action, 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 Section 2 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Preferred Stock against impairment.

 

(l)                                     Certificate as to Adjustments.  Upon the occurrence of each adjustment or
readjustment of the Conversion Rate for any shares of Preferred Stock pursuant
to paragraphs 2(i) or (j) hereof, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Preferred Stock effected thereby a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of any holder of Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting
forth: (i) such adjustments and readjustments; (ii) the Conversion Rate at the
time in effect; and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the conversion
of such holder’s shares of Preferred Stock; and

 

(m)                               Limitation
on Conversion. 
Notwithstanding anything to the contrary set forth herein the Preferred
Stock held by a particular Purchaser shall not convert if, upon giving effect
to such conversion, the aggregate number of shares of Common Stock beneficially
owned by that Purchaser and its affiliates exceed

 

3

 

4.99%
of the outstanding shares of the Common Stock following such conversion unless
expressly waived by the Purchaser in the Notice of Conversion.

 

Liquidation
Provisions

 

3.                                       In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
holders of Preferred Stock shall be entitled to receive an amount equal to
$1,000 per share. After the full preferential liquidation amount has been paid
to, or determined and set apart for the Preferred Stock and all other series of
preferred stock hereafter authorized and issued, if any, the remaining assets
of the Company available for distribution to shareholders shall be distributed
ratably to the holders of the Common Stock. In the event the assets of the
Company available for distribution to its shareholders are insufficient to pay
the full preferential liquidation amount per share required to be paid to the
holders of the Company’s Series B and Series C Preferred Stock, the entire
amount of assets of the Company available for distribution to shareholders
shall be paid to the holders of Series B and Series C Convertible Preferred
Stock, all of which amounts shall be distributed ratably among holders of each
such series of preferred stock, and the Common Stock shall receive nothing. A
reorganization or any other consolidation or merger of the Company with or into
any other corporation, or any other sale of all or substantially all of the
assets of the Company, shall not be deemed to be a liquidation, dissolution or
winding up of the Company within the meaning of this Section 3, and the
Preferred Stock shall be entitled only to: (i) the rights provided in any
agreement or plan governing the reorganization or other consolidation, merger
or sale of assets transaction; (ii) the rights contained in the Delaware
General Business Corporation Law; and (iii) the rights contained in other
Sections hereof.

 

Dividend
Provisions

 

4.                                       The holders of shares of Preferred Stock
shall not be entitled to receive any dividends.

 

Reservation
of Stock to be issued upon Conversion

 

5.                                       The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock
solely for the purpose of effecting the conversion of the shares of the
Preferred Stock such number of its shares of Common Stock as shall from time to
time be sufficient, based on the Conversion Rate then in effect, to effect the
conversion of all then outstanding shares of the Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, then, in addition to all rights, claims and damages to which
the holders of the Preferred Stock shall be entitled to receive at law or in
equity as a result of such failure by the Company to fulfill its obligations to
the holders hereunder, the Company will take any and all corporate or other
action as may, in the opinion of its counsel, be helpful, appropriate or
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.

 

Notices

 

6.                                       In the event of the establishment 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
distribution, the Company shall mail to each holder of Preferred Stock at least
twenty (20) days prior to the date specified therein (the “Record Date”) a
notice specifying the Record Date for the purpose of such distribution and the
amount and character of such distribution.

 

7.                                       Any notices required by the provisions
hereof to be given to the holders of shares of Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid and return
receipt requested, and addressed to each holder of record at its address
appearing on the books of the Company or to such other address of such holder
or its representative as such holder may direct.

 

4

 

Voting
Provisions

 

8.                           Except as
otherwise expressly provided or required by law, the Preferred Stock shall have
no voting rights.

 

IN WITNESS WHEREOF, the
Company has caused this Certificate of Designation of Series C Convertible
Preferred Stock to be duly executed by its President and attested to by its
Secretary this            day
of            , 2004, who, by
signing their names hereto, acknowledge that this Certificate of Designation is
the act of the Company and state to the best of their knowledge, information
and belief, under the penalties of perjury, that the above matters and facts
are true in all material respects.

 

 

	
   

  	
   

  	
  CANO PETROLEUM, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  S. Jeffrey
  Johnson,

  	
   

  
	
   

  	
   

  	
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  James W.
  Baumgardner,

  	
   

  
	
   

  	
   

  	
  Secretary

  	
   

  

 

5

 

EXHIBIT A

 

CONVERSION CERTIFICATE

CANO PETROLEUM, INC.

Series C Convertible Preferred Stock

 

The
undersigned holder (the “Holder”) is surrendering to Cano Petroleum, Inc., a
Delaware corporation (the “Company”), one or more certificates representing
shares of Series C Convertible Preferred Stock of the Company (the “Preferred
Stock”) in connection with the conversion of all or a portion of the Preferred
Stock into shares of Common Stock, $0.0001 par value per share, of the Company
(the “Common Stock”) as set forth below.

 

1.                                       The Holder understands that the Preferred
Stock was issued by the Company pursuant to the exemption for registration
under the United States Securities Act of 1933, as amended (the “1933 Act”),
provided by Regulation D promulgated thereunder.

 

2.                                       The
Holder acknowledges that the Certificate(s) representing the Common Stock may
be legended with the following legend:

 

THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

 

3.                                       The
Holder represents and warrants that all offers and sales of the Common Stock
issued to the Holder upon such conversion of the Preferred Stock shall be made
(a) pursuant to an effective registration statement under the 1933 Act, (in
which case the Holder represents that a prospectus has been delivered) (b) in
compliance with Rule 144, or (c) pursuant to some other exemption from
registration.

 

	
   

  	
  Number of
  Shares of Preferred Stock being Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Applicable
  Conversion Rate:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  OR

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Applicable
  Alternative Conversion Rate:

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of
  Shares of Common Stock To be issued:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Conversion
  Date:

  	
   

  
	
   

  	
   

  
	
   

  	
  Delivery instructions for certificates of
  Common Stock and for new certificates representing any remaining shares of
  Preferred Stock:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
							

 

 

4.                                       The undersigned represents, warrants and certifies as follows (one
(only) of the following must be checked):

 

o                                    B.                                     the undersigned holder (i) purchased the Preferred Stock directly
from the Company pursuant to a written subscription agreement; (ii) is
converting the Preferred Stock solely for its own account and not on behalf of
any other person; and (iii) each of the representations and warranties made at
the time of subscription for the purchase of the Preferred Stock remains true
and correct on the date of conversion of the Preferred Stock; OR

o                                    C.                                     the undersigned holder has delivered to the Company an opinion of
counsel (which will not be sufficient unless it is from counsel of recognized
standing and in form and substance satisfactory to the Company) to the effect
that an exemption from the registration requirements of the 1933 Act and
applicable state securities laws is available.

 

	
  DATED
  this           day of                       ,
  20    .

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  
	
   

  	
   

  	
  )

  	
   

  	
  Signature

  	
   

  	
   

  
	
  Witness

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
  Print
  full name

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
  Address
  in full

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  )

  	
   

  	
   

  
											

 

2

 

Annex II

Use of
Proceeds

8,000
Shares of Series C Convertible Preferred Stock

$1,000
per Share

 

	
   

  	
   

  	
  Maximum

  	
   

  
	
  Item

  	
   

  	
  Offering

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross Proceeds

  	
   

  	
  $

  	
  8,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Closing Costs

  	
   

  	
  $

  	
  50,000

  	
   

  
	
  Registration Statement

  	
   

  	
  $

  	
  20,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Net Proceeds

  	
   

  	
  $

  	
  7,930,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Property Acquisitions

  	
   

  	
  $

  	
  2,500,000

  	
   

  
	
  Field Improvements & Drilling Costs

  	
   

  	
  $

  	
  2,500,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total Property Costs

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Operations

  	
   

  	
  $

  	
  155,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Marketing Expenses

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Unallocated Working Capital

  	
   

  	
  $

  	
  1,775,000

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00078-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00078-of-00352.parquet"}]]