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 Kreuger

  Facsimile: 212-452-6160

  Telephone: 212-452-6100

  	
   

  	
  106

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  106,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Brightstream
  Master Fund, LP

  	
   

  	
  c/o Brightstream Asset Management

  598 Madison Avenue, 5th Floor

  New York, NY 10022

  Attention: Donald Kreuger

  Facsimile: 212-452-6160

  Telephone: 212-452-6100

  	
   

  	
  1,120

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  1,120,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  HFR HE
  Brightwater Master Trust

  	
   

  	
  c/o Brightstream Asset Management

  598 Madison Avenue, 5th Floor

  New York, NY 10022

  Attention: Donald Kreuger

  Facsimile: 212-452-6160

  Telephone: 212-452-6100

  	
   

  	
  287

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  287,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

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

  	
   

  	
  c/o D.E. Shaw & Co

  120 West 45th Street, 39th Floor

  New York, NY 10036

  Attention: Maureen Welby Knoblauch

  Facsimile: 212-845-1628

  Telephone: 212-478-0628

  	
   

  	
  10,005

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  10,005,000

  	
   

  	
  PIK

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Dynamis
  Energy Fund, LTD

  	
   

  	
  c/o Spectrum Global Fund

  Administration (Cayman)

  PO Box 10243 APO

  Grand Cayman, Cayman Islands

  Attention: John H. Bocock

  Facsimile: 434-220-0234

  Telephone: 434-220-4621

  	
   

  	
  180

  	
   

  	
  75,630

  	
   

  	
  18,907

  	
   

  	
  $

  	
  545,293

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Dynamis
  Energy Fund, LP

  	
   

  	
  c/o Spectrum Global Fund

  Administration (Cayman)

  PO Box 10243 APO

  Grand Cayman, Cayman Islands

  Attention: John H. Bocock

  Facsimile: 434-220-0234

  Telephone: 434-220-4621

  	
   

  	
  820

  	
   

  	
  344,538

  	
   

  	
  86,135

  	
   

  	
  $

  	
  2,484,119

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Fort
  Mason Master, LP

  	
   

  	
  c/o Fort Mason Capital, LLC

  4 Embarcadero Center, Suite 2050

  San Francisco, CA 94111

  Attention: KC Lynch and Marshall Jensen

  Facsimile: 415-288-8113

  Telephone: 415-288-8100

  	
   

  	
  3,756

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  3,756,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Fort Mason Partners, LP

  	
   

  	
  c/o Fort Mason Capital, LLC

  4 Embarcadero Center, Suite 2050

  San Francisco, CA 94111

  Attention: KC Lynch and Marshall Jensen

  Facsimile: 415-288-8113

  Telephone: 415-288-8100

  	
   

  	
  244

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  244,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  

 

 

	
  GLG North American Opportunity
  Fund

  	
   

  	
  c/o GLG Partners LP

  Walker House, P.O. Box 908GT,

  Mary Street

  Georgetown, Grand Cayman,

  Cayman Islands

  Attention: Gitesh Parmar

  Facsimile: 44-207-016-7200

  Telephone: 44-207-016-7000

  	
   

  	
  5,175

  	
   

  	
  1,050,000

  	
   

  	
  262,500

  	
   

  	
  $

  	
  10,246,500

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Investcorp
  Interlachen Multi-Strategy Master Fund Limited

  	
   

  	
  c/o Interlachen Capital Group LP

  800 Nicollet Mall, Suite 2500

  Minneapolis, MN 55402

  Attention: Gregg Colburn and

  Legal Department

  Facsimile: 612-659-4457

  Telephone: 612-659-4407

  	
   

  	
  1,254

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  1,254,000

  	
   

  	
  PIK

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Kellogg
  Capital Group LLC

  	
   

  	
  55 Broadway, 4th Floor

  New York, NY 10006

  Attention: Nicholas Cappelleri

  Facsimile: 212-380-5665

  Telephone: 212-607-5061

  	
   

  	
  2,013

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  2,013,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  William
  Herbert Hunt Trust Estate

  	
   

  	
  c/o J.W. Beavers, Jr., Trustee

  1601 Elm Street, Suite 3400

  Dallas, TX 75201

  Attention: David S. Hunt

  Facsimile: 214-880-7101

  Telephone: 214-880-8484

  	
   

  	
  2,875

  	
   

  	
  500,000

  	
   

  	
  125,000

  	
   

  	
  $

  	
  5,290,000

  	
   

  	
  PIK

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

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

  	
   

  	
  c/o RG Capital Management, L.P.

  3 Bala Plaza - East, Suite 501

  Bala Cynwyd, PA 19004

  Attention: Gerald F. Stahlecker

  Facsimile: 610-617-0580

  Telephone: 610-617-5900

  	
   

  	
  2,013

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  2,013,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Truk
  Opportunity Fund, LLC

  	
   

  	
  c/o Atoll Asset Management, LLC

  1 East 52nd Street, 6th Floor

  New York, NY 10022

  Attention: Antonia Koleva

  Facsimile: 212-888-0334

  Telephone: 212-888-2224

  	
   

  	
  523

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  523,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Truk
  International Fund, LP

  	
   

  	
  c/o Atoll Asset Management, LLC

  1 East 52nd Street, 6th Floor

  New York, NY 10022

  Attention: Antonia Koleva

  Facsimile: 212-888-0334

  Telephone: 212-888-2224

  	
   

  	
  52

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  52,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Touradji
  DeepRock Master Fund, Ltd.

  	
   

  	
  c/o Spectrum Global Fund

  Administration (Cayman)

  PO Box 10243 APO, Anchorage

  Center, Second Floor

  George Town, Grand Cayman,

  Cayman Islands, BWI

  Attention: Thomas S. Dwan

  Facsimile: 212-984-8881

  Telephone: 212-984-8899

  	
   

  	
  1,000

  	
   

  	
  250,000

  	
   

  	
  62,500

  	
   

  	
  $

  	
  2,207,500

  	
   

  	
  Cash

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  

 

 

	
  Touradji Global Resources
  Master Fund, Ltd.

  	
   

  	
  c/o Spectrum
  Global Fund

  Administration (Cayman)

  PO Box 10243 APO, Anchorage

  Center, Second Floor

  George Town, Grand Cayman,

  Cayman Islands, BWI

  Attention: Thomas S. Dwan

  Facsimile: 212-984-8881

  Telephone: 212-984-8899

  	
   

  	
  0

  	
   

  	
  250,000

  	
   

  	
  62,500

  	
   

  	
  $

  	
  1,207,500

  	
   

  	
   

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  
	
  Trapeze Capital Corp.

  	
   

  	
  c/o Trapeze Asset
  Management Inc.

  22 St. Clair Avenue East, 18th Floor

  Toronto, ON, M4T 253

  Attention: Randall Abramson

  Facsimile: 416-867-9771

  Telephone: 416-861-0774

  	
   

  	
  810

  	
   

  	
  412,500

  	
   

  	
  103,125

  	
   

  	
  $

  	
  2,802,375

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Trapeze Asset Management, Inc.

  	
   

  	
  22 St. Clair
  Avenue East, 18th Floor

  Toronto, ON, M4T 253

  Attention: Randall Abramson

  Facsimile: 416-867-9771

  Telephone: 416-861-0774

  	
   

  	
  2,269

  	
   

  	
  1,187,500

  	
   

  	
  296,875

  	
   

  	
  $

  	
  8,004,625

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  O’Connor PIPEs Corporate
  Strategies Master Limited

  	
   

  	
  c/o UBS O’Connor
  LLC

  1 North Wacker Drive, 32nd Floor

  Chicago, IL 60606

  Attention: Brian Herward

  Facsimile: 312-525-6271

  Telephone: 312-525-5868

  	
   

  	
  1,254

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  1,254,000

  	
   

  	
  Cash

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Spindrift Partners, L.P.

  	
   

  	
  c/o Wellington
  Management

  Company, LLP

  75 State Street\

  Boston, MA 02109

  Attention: 914-225-4924

  Facsimile: 617-204-7006

  Telephone: 617-790-7006

  	
   

  	
  5,837

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  5,837,000

  	
   

  	
  PIK

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  
	
  Spindrift Investors (Bermuda)
  L.P.

  	
   

  	
  c/o Wellington
  Management

  Company, LLP

  75 State Street\

  Boston, MA 02109

  Attention: 914-225-4924

  Facsimile: 617-204-7006

  Telephone: 617-790-7006

  	
   

  	
  7,100

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  $

  	
  7,100,000

  	
   

  	
  PIK

  	
   

  	
  No Limit

  	
   

  	
   

  	
   

  
	
  CamCap Energy Offshore Mater
  Fund, L.P.

  	
   

  	
  c/o BISYS Hedge
  Fund Services

  (Cayman) Ltd.

  P.O. Box 1748GT, Cayman

  Corporate Center, 27 Hospital Road

  George Town, Grand Cayman,

  Cayman Islands

  Attention: Roland von Metzsch

  Facsimile: 415-658-3020

  Telephone: 415-658-3010

  	
   

  	
  0

  	
   

  	
  215,000

  	
   

  	
  53,750

  	
   

  	
  $

  	
  1,038,450

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  ING VP Natural Resources Trust

  	
   

  	
  c/o ING
  Investment Management

  Company

  230 Park Avenue

  New York, NY 10169

  Attention: Sal Digangi

  Facsimile: 212-309-8247

  Telephone: 212-309-1755

  	
   

  	
  0

  	
   

  	
  222,047

  	
   

  	
  55,512

  	
   

  	
  $

  	
  1,072,487

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  ING Global Resources Portfolio

  	
   

  	
  c/o ING
  Investment Management

  Company

  230 Park Avenue

  New York, NY 10169

  Attention: Sal Digangi

  Facsimile: 212-309-8247

  Telephone: 212-309-1755

  	
   

  	
  0

  	
   

  	
  912,953

  	
   

  	
  228,238

  	
   

  	
  $

  	
  4,409,563

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Europa International Inc.

  	
   

  	
  c/o Knoll Capital
  Management

  666 Fifth Avenue, Suite 3702

  New York, NY 10103

  Attention: Fred Knoll

  Facsimile: 212-808-7475

  Telephone: 212-808-7474

  	
   

  	
  0

  	
   

  	
  325,000

  	
   

  	
  81,250

  	
   

  	
  $

  	
  1,569,750

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  

 

 

	
  Knoll Capital Fund II Master
  Fund Ltd.

  	
   

  	
  c/o KOM Capital
  Management

  666 Fifth Avenue, Suite 3702

  New York, NY 10103

  Attention: Fred Knoll

  Facsimile: 212-808-7475

  Telephone: 212-808-7474

  	
   

  	
  0

  	
   

  	
  325,000

  	
   

  	
  81,250

  	
   

  	
  $

  	
  1,569,750

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Ridgecrest Partners Ltd.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29 Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  13,000

  	
   

  	
  3,250

  	
   

  	
  $

  	
  62,790

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Ridgecrest Partners QP, L.P.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29 Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  50,000

  	
   

  	
  12,500

  	
   

  	
  $

  	
  241,500

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Advantage Advisors Catalyst
  International Ltd.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29 Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  18,500

  	
   

  	
  4,625

  	
   

  	
  $

  	
  89,355

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  Advantage Advisors Catalyst
  Partners L.P.

  	
   

  	
  c/o Ridgecrest
  Partners

  220 East 42nd Street, 29 Floor

  New York, NY 10017

  Attention: Todd McElroy

  Facsimile: 212-476-9159

  Telephone: 212-476-5517

  	
   

  	
  0

  	
   

  	
  18,500

  	
   

  	
  4,625

  	
   

  	
  $

  	
  89,355

  	
   

  	
   

  	
   

  	
  9.99

  	
  %

  	
   

  	
   

  
	
  S.A.C. Capital Associates, LLC

  	
   

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

  P.O. Box 58, Victoria House

  The Valley, Anguilla, BWI

  	
   

  	
  0

  	
   

  	
  414,079

  	
   

  	
  103,520

  	
   

  	
  $

  	
  2,000,002

  	
   

  	
   

  	
   

  	
  4.99

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
  INFORMATION FOR

  DISTRIBUTION OF SHARES

  AND CORRESPONDENCE: 

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

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

  72 Cummings Point Road

  Stamford, CT 06902

  Attention: General Counsel

  Tel: (203) 890-2000

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBITS

	
  Exhibit A

  	
   

  	
  Form of Certificate of Designations

  
	
  Exhibit B

  	
   

  	
  Form of Warrant

  
	
  Exhibit C

  	
   

  	
  Form of Registration Rights Agreement

  
	
  Exhibit D

  	
   

  	
  Form of Irrevocable Transfer Agent Instructions

  
	
  Exhibit E

  	
   

  	
  Form of Secretary’s Certificate

  
	
  Exhibit F

  	
   

  	
  Form of Officer’s Certificate

  
	
  Exhibit G

  	
   

  	
  Form of Lock-Up Agreement

  

 

SCHEDULES

	
  Schedule 3(a)

  	
   

  	
  Subsidiaries

  
	
  Schedule 3(d)

  	
   

  	
  No Conflicts

  
	
  Schedule 3(e)

  	
   

  	
  Consents

  
	
  Schedule 3(f)

  	
   

  	
  Acknowledgment Regarding Buyer’s Purchase of
  Securities

  
	
  Schedule 3(l)

  	
   

  	
  Absence of Certain Changes

  
	
  Schedule 3(q)

  	
   

  	
  Transactions with Affiliates

  
	
  Schedule 3(r)

  	
   

  	
  Equity Capitalization

  
	
  Schedule 3(s)

  	
   

  	
  Indebtedness and Other Contracts

  
	
  Schedule 3(t)

  	
   

  	
  Absence of Litigation

  
	
  Schedule 3(w)

  	
   

  	
  Title

  
	
  Schedule 3(z)

  	
   

  	
  Subsidiary Rights

  
	
  Schedule 3(bb)

  	
   

  	
  Internal Accounting and Disclosure Controls

  

 

 

EXHIBIT
A

CERTIFICATE
OF DESIGNATIONS, PREFERENCES

AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK

OF

CANO PETROLEUM, INC.

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

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

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

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

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

 

 

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

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

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

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

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

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

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

 2
 

 

 

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

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

(ix)           “Bloomberg” means Bloomberg Financial Markets.

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

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

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

 3
 

 

 

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

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

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

 4
 

 

 

(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
10.7

KEY OFFICER AGREEMENT

THIS AGREEMENT (“Agreement”) is
made and entered into as of Oct. 12, 2005, by and between STEVEN M. ORESKOVICH
(the “Executive”) and MERGE TECHNOLOGIES INCORPORATED, a Wisconsin corporation
(the “Company”).

R E C I T A L S :

A.            The
Company is engaged in the provision of medical diagnostic imaging software and
professional services for healthcare facilities and medical equipment
manufacturers. The business in which the Company is engaged in from
time-to-time during the term of this Agreement, inclusive of those new lines of
business, if any, in which the Company is working toward entering from
time-to-time are hereinafter collectively referred to as the “Business”; and

B.            The
Company employs the Executive and wishes to provide the Executive with benefits
in the event of severance or a change in control in exchange for Executive’s
agreement with respect to competition, confidentiality, inventions, secrecy and
retention of property in the event of such termination of employment;

NOW THEREFORE, in consideration of the promises,
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Executive do hereby agree as follows:

1.             Disability Benefit.  If at any time during the Executive’s
employment the Executive is unable to perform fully the material and
substantial duties of the Executive’s regular job position hereunder by reason
of illness, accident, or other disability (as confirmed by competent medical
evidence by a physician selected by the Executive Committee of the Board), the
Executive shall be entitled to receive periodic payments of Salary, Bonus and
any and all benefits to which he/she would otherwise be entitled by reason of
his/her employment for a period of ninety (90) days. If the Executive is
prevented by reason of any illness, accident or other disability from
performing the material and substantial duties of his/her regular job position
for a period of 180 days, whether or not consecutive, in any 12 month period
which, in the opinion of a physician selected by the Executive Committee of the
Board is likely to continue to the same degree, he/she will be considered to be
suffering from a Disability (“Disability”). Notwithstanding the foregoing
provision (i) the amounts payable to the Executive pursuant to this Section
1 shall be reduced by any amounts received by the Executive with respect to
any such incapacity pursuant to any insurance policy, plan, or other employee
benefit provided to the Executive by the Company; and (ii) in no event will the
terms of this Agreement supersede any health or disability benefit to which
Executive is entitled under applicable law.

2.             Change in Control.  In the event of a “change in control” of the
Company (“change in control” of the Company shall mean a change in the
ownership of fifty percent (50%) or more of the outstanding stock of the
Company in a single transaction or series of transactions effected by a third
party or third parties acting in concert, or a change of fifty percent (50%) or
more of the members of the Board in a single transaction or series of
transactions effected by any third party or third parties acting in concert,
other than pursuant to nomination of a new slate of directors where there has
been no material change in beneficial 

 

ownership of the Company
within 365 days preceding such nomination or a sale of substantially all of the
Company’s assets), all of the Executive’s options will immediately vest and
become exercisable. In the event of a change in control as (described above)
and if the Executive is: (i) involuntarily terminated within 365 days following
the change in control; or (ii) voluntarily terminates his/her employment with
the Company within 365 days following such change of control, following either:
(a) any reduction in Executive’s responsibilities or authority with respect to
the Business; (b) a reduction in Executive’s compensation package, including
then current salary, in effect immediately prior to the change in control; or
(c) the Company’s principal place of business is relocated more than 30 miles
further from the Company’s current headquarters location as of the date of this
Agreement; then the Executive will be entitled to (A) 12 months then current
Salary as a change in control allowance, to be paid in a single payment within
thirty (30) days of such termination of Executive’s employment, plus (B) an
amount equal to one-twelfth of the maximum amount of the Executive’s then
current annual bonus determined without regard to the achievement of
performance targets for each month of the current plan year during which the
Executive was employed plus an additional 12 months, to be paid in a single
payment within thirty (30) days of the termination of Executive’s employment,
and (C) a continuation of the welfare benefits of health care, life and
accidental death and dismemberment, and disability insurance coverage
(collectively, “Supplemental Benefits”) for 12 months after the effective date
of termination. These benefits shall be provided at the same cost to the
Executive (if any), and at the same coverage level, as in effect as of the
Executive’s effective date of termination. However, in the event the premium
cost and/or level of coverage shall change for all management employees with
respect to Supplemental Benefits, the cost and/or coverage level, likewise,
shall change for the Executive in a corresponding manner. The continuation of
Supplemental Benefits shall be discontinued in the event Executive has
available substantially similar welfare benefits at a comparable cost from a
subsequent employer. For purposes of this Agreement, no change in ownership or
directors as a result of the merger of the Company with Cedara Software Corp.
shall be considered when determining whether a change in control has occurred.

In addition, upon a “change
of control” as defined above, the Company will deposit Fifty Thousand Dollars
($50,000) into an interest-bearing escrow account (the “Escrow”) to be held by
a third party mutually acceptable to the Executive and the Company. The cost of
such escrow shall be paid by the Company. The purpose of the escrow shall be to
provide Executive a “stay bonus” to help assure a smooth transition if the
acquiror in a change of control transaction requests that Executive continue
his/her employment with the Company in an executive or managerial capacity
suitable for Executive’s background, although not necessarily the same position
previously occupied by Executive. The compensation, bonus and benefits to be
paid to Executive during such period following the change in control must be at
least the same as paid or provided prior to closing except for minor changes in
Supplemental Benefits. Executive’s services pursuant to this paragraph shall be
performed within 30 miles from the Company’s current headquarters location as
of the date of this Agreement, except for travel consistent with Executive’s
position prior to the change in control. The total amount in such Escrow,
including interest thereon, will be paid to the Executive twelve months
following the change in control if Executive has substantially performed the
services requested to be performed by the acquiror following such change of
control transaction. If the acquiror does not request Executive’s service after
the change in control, no amount shall be paid to 

 2
 

 

Executive from the Escrow. If the acquiror requests
less than a full year of service, a pro rata amount of the Escrow shall be paid
to Executive based upon the number of months or partial months worked divided
by twelve. At the end of the stay bonus performance period Executive shall have
a period of thirty days following the termination of such services or 365 days
following the change of control, whichever is later, to terminate his/her
services with the Company and be entitled to receive the change of control
payments in addition to the stay bonus described in this paragraph.

3.             Termination. 
This Agreement may be terminated by the Company or the Board or
appropriate committee thereof at any time for the following reasons:

(a)           For Cause, by written notice to the
Executive. “Cause” shall mean termination for gross negligence, commission of a
felony or material violation of any Company policies;

(b)           In the event of the death of the
Executive;

(c)           The Executive’s resignation or
retirement from employment with the Company (this clause shall not be construed
as an agreement to employ the Executive for a defined term), upon thirty (30)
days advance written notice to the Company;

(d)           In the event of the Disability of the
Executive as defined in Section 1 of this Agreement, subject to the
Company discharging its duty to accommodate under applicable law, by written
notice to the Executive and by providing to the Executive the severance
entitlements set out in Section 4;

(e)           By the Executive for “Good Reason,”
defined as including only constructive termination, a material reduction in
base salary or a material reduction in responsibility, by written notice from
the Executive; and

(f)            Without Cause for any reason other
than as set forth above in Subsection 3 (a), (b), (c), (d) or (e), by
providing to the Executive the severance entitlements set out in Section 4.

4.             Severance.  In the event that the Executive is terminated
pursuant to Subsection 3 (d), (e) or (f), and the Executive has executed
a Company release substantially in the form of the attached Exhibit A, then the
Company shall pay the Executive, as a severance allowance, (A) an amount equal
to 12 months of the Executive’s then current Salary plus (B) an amount equal to
one-twelfth of the Executive’s then current calculated bonus, determined by
taking the maximum amount of bonus in effect for the then current year times
the Executive’s individual goal performance score from the previous year, for
each month of the current plan year during which the Executive was employed
plus an additional 12 months and (C) a continuation of the welfare benefits of
health care, life and accidental death and dismemberment, and disability
insurance coverage (collectively, “Supplemental Benefits”) for 12 months after
the effective date of termination. These benefits shall be provided at the same
cost to the Executive (if any), and at the same coverage level, as in effect as
of the Executive’s Effective Date of Termination. However, in the event the
premium cost and/or level of coverage shall change for all management employees
with respect to Supplemental Benefits, the cost and/or coverage level,
likewise, shall change for the Executive in a corresponding manner. The amount
of the severance allowance provided for in subsections (A) and (B) of this Section
4 shall be paid in equal 

 3
 

 

installments over the
severance period. Notwithstanding anything to the contrary contained herein, in
the event the Executive elects to receive (pursuant to the operation of Section
2) 12 months of his/her then current salary following a change in control
event and Executive’s voluntary or involuntary termination, then Executive
shall not be entitled to any payment of severance pursuant to this Section 4.
In the event a change in control occurs and the Executive is not entitled to 12
months of his/her then current salary pursuant to Section 2, then the
Executive shall continue to be entitled to receive severance payments per this Section
4.

5.             Surrender of Properties.  Upon termination of the Executive’s
employment with the Company, regardless of the cause therefor, the Executive
shall promptly surrender to the Company all property provided him/her by the
Company for use in relation to his/her employment, and, in addition, the
Executive shall surrender to the Company any and all confidential sales
materials, lists of customers and prospective customers, price lists, files,
patent applications, records, models, or other materials and information of or
pertaining to the Company or its customers or prospective customers or the
products, Business, and operations of the Company in his/her possession.

6.             Inventions and Secrecy.  Except as otherwise provided in this Section
6 the Executive:

(a)           shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge, or data of the Company or its Business or production
operations obtained by the Executive during his/her employment by the Company,
which shall not be generally known to the public or recognized as standard
practice (whether or not developed by the Executive) and shall not, during
his/her employment by the Company and after the termination of such employment
for any reason, communicate or divulge any such information, knowledge or data
to any person, firm or corporation other than the Company or persons, firms or
corporations designated by the Company;

(b)           shall promptly
disclose to the Company all inventions, ideas, devices, and processes made or
conceived by him/her alone or jointly with others, from the time of entering
the Company’s employ until such employment is terminated, relevant or pertinent
in any way, whether directly or indirectly, to the Company’s Business or
production operations or resulting from or suggested by any work which he/she
may have done for the Company or at its request;

(c)           shall, at all times
during his/her employment with the Company, assist the Company (entirely at the
Company’s expense) to obtain and develop for the Company’s benefit patents on
such inventions, ideas, devices and processes, whether or not patented; and

(d)           shall do all such
acts and execute, acknowledge and deliver all such instruments as may be
necessary or desirable in the opinion of the Company to vest in the Company the
entire interest in such inventions, ideas, devices, and processes referred to
above.

 4
 

 

The foregoing to the
contrary notwithstanding, the Executive shall not be required to assign or
offer to assign to the Company any of the Executive’s rights in any invention
for which no equipment, supplies, facility, or trade secret information of the
Company was used and which was developed entirely on the Executive’s own time,
unless: (A) the invention related to (i) the Business of the Company; or (ii)
the Company’s actual or demonstrably anticipated (with the realistic prospect
of occurring) research or development; or (B) the invention results from any
work performed by the Executive for the Company. The Executive acknowledges
his/her prior receipt of written notification of the limitation set forth in
the preceding sentence on the Executive’s obligation to assign or offer to
assign to the Company the Executive’s rights in inventions.

7.             Confidentiality of Information: Duty of
Non-Disclosure.

(a)           The Executive
acknowledges and agrees that his/her employment by the Company under this
Agreement necessarily involves his/her understanding of and access to certain
trade secrets and confidential information pertaining to the Business of the
Company. Accordingly, the Executive agrees that after the date of this
Agreement at all times he/she will not, directly or indirectly, without the
express consent of the Company, disclose to or use for the benefit of any
person, corporation or other entity, or for himself/herself any and all files,
trade secrets or other confidential information concerning the internal affairs
of the Company, including, but not limited to, information pertaining to its
customers, prospective customers, services, products, earnings, finances,
operations, methods or other activities, provided, however, that the foregoing
shall not apply to information which is of public record or is generally known,
disclosed or available to the general public or the industry generally, or
known by Executive prior to his/her employment with the Company. Further, the
Executive agrees that he/she shall not, directly or indirectly, remove or
retain, without the express prior written consent of the Company, and upon
termination of this Agreement for any reason shall return to the Company, any
confidential figures, calculations, letters, papers, records, computer disks,
computer print-outs, lists, documents, instruments, drawings, designs,
programs, brochures, sales literature, or any copies thereof, or any
information or instruments derived therefrom, or any other similar information
of any type or description, however such information might be obtained or
recorded, arising out of or in any way relating to the Business of the Company
or obtained as a result of his/her employment by the Company. The Executive
acknowledges that all of the foregoing are proprietary information, and are the
exclusive property of the Company. The covenants contained in this Section 7
shall survive the termination of this Agreement.

(b)           The Executive agrees
and acknowledges that the Company does not have any adequate remedy at law for
the breach or threatened breach by the Executive of his/her covenant, and
agrees that the Company shall be entitled to injunctive relief to bar the
Executive from such breach or threatened breach in addition to any other
remedies which may be available to the Company at law or in equity.

 5
 

 

8.             Covenant Not to Compete.

(a)           During Executive’s
Employment.  During the Executive’s
employment, the Executive shall not, without the. prior written consent of the
Company, which consent may be withheld at the sole and reasonable discretion of
the Company, engage in any other business activity for gain, profit, or other
pecuniary advantage (excepting the investment of funds in such form or manner
as will not require any services on the part of the Executive in the operation
of the affairs of the companies in which such investments are made) or engage
in or in any manner be connected or concerned, directly or indirectly, whether
as an officer, director, stockholder, partner, owner, employee, creditor, or
otherwise, with the operation, management, or conduct of any business that
competes with the Business of the Company.

(b)           Following Termination
of the Executive’s Employment. 
Within the 12 month period immediately following the end of the
Executive’s employment, regardless of the reason therefore, the Executive shall
not engage in the following, but only to the extent that these activities
compete in a similar Business to the Company, without the prior written consent
of the Company, which consent may be withheld at the sole discretion of the
Company: (A) engage in or in any manner be connected or concerned, directly or
indirectly, whether as an officer, director, stockholder, partner, owner,
employee, creditor, or otherwise with the operation, management, or conduct of
any business similar to the Business being conducted at the time of such
termination within a 100-mile radius from the Company’s current headquarters
location as of the date of this Agreement; (B) directly solicit, contact,
interfere with, or divert any customer served by the Company for the Business,
or any prospective customer identified by or on behalf of the Company, during
the Executive’s employment with the Company; or (C) directly solicit any
employee then employed by the Company or previously employed by the Company
within the one year period preceding termination of the Executive’s employment
with the Company to join the Executive, whether as a partner, agent, employee
or otherwise, in any enterprise engaged in a business similar to the Business
of the Company being conducted at the time of such termination.

(c)           Acknowledgment.  The Executive acknowledges that the restrictions
set forth in Section 8 are reasonable in scope and essential to the
preservation of the Business of the Company and proprietary properties and that
the enforcement thereof will not in any manner preclude the Executive, in the
event of the Executive’s termination of employment with the Company, from
becoming gainfully employed in such manner and to such extent as to provide a
standard of living for himself/herself, the members of his/her family, and
those dependent upon him of at least the sort and fashion to which he/she and
they have become accustomed and may expect.

(d)           Severability.  The covenants of the Executive contained in Section
8 of this Agreement shall each be construed as an agreement independent of
any other provision in this Agreement, and the existence of any claim or cause
of action of the Executive against the Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by
the Company of such covenants. Both parties hereby expressly agree and contract
that it is not the intention of either party 

 6
 

 

to violate any
public policy, or statutory or common law, and that if any sentence, paragraph,
clause, or combination of the same of this Agreement is in violation of the
law, such sentence, paragraph, clause or combination of the same shall be void,
and the remainder of such paragraph and this Agreement shall remain binding on
the parties to make the covenants of this Agreement binding only to the extent
that it may be lawfully done. In the event that any part of any covenant of
this Agreement is determined by a court of law to be overly broad thereby
making the covenant unenforceable, the parties hereto agree, and it is their
desire, that such court shall substitute a judicially enforceable limitation in
its place, and that as so modified the covenant shall be binding upon the
parties as if originally set forth herein.

9.             General Provisions.

(a)           Goodwill.  The Company has invested substantial time and
money in the development of its products, services, territories, advertising
and marketing thereof, soliciting clients and creating goodwill. By accepting
employment with the Company, the Executive acknowledges that the customers are
the customers of the Company, and that any goodwill created by the Executive
belongs to and shall inure to the benefit of the Company.

(b)           Notices.  Any notice required or permitted hereunder
shall be made in writing (i) either by actual delivery of the notice into the
hands of the party thereunder entitled, or (ii) by depositing the notice with a
nationally recognized overnight delivery service, all shipping costs prepaid
and addressed to the party to whom the notice is to be given at the party’s
respective address set forth below, or such other address as the parties may
from time to time designate by written notice as herein provided.

	
  As addressed to the Company:

  	
  With a copy to:

  
	
   

  	
   

  
	
  Merge Technologies
  Incorporated

  	
  Michael Best & Friedrich LLP

  
	
  6737 W. Washington
  Street

  	
  100 East Wisconsin Avenue  

  
	
  Milwaukee, Wisconsin
  53214-5650

  	
  Suite 3300

  
	
  Attention:  Chief Executive Officer

  	
  Milwaukee, Wisconsin 53202 

  
	
   

  	
  Attention: 
  Geoffrey R. Morgan, Esquire

  
	
   

  	
   

  
	
  As
  addressed to the Executive: 

  	
   

  
	
  Steve Oreskovich

  	
   

  
	
  1302 S. 91st Street

  	
   

  
	
  
  West Allis, WI
  53214

  

  	
   

  
	
   

  	
   

  
	
  The notice shall be
  deemed to be received on the date of its actual receipt by the party entitled
  thereto.

  

 

(c)           Amendment and
Waiver.  No amendment or modification
of this Agreement shall be valid or binding upon the Company unless made in
writing and signed by an officer of the Company duly authorized by the Board or
upon the Executive 

 7
 

 

unless made in writing and signed by him. The waiver by the Company of
the breach of any provision of this Agreement by the Executive shall not
operate or be construed as a waiver of any subsequent breach by him.

(d)           Entire Agreement.  This Agreement constitutes the entire
Agreement between the parties as an executive of the Company, and there are no
representations, warranties, agreements or commitments between the parties
hereto with respect to his employment except as set forth herein, as set forth
in Schedule G of the Merger Agreement between Cedara Software Corp. and the
Company. No presumption shall be made in favor or against either party based
upon who has served as draftsman of this Agreement.

(e)           Governing Law.  This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts)
of the State of Wisconsin.

(f)            Severability.  If any provision of this Agreement shall, for
any reason, be held unenforceable, such provision shall be severed from this
Agreement unless, as a result of such severance, the Agreement fails to reflect
the basic intent of the parties. If the Agreement continues to reflect the
basic intent of the parties, then the invalidity of such specific provision
shall not affect the enforceability of any other provision herein, and the
remaining provisions shall remain in full force and effect.

(g)           Assignment.  The Executive may not under any circumstances
delegate any of his/her rights and obligations hereunder without first
obtaining the prior written consent of the Company. This Agreement and all of
the Company’s rights and obligations hereunder may be assigned or transferred
by it, in whole or in part, to be binding upon and inure to the benefit of any
subsidiary or successor of the Company, provided either the successor has a net
worth greater than the Company at the time of assignment or the Company remains
primarily liable with respect to the obligations so assigned.

(h)           Costs of Enforcement, Litigation.  In the event of any suit or proceeding
seeking to enforce the terms, covenants, or conditions of this Agreement, the
prevailing party shall, in addition to all other remedies and relief that may
be available under this Agreement or applicable law, recover his/her or its
reasonable attorneys’ fees and costs as shall be determined and awarded by the
court. Any controversy or dispute with respect to the terms of Section 5, 6,
7 or 8 of this Agreement will survive termination of this Agreement and
shall be litigated in the state of federal courts of competent jurisdiction
situated in Milwaukee, Wisconsin, to which jurisdiction and venue all parties
consent.

(i)            Mitigation.  The Executive shall not be obligated to seek
other employment in mitigation of the amounts payable under this Agreement, and
the obtaining of any such other employment shall in no event effect any
reduction of the Company’s obligations to make payments hereunder.
Notwithstanding the foregoing, if Executive receives the payments described in Section
9 by terminating his/her employment following a change in control and
Executive subsequently becomes re-employed by the Company or by the party or
parties effecting the change in control, the 

 8
 

 

amounts earned
on re-employment (up to a period of one year’s compensation) shall be repaid to
the Company.

10.           Executive Acknowledgement.  The Executive acknowledges that:

(a)           the Executive has had sufficient time
to review this Key Officer Agreement thoroughly;

(b)           the Executive has read and
understands the terms of this Key Officer Agreement and the obligations
hereunder;

(c)           the Executive has received the good
and adequate consideration for entering into this Key Officer Agreement; and

(d)           the Executive has been given an
opportunity to obtain independent legal advice concerning the interpretation
and effect of this Key Officer Agreement.

IN WITNESS WHEREOF, this Agreement is entered into as
of the day and year first above written.

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  MERGE TECHNOLOGIES
  INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Richard A. Linden

  
	
   

  	
   

  	
  Richard A. Linden

  
	
   

  	
   

  	
  President and Chief
  Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:
  

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steve Oreskovich

  
	
   

  	
   

  	
  Steve Oreskovich

  
				

 

 9
 

 

RELEASE

EXHIBIT A

I, _______________ (Employee), in consideration of the
payments made by Merge Technologies Incorporated (“Company”) to me pursuant to
the severance section in the Key Officer Agreement, dated
_____________________, the adequacy of which is hereby acknowledged, do hereby
release and discharge the Company and all of its directors, officers, owners,
agents, employees, attorneys, insurers, affiliates, subsidiaries, related
corporations, predecessors, successors, heirs and assigns, (collectively “Released
Persons and Entities”) from any and all sums of money, attorneys fees,
accounts, motions, causes of action, claims, demands or liabilities of any ‘kind
or character whatsoever, whether known or unknown, which I either have had or
now have against such Released Persons and Entities, or any of them, for or related
in any way to anything occurring from the beginning of time to the date of
execution of this Release.

Without limiting the generality of the foregoing, this
Release applies to any and all claims, causes of action, demands or
liabilities, which I have had or now have:

(a)                                  For
any and all tort, contract, common law, statutory or other claims.

(b)                                 For
any and all Claims under or pursuant to the Americans With Disabilities Act,
Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of
1991, the Equal Pay Act, the Fair Labor Standards Act, the Employee Retirement
Income Security Act of 1974, the Age Discrimination in Employment law, the
Older Workers Benefit Protection Act, the Employee Retirement Income Security
Act “ERISA” (except for vested benefits which are not affected by this
agreement) the National Labor Relations Act, the Federal Family Medical Leave
Acts, any and all Claims under federal, state or local wage payment laws or any
other federal, state or local law, statute, ordinance, rule, regulation or
executive order, and/or any Claims to attorneys’ fees or costs thereunder. The
foregoing does not supersede the employee’s rights to any workers’ compensation
claims and any pension or unemployment compensation claims.

(c)                                  For
wrongful termination of employment, including violations of public policy.

(d)                                 For
breach of contract, whether express or implied.

(e)                                  For
libel, slander, defamation, damage to reputation, intentional or negligent
infliction of emotional distress or other tortious conduct.

In addition to the above, I warrant that I have
neither filed nor joined in any complaint, charge, claim, lawsuit or other
proceeding of any kind against Company or any of the other Released Parties and
Entities identified above. I promise never to file, join in or pursue any
complaint, charge, claim, lawsuit or other proceeding asserting any claims
released above. 

 10
 

 

The Company reserves the
right to immediately terminate any payments due under this Agreement in the
event of a breach of this Release, and shall have the right to seek all legal
remedies, including injunctive relief, in any court of competent jurisdiction
barring Employee from further breaches of this Release.

I have read this Release, have had sufficient time to
consider its contents and agree to its terms and conditions of my own free
will. I also understand that this Release includes a final general release and
that I can make no further claims against the Released Persons and Entities in
connection with my employment or the termination thereof.

	
  EMPLOYEE:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name (Please Print)

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date

  	
   

  

 

 11

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}]]