Document:

Exhibit
10.3

PARTICIPATION AGREEMENT

RELATING TO

NORTH LOUISIANA - BOSSIER

This PARTICIPATION
AGREEMENT (this “Agreement”)
is made and entered into as of March 1, 2006 (the “Effective Date”), by and among
the Parties (as defined below).

FOR AND IN CONSIDERATION
OF the mutual covenants, rights, and obligations set forth in this Agreement,
the benefits to be derived from them, and other good and valuable
consideration, the receipt and the sufficiency of which are hereby
acknowledged, the Parties agree as follows:

ARTICLE I

DEFINITIONS

1.01         Certain
Definitions.  As used in this
Agreement, the following terms have the following meanings:

“Acquisition Costs” means (i) with respect
to any Designated Property relating to a Lease that was owned by CWEI
prior to the date such property became subject to this Agreement, the fair
market value of the portion of such Lease that is attributable to such
Designated Property as of the date it became subject to this Agreement, and
(ii) with respect to any Designated Property relating to a Lease that was
acquired by CWEI on or after the date such Designated Property became subject
to this Agreement, the portion of the costs of acquiring such Lease
(including, without limitation, direct costs of seismic data and interpretation,
lease broker services, title examinations, filing fees, and recording costs)
that is attributable to the Designated Property.

“Affiliate” means, when used with
reference to a specified Person, (a) any Person directly or indirectly owning,
controlling or holding power to vote 50% or more of the outstanding voting
securities of the specified Person, (b) any Person 50% or more of whose
outstanding voting securities are directly or indirectly owned, controlled or
held with power to vote by the specified Person, (c) any Person directly or
indirectly controlling, controlled by or under common control with the
specified Person, (d) if the specified Person is a corporation, any officer or
director of the specified Person or of any corporation directly or indirectly controlling
that specified Person, (e) if the specified Person is a partnership, any
general partner or if the general partner is a partnership, the general
partners of that partnership, and (f) if the specified Person is an individual,
such individual’s spouse and natural and adoptive lineal descendants and trusts
for the benefit of any such Persons.  For
purposes of this definition, the ability through share ownership or contractual
arrangement to elect or cause the election of a majority of the board of directors
of a corporation shall constitute “control.”

“Agreed Rate” means 4.54% per annum.

 

 

“Agreement” means this
Participation Agreement, as amended or restated from time to time.

“Area of
Interest” means the area described in Exhibit B, as such may
amended from time to time by CWEI.

 

“Capital
Account” has the meaning set forth in Section 5.03.

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

“Contribution
Date” has the meaning set forth in Section 5.04(b).

“Contribution
Notice” has the meaning set forth in Section 5.04(b).

“CWEI” means Clayton Williams
Energy, Inc., a Delaware corporation.

“CWEI
Counsel” has the meaning set forth in Section 8.12.

“Designated
Property” means an undivided 5% of CWEI’s interests in the
Wells.

“Event
of Forfeiture” has the meaning set forth in Section 4.04.

“Indemnified Person” has the
meaning set forth in Section 8.11.

“Interest”
means an interest in Designated Property under this Agreement.  The number of Interests owned by each
Participant and the total number of Interests in this Agreement are set forth
on Exhibit A, as amended from time to time.

“Lease”
means a lease, mineral interest, royalty or overriding royalty, fee right,
mineral servitude, license, concession or other right covering oil, gas and
related hydrocarbons (or a contractual right to acquire such an interest) or an
undivided interest therein or portion thereof, together with all appurtenances,
easements, permits, licenses, servitudes and rights-of-way situated upon or
used or held for future use in connection with such an interest or the
exploration, development or production thereof, in each case, in the Area of
Interest.  A “Lease” shall also mean and
include all rights and interests in all lands and interests unitized or pooled
therewith pursuant to any law, rule, regulation or agreement.

“Majority in Interest” means a majority of the Interests held by
all Participants.

“Non-Contributing
Party” has the meaning set forth in Section 5.04(c).

“Operating
Agreement” means an
agreement between the operator and non-operating interest owners in a Lease for
the testing, development and operation of a tract of land or Lease for the
exploration and development of oil, gas, minerals or hydrocarbons.

“Party” means CWEI or any
Participant.

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“Participant” means each Person
listed as such on Exhibit A.

“Payout” means the earliest calendar month
during which CWEI shall have received cumulative cash proceeds relating to all
Designated Property (but only taking into account proceeds received with
respect to a Designated Property after such Designated Property became subject
to this Agreement) in an aggregate amount equal to the sum of (i) the
Acquisition Costs, Well Costs and other expenses incurred by CWEI relating to
the Designated Property, plus (ii) an annual internal rate of return on such
costs equal to the Agreed Rate.  For this
purpose, each proceed and expense shall be deemed to have been made on the last
day of the month during which it was received or made.

“Person” means an individual,
corporation, partnership, limited partnership, limited liability company,
business trust or other legal entity.

“Regulations” mean the regulations
promulgated by the United States Department of Treasury pursuant to the
Code.  All references herein to sections
of the Treasury Regulations shall include corresponding provision or provisions
of succeeding, similar, substitute, temporary or final Treasury Regulations.

“Tax
Partnership” means the relationship (constituting a tax
partnership for federal and applicable state law tax purposes) between the
Parties existing pursuant to this Agreement.

“Transfer” means any sale,
transfer, assignment, pledge, encumbrance, hypothecation, gift or disposition
of an Interest in whole or in part, or any rights or benefits to which a holder
of an Interest may be entitled as provided in this Agreement, including,
without limitation, the right to receive distributions in cash or in kind.

“Well” means a well in which CWEI holds a Working Interest derived from its
ownership of one or more Leases in the Area of Interest, as determined in
accordance with Section 8.16.  The
name and location of each “Well” is shown on Exhibit
C, as amended from time to time by CWEI.

“Well Costs” means CWEI’s share of
costs pursuant to any Operating Agreement for the drilling, completing,
equipping, deepening or sidetracking a Well, including, without
limitation:  (i) the costs of
surveying and staking the Well, the costs of any surface damages and the costs
of clearing, coring, testing, logging and evaluating the Well; (ii) the
costs of casing, cement and cement services for the Well; (iii) the cost
of plugging and abandoning the Well (including standard and customary
remediation activities associated therewith), if it is determined that the Well
would not produce in commercial quantities and should be abandoned; (iv) all
direct charges and overhead chargeable to CWEI with respect to the Well under
any applicable Operating Agreement until such time as all operations are
carried out as required by applicable regulations and sound engineering
practices to make such Well ready for production, including the installation
and testing of wellhead equipment, or to plug and abandon a dry hole;
(v) all costs incurred by CWEI in recompleting or plugging back any Well;
(vi) all costs 

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incurred
by CWEI in reworking any Well if the rework is covered by an authority for
expenditure under the applicable Operating Agreement; (vii) all costs incurred
by CWEI in locating, drilling, completing, equipping, deepening or sidetracking
any enhanced recovery producer or injector Well (including the costs of all
necessary surface equipment such as steam generators, compressors, water
treating facilities, injection pumps, flow lines and steam lines); and (viii)
the costs of constructing production facilities, pipelines and other facilities
necessary to develop property acquired pursuant to the terms hereof and
produce, collect, store, treat, deliver, market, sell or otherwise dispose of
oil, gas and other hydrocarbons and minerals therefrom; provided, that
Well Costs shall not include any Acquisition Costs.

“Working Interest” means an operating
interest in a Lease that permits CWEI to explore, develop and produce one or
more properties in the Area of Interest and bear its percentage of the costs
and expenses relating to the maintenance and development of and operations
relating to such properties.

1.02         Construction.  Whenever the context requires, the gender of
all words used in this Agreement includes the masculine, feminine and
neuter.  All references to Articles and
Sections refer to articles and sections of this Agreement, and all references
to exhibits are to Exhibits attached to this Agreement, each of which is made a
part of this Agreement for all purposes.

ARTICLE II

RELATIONSHIP OF THE PARTIES

2.01         Formation of Tax
Partnership; No Partnership for any Other Purpose.  This Agreement and its attachments are not
intended and shall not be construed to create a joint venture or other
partnership (general, limited, or otherwise) or association or to render the
Parties hereto liable as partners.  Each
of the Parties hereto hereby agrees that this Agreement creates a partnership
for United States federal and State income tax purposes only, which Tax
Partnership shall be deemed to own the Designated Property and shall function
and exist as set forth in Exhibit D attached hereto, which is hereby
incorporated by reference for all purposes of this Agreement.  Furthermore, each of the Parties agrees that
it shall not make an election for the Tax Partnership to be excluded from the
application of the provisions of Subchapter K of Chapter 1 of Subtitle A of the
Code (“Subchapter K”) or any
similar provisions of applicable state law; provided, however,
that each Participant acknowledges that CWEI may currently be, or may become in
the future, party to an Operating Agreement relating to one or more of the
Leases and/or Wells that requires each party thereto to make an election to be
excluded from the application of the provisions of Subchapter K and authorizes
CWEI to make such elections in the future on behalf of the Tax Partnership (as
an entity) if necessary to comply with the applicable Operating Agreement.

2.02         Purpose.  The purpose for which this Agreement is being
entered is to further align the interests of the Participants with those of
CWEI by permitting the Participants to participate with CWEI in the CWEI oil
and gas production (if any) developed, directly or indirectly, by CWEI and the
Participants.

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2.03         Term.  This Agreement shall commence on the
Effective Date and continue in effect until terminated in accordance with Section
7.01.

ARTICLE III

MANAGEMENT OF LEASES AND WELLS

3.01         Authority of CWEI.  CWEI shall have the full and exclusive power
and authority to do any and all things necessary, incidental, proper, advisable
or convenient for the furtherance of developing the Leases and Wells on behalf
of the Tax Partnership, including without limitation:

(a)           to determine whether to acquire,
hold, develop or produce properties and other assets and whether, when and on
what terms to farm-out, sell, promote or otherwise transfer any particular
prospect, or any interest therein;

(b)           to make all decisions concerning the
desirability of payment, and the payment or supervision of payment, of all
delay rentals, shut-in royalty payments, minimum royalty payments and any other
similar or related payments;

(c)           to drill, complete, control, rework,
side-track, redrill, recomplete, produce, plug and/or abandon any or all of the
Wells;

(d)           to form and participate in
partnerships, joint ventures or other relationships that it deems desirable;

(e)           to make any expenditures and incur
any obligations it deems appropriate;

(f)            to acquire (including, without
limitation, to purchase at premium prices when deemed appropriate by CWEI), exchange,
sell, lease, or dispose of any or all Designated Property;

(g)            to negotiate, execute, deliver and
perform any contracts, conveyances or other instruments which it considers
appropriate for the implementation of its powers under this Agreement, including,
without limitation, Operating Agreements, unit Operating Agreements and joint
development agreements, and the right to make any and all elections that are
required or necessary under the terms of any agreements;

(h)           to borrow money, incur indebtedness
or make guaranties and to secure the same by mortgages, deeds of trust,
security interests, pledges or other liens or encumbrances on all or any part
of the Designated Property;

(i)            to acquire and maintain such
insurance, if any, for the benefit of the Parties as it deems appropriate; and

(j)            to construct pipelines, drilling and
production platforms and facilities, gas plants, processing plants and other
facilities incidental to the development of the Area of Interest and the
production and marketing of oil and gas therefrom.

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(k)           to execute and deliver division
orders and transfer orders upon such terms and conditions and containing such
provisions as CWEI may consider appropriate; and

(l)            to control any matters affecting the
Designated Property including the conduct of litigation and other incurring of
legal expenses and the settlement of claims in litigation; provided,
that, CWEI shall not be authorized to settle any claims for which any
Participant has, or may have, any individual liability without the Participant’s
prior written consent.

3.02         Duties and Services of
CWEI.  CWEI shall devote
such time and effort to the development of the Leases and Wells as it shall
deem appropriate.  The Parties
acknowledge and agree that neither CWEI nor any Affiliate thereof nor any of
their respective officers, directors, employees or agents shall be required to
devote full time to the development of the Leases and Wells and may from time
to time engage in and possess interests in other business ventures of any and every
type and description, independently or with others, including without
limitation, the ownership, acquisition, exploration, development, operation and
management of oil and gas properties and oil and gas drilling programs, and
that no Participant shall by virtue of this Agreement have any right, title,
interest or expectancy in or to such activities or ventures.

3.03         Operating Agreements.  CWEI shall
use its reasonable efforts to enter into, and act in accordance with the
provisions of, all applicable Operating Agreements relating to any Lease or Well.  Following termination of this Agreement, each
Party agrees to become a party to all Operating Agreements in which CWEI serves
as operator, and further agrees to use its reasonable efforts to become a party
to all other applicable Operating Agreements. 
To the extent any Party for any reason does not become a party to an
applicable Operating Agreement, such Party agrees to use its reasonable efforts
to act in accordance with the provisions of such Operating Agreement as if it
were a party to such Operating Agreement.

ARTICLE IV

ACCESS TO INFORMATION; TRANSFER RESTRICTIONS

4.01         Access to Information.  A Participant, on written request to CWEI
stating the purpose, may examine and copy, at any reasonable time, for any
proper purpose, and at the expense of the Participant, any information
regarding the business affairs and financial condition of any Designated
Property as is just and reasonable for the Participant to examine and copy.  Information provided to or obtained by a
Participant relating to Designated Property shall be used by such Participant
solely in furtherance of his or her interests hereunder and shall not be used
for any other purpose.  Participants
shall maintain the confidentiality of all such information and shall not
disclose such information to any other Person. 
If a Participant receives a request to disclose information relating to
the Designated Property or this Agreement under the terms of a subpoena,
investigative demand or order issued by a court or governmental agency, the
Participant shall promptly notify CWEI of the existence, terms and
circumstances surrounding such request, so that CWEI may seek a protective
order or confidential treatment of such information.

4.02         Transfer Restrictions.  Except as provided in Section 4.03, no Participant shall Transfer his
or her Interests without the prior written consent of CWEI.  Any attempted Transfer in violation of this Section 4.02 shall be null and void, and CWEI
shall refuse to recognize any such Transfer.

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4.03         Permitted Transfers;
Status as Assignee.  A
Participant may Transfer all or any portion of his or her Interests to his or
her spouse, parents or natural or adoptive lineal descendants, or to one or
more trusts or partnerships established exclusively for the benefit of his or
her spouse, parents or natural or adoptive lineal descendants; provided,
that any such permitted assignee shall receive and hold such rights subject to
the provisions of this Agreement, including, without limitation, the provisions
of this ARTICLE IV, and as a condition to such Transfer, shall execute
and deliver a written agreement with the Parties agreeing to be bound
hereby.  A Participant intending to
Transfer Interests pursuant to this Section 4.03 shall provide at least
10 days prior written notice of such proposed transfer to CWEI.

 

4.04         Forfeiture of Interests.  A Participant shall forfeit any and/or all of
his or her Interests held by such Participant if such Participant admits or
enters a plea of no contest to or is convicted of a felony or misdemeanor
offense against CWEI or any of its Affiliates (“Event of Forfeiture”).

4.05         Specific Performance.  The parties
agree that each Party would be irreparably damaged if any of the provisions of
this ARTICLE IV are not performed in accordance with their specific terms and that
monetary damages would not provide an adequate remedy in such event.  Accordingly, it is agreed that, in addition
to any other remedy to which they may be entitled, at law or in equity, CWEI and
any nondefaulting Participant shall be entitled to injunctive relief to prevent
breaches of the provisions of this ARTICLE IV and
specifically to enforce the terms and provisions hereof in any action
instituted in any court of competent jurisdiction.

ARTICLE V

SHARING, ALLOCATIONS AND DISTRIBUTIONS

5.01         Allocation of Costs and
Expenses.  All costs and
expenses, including Acquisition Costs and Well Costs, relating to the
Designated Property shall be shared as follows: (i) 100% to CWEI before Payout
and (ii) 1% to CWEI and 99% to the Participants after Payout, apportioned among
the Participants in proportion to the percentages listed on Exhibit A
attached hereto.

5.02         Allocation of Revenues.  All revenues relating to the Designated
Property shall be allocated as follows: (i) 100% to CWEI before Payout and (ii)
1% to CWEI and 99% to the Participants after Payout, apportioned among the
Participants in proportion to the percentages listed on Exhibit A
attached hereto.

5.03         Allocations for Capital
Account and Tax Purposes. 
An individual capital account (a “Capital
Account”) shall be established and maintained for each Participant
as provided in Exhibit D.  Subject
to Section 7.02(c), all items of income, gain, deduction, loss, credit
and amount realized shall be allocated to the Parties in accordance with the
provisions of Exhibit D.

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5.04         Funding of Costs and
Expenses.

(a)           The Parties agree to
pay timely the costs and expenses allocated and charged to them pursuant to Section
5.01 and elsewhere herein.

(b)           To the extent that
costs and expenses are allocated and charged to Participants pursuant to Section
5.01 and elsewhere in this Agreement, and not retained by CWEI from a
distribution to Participants pursuant to Section 5.05, CWEI shall send
written notice to the Participants (a “Contribution
Notice”) setting forth (i) the date on which such additional funds
shall be payable (the “Contribution Date”),
which date shall be not less than 10 days after the date of the Contribution
Notice, and (ii) the total amount of funds required to be paid by each
Participant pursuant to this Section 5.04.  The funds required of each Participant shall
be in proportion to the number of Interests held by such Participant.

(c)           If a Participant
does not pay timely the costs and expenses allocated and charged to such
Participant (a “Non-Contributing Party”)
at the time or in the manner provided in the Contribution Notice, CWEI, in its
sole discretion, may pay the costs and expenses that the Non-Contributing Party
failed to pay within 20 days after the Contribution Notice, in which case the
Non-Contributing Party, without further action on his or her part, shall be
deemed to have assigned to CWEI the economic rights to the Interests held by
the Non-Contributing Party pursuant to this Agreement, and CWEI, as the
assignee of the Non-Contributing Party and the holder of such Interests, shall
be entitled to receive all allocations of income, gain, loss, deduction, credit
or similar items, and all distributions, to which the Non-Contributing Party
would otherwise be entitled from and after the Contribution Date.  CWEI shall hold such Interests attributable
to the Non-Contributing Party until such time as CWEI, as the holder of such
Interests, shall have received distributions pursuant to Section 5.05 in
an aggregate amount equal to 200% of the additional funds paid by CWEI pursuant
to this Section 5.04(c), whereupon CWEI, without further action on its
part, shall be deemed to have re-assigned the economic rights to such Interests
to the Non-Contributing Party.  CWEI may
use the power of attorney set forth in Section 8.13 to reflect any
assignment pursuant to this Section 5.04(c).  Furthermore, a Non-Contributing Party shall
indemnify and hold harmless each other Party to the fullest extent permitted by
law, from and against the costs and expenses that the Non-Contributing Party
failed to pay, including any losses, costs, liabilities, damages, and expenses
(including, without limitation, costs of suit and attorneys’ fees) paid or
incurred in attempting to collect the costs that the Non-Contributing Party
failed to pay.

5.05         Distributions of Revenues.  Subject to Section 5.04(c), all
revenues relating to the Designated Property shall be distributed to the Party
to whom such revenues are allocated pursuant to Section 5.02; provided,
however, that CWEI shall, in lieu of issuing Contribution Notices, be
entitled to retain from any distribution to any Participant an amount necessary
to discharge the costs and expenses allocated to such Participant pursuant to Section
5.01 that remains unpaid; provided, further, that if Payout
would occur as a result of a distribution of cash funds to CWEI, such
distribution shall be deemed to constitute two distributions:  (i) the first distribution shall consist of
the amount of cash funds necessary to cause Payout to occur, and (ii) the
second distribution shall consist of the balance of the funds then distributed.

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5.06         Withholding Taxes.  CWEI shall at all times be entitled (but not
obligated) to make payments required to discharge any obligation of CWEI to
withhold or make payments to any governmental authority with respect to any
federal, state or local tax liability of any Participant for such taxes arising
out of such Participant’s interest in the Designated Property.  The amount of each such payment made by CWEI
with respect to any Participant shall be deducted from any distributions
otherwise payable to such Participant pursuant to this Agreement.  Notwithstanding anything contained in this
Agreement to the contrary, in the event CWEI fails to withhold any federal,
state or local taxes in respect of any Participant when required to do so
(including as a result of any change in law or interpretation thereof or
otherwise) any liability incurred by CWEI (including any interest and
penalties) as a result of such failure shall be borne by such Participant (and
charged to such Participant’s Capital Account), and such Participant shall
indemnify and hold harmless CWEI from and against any and all claims, demands,
liabilities, costs, damages and causes of action of any nature whatsoever
related to such withholding obligation.

ARTICLE VI

BOOKS AND RECORDS

6.01         Maintenance of Books and
Records.  The books of
account for the Tax Partnership shall be maintained on an accrual basis in
accordance with the terms of this Agreement, except that the Capital Accounts
of the Parties shall be maintained in accordance with Exhibit D.  The accounting year of the Tax Partnership
shall be the calendar year.

ARTICLE VII

TERMINATION

7.01         Termination.  This Agreement shall terminate on the first
to occur of the following:

(a)           the third anniversary of Payout;

(b)           the election of CWEI, in its sole discretion, to terminate
this Agreement.

7.02         Distributions upon
Termination.  Upon
termination of this Agreement, CWEI shall distribute all Designated Property
(or proceeds therefrom) to the Parties as follows:

(a)           CWEI may sell any or all Designated
Property and other assets, including to Parties, and any resulting gain or loss
from each sale shall be computed and allocated to the Capital Accounts of the
Parties in accordance with Section 7.02(c);

(b)           With respect to all Designated
Property that has not been sold, the fair market value of such Designated
Property shall be determined by CWEI and any unrealized income, gain, loss, and
deduction inherent in such property that has not been reflected in the Capital
Accounts of the Parties previously shall be allocated among the Parties in
accordance with Section 7.02(c);

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(c)           All items of income, gain, loss and deduction
referred to in Sections 7.02(a) and (b) shall be allocated among the
Parties in such a manner as to cause, to the maximum extent possible, the
positive Capital Account balance of each Party to equal the distribution such
Party would receive if the distributions upon liquidation of the proceeds
described in Section 7.02(a) and proceeds equal in amount to the fair
market value of property described in Section 7.02(d) were made in
accordance with Section 5.05 of this Agreement;

(d)           Designated
Property (and proceeds therefrom) shall then be distributed among the Parties
in accordance with the positive Capital Account balances of the Parties, as
determined after taking into account all Capital Account adjustments for the
taxable year of the Tax Partnership during which the termination of this
Agreement occurs (other than those made by reason of distributions pursuant to
this clause (d)), and those distributions shall be made by the end of the
taxable year of the Tax Partnership during which the termination of this
Agreement occurs (or, if later, 90 days after the date of the liquidation);

(e)           It is intended that the distributions
made to each Party pursuant to this Section 7.02
be equal to the distributions to which such Party would be entitled if liquidating
distributions were made in accordance with Section
5.05 of this Agreement.  To
the extent the Parties’ positive Capital Account balances after application of
Section 7.02(c) do not correspond to the amounts of such intended
distributions, the allocations provided for in Exhibit
D for the taxable year in which the liquidation occurs shall be
adjusted, to the maximum extent possible, to produce Capital Account balances
which correspond to the amount of such intended distributions.

All distributions in kind
to the Participants shall be made subject to the liability of each distributee
for his, her or its allocable share of costs, expenses and liabilities
previously incurred or for which CWEI has committed prior to the date of
termination and those costs, expenses and liabilities shall be allocated to the
distributee under this Section 7.02. The distribution of cash or
property to a Participant in accordance with the provisions of this Section 7.02 constitutes a complete
distribution to the Participant of his, her or its Interests and all the
Designated Property and other assets and constitutes a compromise to which all
Parties have consented. To the extent that a Participant returns funds to CWEI,
it has no claim against any other Party for those funds.

7.03         Termination.
On completion of the distribution of Partnership assets as provided in this
Agreement, the Tax Partnership shall be considered terminated.

ARTICLE VIII

GENERAL PROVISIONS

8.01         Offset.  Whenever CWEI is to pay any sum to any
Participant, any amounts that Participant owes CWEI or its Affiliates may be
deducted from that sum before payment.

8.02         Notices.  All notices, requests or consents required or
permitted to be given under this Agreement must be in writing and shall be
considered as properly given if mailed by first class United States mail,
postage paid, and registered or certified with return receipt requested, or if
delivered to the recipient in person, by courier or by facsimile
transmission.  Notices, requests and
consents shall be sent to a Participant at the address shown on its Signature
Page for 

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Participants.  A Participant may
change its address by giving written notice to CWEI.  Any notice, request or consent to CWEI shall
be sent to CWEI at its principal place of business, to the attention of the
Executive Vice President and Chief Operating Officer.

 

8.03         Entire Agreement.  This Agreement constitutes the entire
agreement of the Parties relating to the Tax Partnership and the Designated
Property, and supersedes all prior contracts or agreements with respect
thereto, whether oral or written.

8.04         Effect of Waiver or
Consent.  A waiver or
consent, express or implied, to or of any breach or default by any Person in
the performance by that Person of its obligations with respect to this Agreement
is not a consent or waiver to or of any other breach or default in the
performance by that Person of the same or any other obligations of that Person
with respect to this Agreement.  Failure
on the part of a Person to complain of any act of any Person or to declare any
Person in default with respect to this Agreement, irrespective of how long that
failure continues, does not constitute a waiver by that Person of its rights
with respect to that default until the applicable statute of limitations period
has run.

8.05         Amendment or Modification.

(a)           Except as otherwise provided in this Section
8.05, any amendment to this Agreement must be proposed by CWEI and approved
in writing by CWEI and at least a Majority in Interest of the Participants
within 90 days of its proposal to be effective.

(b)           CWEI may amend this Agreement without
the consent of any Participant (i) to remove or correct any inconsistency,
ambiguity or error contained herein, provided that such amendment does not
materially and adversely affect the Participants, (ii) to reflect any Transfer
or forfeiture of Interests pursuant to Sections 4.03 and 4.04 ,
(iii) to amend Exhibit B from time to time to amend the Area
of Interest, or (iv) to amend Exhibit C from time to time to
add additional Wells to become subject to this Agreement.

(c)           Upon publication of final regulations
in the Federal Register (or other official pronouncement), CWEI shall have the
authority, without any requirement for consent by any Participant, to amend
this Agreement to the extent CWEI determines, in its sole discretion, is
necessary (a) to provide for the making and filing of any available election to
obtain the benefits of a safe harbor corresponding to that described under
proposed U.S. Treasury Regulations section 1.83-3(1) (or any similar provision)
under which the fair market value of an interest that is transferred in
connection with the performance of services is treated as being equal to the
liquidation value of that interest, and (b) to reflect the agreement of, and
the requirement that, the Tax Partnership and all of the Parties comply with
all of the requirements set forth in such regulations and Notice 2005-43 (and
any other guidance to a substantially similar effect provided by the IRS with
respect to such election) with respect to all interests transferred in
connection with the performance of services while the election remains
effective.

 

8.06         Binding Effect.  Subject to the restrictions on Transfers set
forth in this Agreement, this Agreement is binding on and inures to the benefit
of the Parties and their respective successors and assigns.

 11
 

 

 

8.07         Governing Law;
Severability.  THIS
AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF
THE STATE OF TEXAS, EXCLUDING ANY CONFLICT OF LAWS RULE OR PRINCIPLE THAT MIGHT
REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF
ANOTHER JURISDICTION.  If any provision
of this Agreement or its application to any Person or circumstance is held
invalid or unenforceable to any extent, the remainder of this Agreement and the
application of that provision to other Persons or circumstances shall not be
affected and that provision shall be enforced to the fullest extent permitted
by law.

8.08         Further Assurances.  In connection with this Agreement and the
transactions contemplated by it, each Party shall execute and deliver any
additional documents and instruments and perform any additional acts that may
be necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.

8.09         Waiver of Certain Rights.  Except for CWEI, each Party irrevocably
waives any right it may have to maintain any action for partition of the
property of the Tax Partnership.

8.10         Insurance.  CWEI may purchase and maintain insurance or
enter into other arrangements on behalf of a Participant against any liability
asserted against the Participant and incurred by the Participant in that
capacity or arising out of this Agreement. 
In the absence of actual fraud, the judgment of CWEI as to the terms and
conditions of the insurance or other arrangement and the identity of the
insurer or other Person participating in an arrangement shall be conclusive,
and the insurance or other arrangement shall not be voidable and shall not
subject CWEI approving the insurance or other arrangement to liability, on any
ground, regardless of whether CWEI will be a beneficiary.

8.11         Indemnification.

(a)           CWEI agrees to indemnify and hold
harmless the Participants (each, an “Indemnified Person”) to the fullest extent permitted by law,
from and against all losses, costs, liabilities, damages, and expenses
(including, without limitation, costs of suit and attorneys’ fees) paid or
incurred in connection with or resulting from any and all claims, actions or
demands against such Indemnified Person that arise out of or in any way relate
to or are incidental to the Tax Partnership, the Designated Property or the
business or affairs of the Tax Partnership that occurs prior to the termination
of this Agreement; provided, however, that this indemnity shall
not extend to (i) any bad faith, willful misconduct, or gross negligence of
such Indemnified Person, or (ii) the failure of such Indemnified Person to
perform any of its obligations under this Agreement, including without
limitation obligations set forth in Sections  5.01, 5.04,
and 5.06.  THE PARTIES INTEND THAT
THE INDEMNIFIED PERSONS BE INDEMNIFIED PURSUANT TO THIS AGREEMENT FROM
LIABILITY FOR THEIR OWN SOLE, PARTIAL OR CONCURRENT NEGLIGENCE.

(b)           The indemnification rights contained
in this Section 8.11 shall be cumulative
of and in addition to any and all other rights, remedies and recourses to which
any Indemnified Person or their respective heirs, personal representatives,
successors and assigns shall be entitled, whether pursuant to some other
provisions of this Agreement, at law or in equity.

 12
 

 

 

(c)           CWEI shall advance to any Indemnified
Person all reasonable fees, costs and expenses (including attorneys’ fees and
related costs), of defending any claim, action or demand that arises out of or
in any way relates to or is incidental to the Tax Partnership, the Designated
Property, business or affairs of the Tax Partnership that occurs during any
period in which such Indemnified Person is an employee of CWEI; provided,
that such Indemnified Person agrees in writing to repay to the Tax Partnership
all such advances in the event that it is finally determined that such
Indemnified Person is not entitled to indemnification hereunder with respect to
such claim, action or demand.

8.12         CWEI Counsel.  CWEI has selected Vinson & Elkins L.L.P.
(“CWEI Counsel”)
as legal counsel to it with respect to this Agreement. Each Participant
acknowledges that CWEI Counsel does not represent such Participant, and that
CWEI Counsel shall owe no duties directly to such Participant.  Each Participant further acknowledges that,
whether or not CWEI Counsel has in the past represented or is currently
representing such Participant with respect to other matters, CWEI Counsel has
not advised or represented the interests of any Participant in the negotiation,
preparation, execution, delivery and performance of this Agreement.

8.13         Power of Attorney.  By the execution of this Agreement, each
Participant does irrevocably constitute and appoint CWEI, with full power of
substitution, as true and lawful attorney-in-fact and agent with full power and
authority to act in such Participant’s name, place and stead and to execute all
documents which such attorney-in-fact deems necessary or reasonably appropriate
in furtherance of this Agreement.

8.14         Counterparts.  This Agreement may be executed in any number
of counterparts (including by facsimile transmission) with the same effect as
if all signing parties had signed the same document.  All counterparts shall be construed together
and constitute the same instrument.

8.15         No Employment Contract.  Nothing contained in this Agreement shall be
construed as conferring upon any Participant who is or may become an employee
of CWEI or any Affiliate of CWEI any right to continue in the employment of
CWEI or any Affiliate of CWEI for any period of time or interfere with or
restrict in any way the rights of CWEI or any Affiliate of CWEI or such
Participant to terminate the employment of such Participant at any time for any
reason (or without any reason) whatsoever, with or without cause.  For the avoidance of doubt, any termination
of a Participant’s employment with CWEI shall not affect any of such
Participant’s rights pursuant to this Agreement.

8.16         Designation of Wells.  Each of the Parties hereby agrees that all
Wells that are located within the Area of Interest that are commenced after the
date hereof and prior to the Cut-Off Date shall be subject to this
Agreement.  For purposes of this
Agreement, the “Cut-Off Date”
shall be the date that CWEI identifies in a written notice delivered to each
Participant indicating that no Wells within the Area of Interest commenced
after the Cut-Off Date will be made subject to this Agreement.  Additionally, each Participant acknowledges
that certain circumstances may make it appropriate for CWEI to deliver such a
written notice to the Participants and to enter into agreements similar to this
Agreement with other parties (which may or may not include certain of the
Participants) that relate to Wells that are located in the Area of Interest but
are not subject to this Agreement.

 13
 

 

 

8.17         Acknowledgement of 409A
Issues.  Notwithstanding
anything herein to the contrary, each Participant (i) acknowledges that this
Agreement and the underlying transactions, as currently structured, may be
considered to be a deferral of compensation under section 409A of the Internal
Revenue Code (“section 409A”) and (ii) agrees
that CWEI may, in its own discretion and upon its own initiative and without
any action by or consent of the Participants, if existing or future guidance
from the Internal Revenue Service or other interpretative authority indicates
that such action is necessary or advisable, modify this Agreement and/or
restructure the transactions contemplated by this Agreement in any manner CWEI
determines is appropriate under the circumstances in an effort to avoid any
adverse tax consequences for the Participants and/or CWEI that may otherwise be
imposed by section 409A and the Treasury Regulations thereunder, and the
Participants hereby consent to any such action that may be taken by CWEI and
expressly ratify this Agreement as it may be so amended.

 

[Signature
Pages Follow]

 14

IN WITNESS WHEREOF, the parties have executed this Participation
Agreement as of the Effective Date.

	
   

  	
   

  	
  CWEI:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CLAYTON WILLIAMS
  ENERGY, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
  /s/ L. Paul Latham

  
	
   

  	
   

  	
   

  	
   

  	
  L. Paul Latham

  
	
   

  	
   

  	
   

  	
   

  	
  Executive Vice
  President

  

 

 

 

Exhibit A

Participants

 

	
  Participant

  	
   

  	
  Interests

  	
   

  	
   

  	
   

  
	
  Pat Reesby

  	
   

  	
  20.00

  	
  %

  	
   

  	
   

  
	
  Kelly Beckham

  	
   

  	
  16.83

  	
  %

  	
   

  	
   

  
	
  Kenneth Lipstreuer

  	
   

  	
  5.00

  	
  %

  	
   

  	
   

  
	
  Phil Amy

  	
   

  	
  4.00

  	
  %

  	
   

  	
   

  
	
  George Matthews

  	
   

  	
  2.50

  	
  %

  	
   

  	
   

  
	
  Sam Sheets

  	
   

  	
  2.50

  	
  %

  	
   

  	
   

  
	
  Martha Reesby

  	
   

  	
  2.00

  	
  %

  	
   

  	
   

  
	
  Cheryl Strickland

  	
   

  	
  1.17

  	
  %

  	
   

  	
   

  
	
  Jana Craig

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Barbara Wynn

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Terri Lengfeld

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Tom Vinyard

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Chris Hanson

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Jean Gathmann

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Paul Latham

  	
   

  	
  5.00

  	
  %

  	
   

  	
   

  
	
  Mel Riggs

  	
   

  	
  5.00

  	
  %

  	
   

  	
   

  
	
  Mark Tisdale

  	
   

  	
  1.88

  	
  %

  	
   

  	
   

  
	
  Sam Lyssy

  	
   

  	
  2.00

  	
  %

  	
   

  	
   

  
	
  Greg Welborn

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Ron Gasser

  	
   

  	
  4.00

  	
  %

  	
   

  	
   

  
	
  Clarence Wolfshohl

  	
   

  	
  3.00

  	
  %

  	
   

  	
   

  
	
  John Kennedy

  	
   

  	
  3.00

  	
  %

  	
   

  	
   

  
	
  Ron Reutzel

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Mike Pollard

  	
   

  	
  3.00

  	
  %

  	
   

  	
   

  
	
  Robert Thomas

  	
   

  	
  1.50

  	
  %

  	
   

  	
   

  
	
  Kim Jones

  	
   

  	
  1.25

  	
  %

  	
   

  	
   

  
	
  Danny Alford

  	
   

  	
  1.50

  	
  %

  	
   

  	
   

  
	
  Bob Langford

  	
   

  	
  1.50

  	
  %

  	
   

  	
   

  
	
  Janet Hamilton

  	
   

  	
  1.00

  	
  %

  	
   

  	
   

  
	
  Kathy Schwope

  	
   

  	
  0.25

  	
  %

  	
   

  	
   

  
	
  Mark Smith

  	
   

  	
  0.25

  	
  %

  	
   

  	
   

  
	
  Dennis Polson

  	
   

  	
  1.50

  	
  %

  	
   

  	
   

  
	
  Donnie Pruitt

  	
   

  	
  1.23

  	
  %

  	
   

  	
   

  
	
  Denise Kelly

  	
   

  	
  0.89

  	
  %

  	
   

  	
   

  
	
  Betsy Luna

  	
   

  	
  0.25

  	
  %

  	
   

  	
   

  
	
   

  	
  Total

  	
  100

  	
  %

  	
   

  	
   

  

 

 A-1

 

EXHIBIT B

AREA OF INTEREST

The Area of Interest shall be the prospects located in the Louisiana
Parishes of Caddo, Desoto, Sabine, Natchitoches, Red River, Bienville, Jackson,
Richland, Caldwell, Franklin, Madison and Tensas, in which the Bossier Sand
Trend is the primary objective.

 B-1

 

 

NORTH LOUISIANA -
BOSSIER

EXHIBIT C

Wells

 

	
  Well Name

  	
   

  	
  County, State

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [Such other wells as may be
 added from time to time]

  	
   

  	
   

  

 

 

 C-1

 

Exhibit
10.3

EXHIBIT D

Allocations of Profits and Losses and Other Tax Matters

ARTICLE I

TAX DEFINITIONS

Section 1.01           Definitions.  All capitalized terms used herein shall have
the meanings assigned to them in the Participation Agreement relating to North Louisiana
- Bossier, dated March 1, 2006 (the “Agreement”), or as follows:

“Adjusted
Capital Account” means the Capital Account maintained for
each Party, (a) increased by any amounts that such Party is obligated to
restore or is treated as obligated to restore under Regulation Sections
1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5)), and (b) decreased by
any amounts described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and
(6) with respect to such Party.

“Minimum
Gain” has the meaning assigned to that term in Regulation
Section 1.704-2(d).

“Partnership
Nonrecourse Liability” has the meaning assigned to that term
in Regulation Section 1.752-1(a)(2).

“Partner
Nonrecourse Debt” has the meaning assigned to that term in
Regulation Section 1.704-2(b)(4).

“Partner
Nonrecourse Deductions” has the meaning assigned to that term
in Regulation Section 1.704-2(i)(1).

“Simulated Basis” has the meaning set
forth in Section 5.01(b) of this Exhibit.

“Simulated Depletion” has the meaning set
forth in Section 5.01(b) of this Exhibit.

“Simulated Gain” has the meaning set forth
in Section 5.01(b) of this Exhibit.

“Simulated Loss” has the meaning set forth
in Section 5.01(b) of this Exhibit.

ARTICLE
II.

REFLECTION
OF ACTIVITIES FOR FEDERAL AND STATE TAX PURPOSES

Section 2.01           Entity Level Reflection of Activities.  For federal and state tax purposes, but
for no other purpose, all transactions effected by the Parties with respect to
the Designated Property pursuant to the Agreement shall be deemed to have been
effected through the Tax Partnership, rather than by the Parties individually,
as set out in this Article II.

 D-1
 

 

 

Section 2.02           Receipts, Profits, Income and Gains.  For purposes of applying the provisions
of this Exhibit D, all receipts by any Party in respect of the
Designated Property pursuant to the Agreement shall be deemed first to have
been received by the Tax Partnership and then to have been distributed to such
Party by the Tax Partnership in the manner specified in the Agreement.  All such items shall be taken into account in
computing the Tax Partnership’s gross income and gain or loss, as appropriate,
and shall be allocated among the Parties in accordance with Article III hereof.

Section 2.03           Costs, Expenses, Deductions and Losses.  For purposes of applying the provisions
of this Exhibit D, all costs incurred or payments made by any Party in
respect of the Designated Property pursuant to the Agreement shall be deemed
first to have been received by the Tax Partnership as a contribution by the
Party incurring the cost or making the payment pursuant to the terms of the
Agreement and then to have been paid, incurred or distributed by the Tax
Partnership to the payee or obligee of the cost or the recipient of the
payment.  All such items shall be taken
into account in computing the Tax Partnership’s basis, depreciation, depletion,
gross income, deductible expenses, and/or gain or loss, as appropriate, and
shall be allocated among the Parties in accordance with Article III hereof.

Section 2.04           Contributions and Distributions.  For purposes of applying the provisions
of this Exhibit D, contributions to the Tax Partnership (“Capital
Contributions”) shall include all Acquisition Costs, Well Costs, and any other
costs incurred or payments made in respect of the Designated Property pursuant
to the Agreement.  Similarly, for
purposes of applying the provisions of this Exhibit D, distributions
from the Tax Partnership shall include, in the case of any Party, all receipts
by such Party in respect of the Designated Property pursuant to the Agreement.

Section 2.05           Debt Financing.  For
purposes of applying the provisions of this Exhibit D, unless the
Parties agree otherwise and this Exhibit D is amended to reflect such
agreement, (a) all debt financing incurred by a Party shall be for the sole
account of that Party and shall not be considered debt financing of the Tax
Partnership, and (b) no Tax Partnership asset shall be acquired by assumption
of, or taking subject to, any debt financing.

Section 2.06           Record Title. 
For purposes of applying the provisions of this Exhibit D,  (a) all legal title to Designated Property
held by any Party shall be deemed to be held by such Party strictly as nominee
for the Tax Partnership, (b) all assignments made among the Parties with
respect to Designated Property prior to termination of the Tax Partnership
shall be disregarded, and (c) upon termination of the Tax Partnership each
Party holding record title to any Designated Property shall make such
assignments as are required to comply with the provisions of the Agreement.

ARTICLE III

ALLOCATIONS OF PROFIT AND
LOSS

Section 3.01           Allocations
for Capital Account and Tax Purposes.  Subject to Section 7.02 of the
Agreement and except as otherwise provided herein, for purposes of any
applicable 

 D-2
 

 

federal, state or
local income tax law, rule or regulation items of income, gain, deduction,
loss, credit and amount realized shall be allocated to the Parties as follows:

(a)           Income from the sale of oil or gas
production and any credits allowed by Section 29 of the Code relating
thereto shall be allocated in the same manner as proceeds therefrom are
allocated and credited pursuant to Section 5.02 of the Agreement.

(b)           Cost and percentage depletion
deductions and the gain or loss on the sale or other disposition of property
the production from which is subject to depletion (herein sometimes called “Depletable Property”)
as computed for tax purposes shall be taken into account separately by the
Parties rather than the Tax Partnership and, except to the extent and in the
manner provided in Section 5.01(b) of this Exhibit D, shall not
affect any Party’s Capital Account.  For
purposes of Section 613A(c)(7)(D) of the Code, the Tax Partnership’s
adjusted basis in each Depletable Property shall be allocated to the Parties in
proportion to each Party’s respective share of the costs and expenses which
entered into the Tax Partnership’s adjusted basis for each Depletable Property,
and the amount realized on the sale or other disposition of each Depletable
Property shall be allocated to the Parties in proportion to each Party’s
respective share of the proceeds from the sale or other disposition of such
property provided for in Section 5.02 of the Agreement.  For purposes of allocating amounts realized
upon any such sale or disposition which are deemed to be received for federal
or state income tax purposes and are attributable to Tax Partnership
indebtedness or indebtedness to which the Depletable Property is subject at the
time of such sale or disposition, such amounts shall be allocated in the same
manner as Partnership proceeds used for the repayment of such indebtedness
would have been allocated under Section 5.02 of the Agreement.

(c)           Items of deduction, loss and credit
not specifically provided for above (other than loss from the sale or other
disposition of Designated Property), including depreciation, cost recovery and
amortization deductions, shall be allocated to the Parties in the same manner
that the costs and expenses of the Tax Partnership that gave rise to such items
of deduction, loss and credit were allocated pursuant to Section 5.01 of
the Agreement.

(d)           Gain from the sale or other
disposition of Designated Property that is not specifically provided for above
shall be allocated to the Parties in a manner which reflects each Party’s
allocable share of the revenue from the sale of the Designated Property
provided for in Section 5.02 of the Agreement, and loss from the
sale or other disposition of Designated Property that is not specifically
provided for above shall be allocated to the Parties in a manner which reflects
each Party’s allocable share of the costs and expenses of the Designated
Property provided for in Section 5.01 of the Agreement.

(e)           All recapture of income tax
deductions resulting from the sale or other disposition of Designated Property
shall be allocated to the Party to whom the deduction that gave rise to such
recapture was allocated hereunder to the extent that such Party is allocated
any gain from the sale or other disposition of such property.

(f)            Any other items of Tax Partnership
income or gain not specifically provided for above shall be allocated in the
same manner as the revenue that resulted in such income or gain is allocated
and credited pursuant to Section 5.02 of the Agreement.

 D-3
 

 

 

(g)           Notwithstanding any of the foregoing
provisions of this Section 3.01 to the contrary:

(i)            If during any fiscal year of the Tax
Partnership there is a net increase in Minimum Gain attributable to a Partner
Nonrecourse Debt that gives rise to Partner Nonrecourse Deductions, each Party
bearing the economic risk of loss for such Partner Nonrecourse Debt shall be
allocated items of Partnership deductions and losses for such year (consisting
first of cost recovery or depreciation deductions with respect to property that
is subject to such Partner Nonrecourse Debt and then, if necessary, a pro rata
portion of the Tax Partnership’s other items of deductions and losses, with any
remainder being treated as an increase in Minimum Gain attributable to Partner
Nonrecourse Debt in the subsequent year) equal to such Party’s share of Partner
Nonrecourse Deductions, as determined in accordance with applicable
Regulations.

(ii)           If for any fiscal year of the Tax
Partnership there is a net decrease in Minimum Gain attributable to Partnership
Nonrecourse Liabilities, each Party shall be allocated items of Tax Partnership
income and gain for such year (consisting first of gain recognized, including
Simulated Gain, from the disposition of Designated Property subject to one or
more Partnership Nonrecourse Liabilities and then, if necessary, a pro rata
portion of the Tax Partnership’s other items of income and gain, and if
necessary, for subsequent years) equal to such Party’s share of such net
decrease (except to the extent such Party’s share of such net decrease is
caused by a change in debt structure with such Party commencing to bear the
economic risk of loss as to all or part of any Partnership Nonrecourse
Liability or by such Party contributing capital to the Tax Partnership that the
Tax Partnership uses to repay a Partnership Nonrecourse Liability), as
determined in accordance with applicable Regulations.

(iii)          If for any fiscal year of the Tax
Partnership there is a net decrease in Minimum Gain attributable to a Partner
Nonrecourse Debt, each Party shall be allocated items of Tax Partnership income
and gain for such year (consisting first of gain recognized, including
Simulated Gain, from the disposition of Designated Property subject to Partner
Nonrecourse Debt, and then, if necessary, a pro rata portion of the Tax
Partnership’s other items of income and gain, and if necessary, for subsequent
years) equal to such Party’s share of such net decrease (except to the extent
such Party’s share of such net decrease is caused by a change in debt structure
or by the Tax Partnership’s use of capital contributed by such Party to repay
Partner Nonrecourse Debt) as determined in accordance with applicable
Regulations.

(h)           CWEI shall use all reasonable efforts
to prevent any allocation or distribution from causing a negative balance in a
Party’s Adjusted Capital Account. 
Consistent therewith, and notwithstanding any of the foregoing
provisions of this Section 3.01 of this Exhibit D to the
contrary, if for any fiscal year of the Tax Partnership the allocation of any
loss or deduction (net of any income or gain) to any Party would cause or
increase a negative balance in such Party’s Adjusted Capital Account as of the
end of such fiscal year (the “Deficit Party”) after taking into account the provisions of Section 3.01(g)
of this Exhibit D, only the amount of such loss or 

 D-4
 

 

deduction that
reduces the balance to zero shall be allocated to such Deficit Party and the
remaining loss or deduction shall be allocated to the Parties whose Adjusted
Capital Accounts have a positive balance remaining at such time (each, a “Positive Party”). 
After any such allocation, any Tax Partnership income or gain (including
Simulated Gain) that would otherwise be allocated to the Deficit Party shall be
allocated instead to the Positive Parties up to an amount equal to the Tax
Partnership loss or deduction allocated to each Positive Party under the
preceding sentence; provided, however, that no allocation of
income or gain realized shall be made under this sentence if the effect of such
allocation would be to cause the Adjusted Capital Account of the Deficit Party
to be less than zero.  If, after taking
into account the allocation in the first sentence of this Section 3.01(h),
the Adjusted Capital Account balance of the Deficit Party remains less than
zero at the end of a fiscal year, a pro rata portion of each item of Tax
Partnership income or gain (including Simulated Gain) otherwise allocable to
the Positive Parties for such fiscal year (or if there is no such income or
gain allocable to the Positive Parties for such fiscal year, all such income or
gain (including Simulated Gain) so allocable in the succeeding fiscal year or
years) shall be allocated to the Deficit Party in an amount necessary to cause
its Adjusted Capital Account balance to equal zero; provided, that no
allocation under this sentence shall have the effect of causing the Positive
Party’s Adjusted Capital Account to be less than zero.  After any such allocation, any Tax
Partnership gain (including Simulated Gain) resulting from the sale or other
disposition of Designated Property that would otherwise be allocated to the
Deficit Party for any fiscal year under this Section 3.01 shall be
allocated instead to the Positive Parties until the amount of gain so allocated
equals the amount of gain (including Simulated Gain) previously allocated to
such Deficit Party under the preceding sentence of this Section 3.01(h);
provided, however, that no allocation of gain (including
Simulated Gain) shall be made under this sentence if the effect of such
allocation would be to cause the Adjusted Capital Account of a Deficit Party to
be less than zero.

ARTICLE IV

OTHER TAX MATTERS

Section 4.01           Tax
Elections.

(a)           For tax purposes, the Tax Partnership
shall elect to use the calendar as its taxable year, and to report income and
loss under the accrual method of accounting.

(b)           In connection with any Transfer or
other assignment of an interest in the Tax Partnership permitted by the terms
and provisions of this Agreement, CWEI shall, at the written request of the
transferor, transferee or other successor, cause the Tax Partnership to make an
election to adjust the basis of the Tax Partnership’s property in the manner
provided in sections 734(b) and 743(b) of the Code (or any like statute or regulation
then in effect), and such transferor, transferee or other successor shall pay
all costs incurred by the Tax Partnership in connection therewith, including,
without limitation, reasonable attorneys’ and accountants’ fees.

(c)           Unless approved by the Participants,
the Tax Partnership shall not file any election pursuant to sections 761 or
7701 of the Code, section 301.7701-3 of the Regulations or otherwise, the
effect of which would cause the Tax Partnership not to be treated as a
partnership for Federal income tax purposes.

 D-5
 

 

 

(d)           Except as otherwise specifically
provided herein, CWEI shall have the sole and absolute discretion to make any
other available election under the Code on behalf of the Tax Partnership
without the prior approval by the Participants.

Section 4.02           Tax
Matters Partner.  CWEI is
hereby designated the “tax matters partner” of the Tax Partnership pursuant to
Section 6231(a)(7) of the Code.

ARTICLE V

CAPITAL ACCOUNT
MAINTENANCE

Section 5.01           Maintenance
of Capital Accounts.  An
individual Capital Account (a “Capital Account”) shall be maintained by the Tax Partnership
for each Party as provided below:

(a)           The Capital Account of each Party
shall, except as otherwise provided herein, be (A) credited by such Party’s
Capital Contributions when made (net of liabilities secured by contributed
property that the Tax Partnership is considered to assume or take subject to
under Section 752 of the Code), (B) credited with the amount of any item of
taxable income or gain and the amount of any item of income or gain exempt from
tax allocated to such Party, (C) credited with the Party’s share of Simulated
Gain as provided in Section 5.01(b) of this Exhibit D, (D)
debited by the amount of any item of tax deduction or loss allocated to such
Party, (E) debited with the Party’s share of Simulated Loss and Simulated
Depletion as provided in Section 5.01(b) of this Exhibit D,
(F) debited by such Party’s allocable share of expenditures of the Tax
Partnership not deductible in computing the Tax Partnership’s taxable income
and not properly chargeable as capital expenditures, including any
non-deductible book amortizations of capitalized costs, and (G) debited by the
amount of cash or the fair market value of any property distributed to such
Party (net of liabilities secured by such distributed property that such Party
is considered to assume or take subject to under Section 752 of the Code).  Immediately prior to any distribution of
assets by the Tax Partnership that is not pursuant to a liquidation of the Tax
Partnership or all or any portion of a Party’s interest therein, the Parties’
Capital Accounts shall be adjusted by (X) assuming that the distributed assets
were sold by the Tax Partnership for cash at their respective fair market
values as of the date of distribution by the Tax Partnership and (Y) crediting
or debiting each Party’s Capital Account with its respective share of the
hypothetical gains or losses, including Simulated Gains and Simulated Losses,
resulting from such assumed sales in the same manner as each such Capital
Account would be debited or credited for gains or losses on actual sales of
such assets.

(b)           The allocation of basis prescribed by
Section 613A(c)(7)(D) of the Code and provided for in Section 3.01(b) of
this Exhibit D and each Party’s separately computed depletion deductions
shall not reduce such Party’s Capital Account, but such Party’s Capital Account
shall be decreased by an amount equal to the product of the depletion
deductions that would otherwise be allocable to the Tax Partnership in the
absence of Section 613A(c)(7)(D) of the Code (computed without regard to any
limitations which theoretically could apply to any Party) times such Party’s
percentage share of the adjusted basis of the property (determined under Section
3.01(b) of this Exhibit D) with respect to which such depletion is claimed
(“Simulated
Depletion”).  The Tax
Partnership’s basis in any Depletable Property as adjusted from time to time
for the Simulated Depletion allocable to all Parties (and where the context requires,
each 

 D-6
 

 

Party’s allocable share
thereof, which share shall be determined in the same manner as the allocation
of basis prescribed in Section 3.01(b) of this Exhibit D) is herein
called “Simulated
Basis.”  No Party’s Capital
Account shall be decreased, however, by Simulated Depletion deductions
attributable to any Depletable Property to the extent such deductions exceed
such Party’s allocable share of the Tax Partnership’s remaining Simulated Basis
in such property.  The Tax Partnership
shall compute simulated gain (“Simulated Gain”) or simulated loss (“Simulated Loss”) attributable to
the sale or other disposition of a Depletable Property based on the difference
between the amount realized from such sale or other disposition and the
Simulated Basis of such property, as theretofore adjusted.  Any Simulated Gain shall be allocated to the
Parties and shall increase their respective Capital Accounts in the same manner
as the amount realized from such sale or other disposition in excess of
Simulated Basis shall have been allocated pursuant to Section 3.01(b) of
this Exhibit D.  Any Simulated Loss
shall be allocated to the Parties and shall reduce their respective Capital
Accounts in the same percentages as the costs of the property sold were
allocated up to an amount equal to each Party’s share of the Tax Partnership’s
Simulated Basis in such property at the time of such sale.

(c)           Any adjustments of basis of
Designated Property provided for under Sections 734 and 743 of the Internal
Revenue Code and comparable provisions of state law (resulting from an election
under Section 754 of the Code or comparable provisions of state law) and any
election by an individual Party under Section 59(e)(4) of the Code to amortize
such Party’s share of intangible drilling and development costs shall not
affect the Capital Accounts of the Parties (unless otherwise required by
applicable Treasury Regulations), and the Parties’ Capital Accounts shall be
debited or credited pursuant to the terms of this Section 5.01 as if no
such election had been made.

(d)           Capital Accounts shall be adjusted,
in a manner consistent with this Section 5.01, to reflect any
adjustments in items of Tax Partnership income, gain, loss or deduction that
result from amended returns filed by the Tax Partnership or pursuant to an
agreement by the Tax Partnership with the Internal Revenue Service or a final
court decision.

(e)           In the case of property carried on
the books of the Tax Partnership at an amount which differs from its adjusted
basis, the Parties’ Capital Accounts shall be debited or credited for items of
depreciation, cost recovery, Simulated Depletion, amortization and gain or loss
(including Simulated Gain or Simulated Loss) with respect to such property
computed in the same manner as such items would be computed if the adjusted tax
basis of such property were equal to such book value, in lieu of the capital
account adjustments provided above for such items, all in accordance with
Regulation Section 1.704-1(b)(2)(iv)(g).

(f)            It is the intention of the Parties
that the Capital Accounts of each Party be kept in the manner required under
Regulation Section 1.704-1(b)(2)(iv).  To
the extent any additional adjustment to the Capital Accounts is required by
such regulations, CWEI is hereby authorized to make such adjustment after
notice to the Party.

[End of Exhibit D]

 

 D-7Exhibit 4.10

AMENDMENT
NUMBER ONE TO AMENDED AND RESTATED

REVOLVING CREDIT AGREEMENT

THIS AMENDMENT NUMBER ONE TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this “Amendment”), dated
as of August 1, 2006, is entered into by and among FRIENDLY ICE
CREAM CORPORATION, a Massachusetts corporation (the “Borrower”),
the lenders signatory hereto (each a “Lender”
and collectively, the ”Lenders”), and WELLS FARGO FOOTHILL, INC., a California corporation, as
administrative agent for the Lenders (in such capacity, the “Administrative
Agent”), in light of the following:

W
I T N E S S E T H

WHEREAS, Borrower and the Lender Group are parties to
that certain Amended and
Restated Revolving Credit Agreement, dated as of March 15, 2006 (as
amended, restated, supplemented, or modified from time to time, the “Credit
Agreement”);

WHEREAS, Borrower has requested that the Lender Group
agree to amend the Credit Agreement in accordance with the provisions of this
Amendment;

WHEREAS, subject to the terms and conditions set forth
in this Amendment, the Lender Group is willing to so amend the Credit
Agreement; and

WHEREAS, Borrower has
advised the Lender Group that the Borrower has failed to comply with the
covenant set forth in Section 8.20 of the Credit Agreement, as more
fully set forth in Section 3 of this Amendment, and, subject to the
terms and conditions set forth herein, the Lender Group is willing to waive
such Event of Default.

NOW, THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
to amend the Credit Agreement as follows:

1.             DEFINITIONS. 
Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed to them in the Credit Agreement, as amended hereby.

2.             AMENDMENTS TO CREDIT AGREEMENT.

(a)           Section
1.1 of the Credit Agreement is hereby amended by amending and restating the
following defined terms in their entirety as follows:

“Applicable Margin.  For each period commencing on an Adjustment
Date through the date immediately preceding the next Adjustment Date (each a “Rate
Adjustment Period”), the Applicable Margin shall be the applicable margin
set forth 

 1
 

 

below with respect to the Leverage Ratio, as
determined for the Reference Period of the Borrower and its Subsidiaries ending
on the fiscal quarter ended immediately prior to the applicable Rate Adjustment
Period.

	
  Level

  	
   

  	
  Leverage Ratio

  	
   

  	
  Base Rate

  Loans

  	
   

  	
  Eurodollar

  Rate Loans

  	
   

  	
  Letter of

  Credit Fees

  	
   

  	
  Commitment

  Fee

  
	
  I

  	
   

  	
  Greater than or equal to 5.00:1.00

  	
   

  	
  2.00%

  	
   

  	
  4.00%

  	
   

  	
  4.00%

  	
   

  	
  0.75%

  
	
  II

  	
   

  	
  Less than 5.00:1.00, but greater than or equal to
  4.00:1.00

  	
   

  	
  1.75%

  	
   

  	
  3.75%

  	
   

  	
  3.75%

  	
   

  	
  0.75%

  
	
  III

  	
   

  	
  Less than 4.00:1.00, but greater than or equal to
  3.50:1.00

  	
   

  	
  1.50%

  	
   

  	
  3.50%

  	
   

  	
  3.50%

  	
   

  	
  0.75%

  
	
  IV

  	
   

  	
  Less than 3.50:1.00

  	
   

  	
  1.00%

  	
   

  	
  3.00%

  	
   

  	
  3.00%

  	
   

  	
  0.75%

  

 

Notwithstanding the foregoing, if the Borrower fails
to deliver any Compliance Certificate pursuant to §8.4(d) hereof then, for the
period commencing on the next Adjustment Date to occur subsequent to such
failure through the date immediately following the date on which such
Compliance Certificate is delivered, the Applicable Margin shall be the highest
Applicable Margin set forth above.” 

“Revolving Credit Loan Maturity Date.  June 30, 2010.”

(b)           Section
1.1 of the Credit Agreement is hereby amended by deleting the definitions
of “Fourth Amendment Effective Date”, “Interest Coverage Ratio”, “Permitted
Units”, and “Permitted Unit Sales” appearing therein, in their entirety.

(c)           The
definition of “Change of Control” appearing in Section 1.1 of the Credit
Agreement is hereby amended by deleting the reference to “30%” appearing
therein, and replacing it with the figure “50%”.

(d)           The
definition of “Consolidated EBITDA” appearing in Section 1.1 of the
Credit Agreement is hereby amended by deleting all references to the text “fiscal
period” and “period” appearing therein, and in each case replacing them with
the text “Reference Period”.

(e)           The
definition of “Consolidated EBITDAR” appearing in Section 1.1 of the
Credit Agreement is hereby amended by deleting all references to the text “fiscal

 2
 

 

period” appearing therein, and in each case replacing them with the
text “Reference Period”.

(f)            The
definition of “Excluded Properties” appearing in Section 1.1 of the
Credit Agreement is hereby amended by deleting the text “(iii) Permitted
Units and (iv)” appearing therein, and replacing it with the text “and, (iii)”.

(g)           The
definition of “Interest Payment Date” appearing in Section 1.1 of the
Credit Agreement is hereby amended by deleting all references to the text “quarter”
appearing therein, and in each case replacing it with the text “month”.

(h)           The
definition of “Interest Period” appearing in Section 1.1 of the Credit
Agreement is hereby amended by deleting the reference to the text “quarter”
appearing therein, and replacing it with the text “month”.

(i)            The
definition of “Maintenance Capital Expenditures” appearing in Section 1.1
of the Credit Agreement is hereby amended by deleting the reference to “$15,000,000”
appearing therein, and replacing it with the figure “$13,000,000”.

(j)            The
definition of “Permitted Asset Sales” appearing in Section 1.1 of the
Credit Agreement is hereby amended by deleting the reference to “(other than
assets sold pursuant to Permitted Unit Sales)” appearing therein, in its
entirety.

(k)           Section
2.2 of the Credit Agreement is hereby amended by deleting all references to
the text “quarter” appearing therein, and in each case replacing them with the
text “month”, and Section 2.2 is hereby further amended by deleting the
text “quarterly” appearing therein, and replacing it with the text “monthly”.

(l)            Section
3.2(b)(i) of the Credit Agreement is hereby amended by deleting the text “or
(D) Permitted Unit Sales” appearing therein, and Section 3.2(b)(i)
is hereby further amended by adding the text “or” immediately before the text “(C)
Excess Properties Sales”.

(m)          Section
3.2(c) of the Credit Agreement is hereby amended by deleting the text “as
of June 15 of each such calendar year (or the next Business Day, if, in
any year, June 15 is not a Business Day) and” appearing therein, in its
entirety.

(n)           Section
8.4(i) of the Credit Agreement is hereby amended by deleting the text, “concurrently
with the financial statements delivered pursuant to clause (c) hereof,
account receivable agings reports” appearing therein, and replacing them with
the text “[Intentionally Omitted].”

(o)           Section
8.20 of the Credit Agreement is hereby amended by deleting the text “Within
30 days after the Closing Date” appearing therein, and replacing them with the
text “On or before August 31, 2006”.

 3
 

 

 

(p)           Section
9.1(c) of the Credit Agreement is hereby amended and restated in its
entirety as follows:

“(c) Indebtedness incurred in connection with
(i) the acquisition after the Original Closing Date of any real or
personal property by the Borrower or any Restricted Subsidiary or under any
Capitalized Lease, provided;  that (A) the aggregate
principal amount of such Indebtedness of the Borrower and its Restricted
Subsidiaries incurred shall not exceed the aggregate amount of $10,000,000.00
at any one time and (B) the Borrower and its Restricted Subsidiaries shall
not incur such Indebtedness in an aggregate amount greater than $6,000,000 per
fiscal year, and (ii) a Permitted Acquisition;”

(q)           Section
9.5.2(b) of the Credit Agreement is hereby amended by deleting the text, “Permitted
Unit Sales” appearing therein, and replacing it with the text, “[Intentionally
Omitted].”

(r)            Section
9.13 of the Credit Agreement is hereby amended by deleting the text, “(as
such Schedule shall be updated pursuant to §8.4(i))” appearing therein.

(s)           Section
10.1 of the Credit Agreement is hereby amended and restated in its entirety
by deleting the text and chart appearing therein, and replacing them with the
text, “[Intentionally Omitted].”

(t)            Section
10.2 of the Credit Agreement is hereby amended by deleting the chart
appearing therein and replacing it with the following chart:

	
  “Fiscal Year

  	
   

  	
  Capital Expenditures

  
	
  2004

  	
   

  	
  $23,500,000

  
	
  2005

  	
   

  	
  $23,500,000

  
	
  2006

  	
   

  	
  $24,000,000

  
	
  2007

  	
   

  	
  $26,000,000

  
	
  2008

  	
   

  	
  $27,000,000

  
	
  2009

  	
   

  	
  $28,000,000

  
	
  2010

  	
   

  	
  $29,000,000”

  

 

 4
 

 

 

(u)           Section
10.2 of the Credit Agreement is hereby amended by deleting the text “for
the 2006 fiscal year” appearing therein, and replacing it with the text “for
the 2007 fiscal year”.

(v)           Section
10.3 of the Credit Agreement is hereby amended by deleting the chart
appearing therein and replacing it with the following chart:

	
  “Period

  	
   

  	
  Amount

  
	
  Fourth Fiscal Quarter of 2005

  	
   

  	
  $42,000,000

  
	
  First Fiscal Quarter of 2006

  	
   

  	
  $38,800,000

  
	
  Second Fiscal Quarter of 2006

  	
   

  	
  $40,500,000

  
	
  Third Fiscal Quarter of 2006

  	
   

  	
  $40,500,000

  
	
  Fourth Fiscal Quarter of 2006

  	
   

  	
  $40,500,000

  
	
  First Fiscal Quarter of 2007

  	
   

  	
  $40,500,000

  
	
  Second Fiscal Quarter of 2007

  	
   

  	
  $40,500,000

  
	
  Third Fiscal Quarter of 2007

  	
   

  	
  $40,500,000

  
	
  Fourth Fiscal Quarter of 2007

  	
   

  	
  $40,500,000

  
	
  First Fiscal Quarter of 2008

  	
   

  	
  $41,500,000

  
	
  Second Fiscal Quarter of 2008

  	
   

  	
  $43,000,000

  
	
  Third Fiscal Quarter of 2008

  	
   

  	
  $43,000,000

  
	
  Fourth Fiscal Quarter of 2008

  	
   

  	
  $43,000,000

  
	
  First Fiscal Quarter of 2009

  	
   

  	
  $44,000,000

  
	
  Second Fiscal Quarter of 2009

  	
   

  	
  $45,000,000

  
	
  Third Fiscal Quarter of 2009

  	
   

  	
  $46,000,000

  
	
  Fourth Fiscal Quarter of 2009

  	
   

  	
  $47,000,000

  
	
  First Fiscal Quarter of 2010

  	
   

  	
  $48,000,000

  
	
  Second Fiscal Quarter of 2010

  	
   

  	
  $49,000,000”

  

 

 5
 

 

 

(w)          Section
10.4 of the Credit Agreement is hereby amended by deleting the chart
appearing therein and replacing it with the following chart:

	
  “Period

  	
   

  	
  Ratio

  
	
  Fourth Fiscal Quarter of 2005

  	
   

  	
  5.80:1.00

  
	
  First Fiscal Quarter of 2006

  	
   

  	
  6.35:1.00

  
	
  Second Fiscal Quarter of 2006

  	
   

  	
  5.95:1.00

  
	
  Third Fiscal Quarter of 2006

  	
   

  	
  5.85:1.00

  
	
  Fourth Fiscal Quarter of 2006

  	
   

  	
  5.75:1.00

  
	
  First Fiscal Quarter of 2007

  	
   

  	
  5.95:1.00

  
	
  Second Fiscal Quarter of 2007

  	
   

  	
  5.95:1.00

  
	
  Third Fiscal Quarter of 2007

  	
   

  	
  5.80:1.00

  
	
  Fourth Fiscal Quarter of 2007

  	
   

  	
  5.80:1.00

  
	
  First Fiscal Quarter of 2008

  	
   

  	
  5.70:1.00

  
	
  Second Fiscal Quarter of 2008

  	
   

  	
  5.50:1.00

  
	
  Third Fiscal Quarter of 2008

  	
   

  	
  5.40:1.00

  
	
  Fourth Fiscal Quarter of 2008

  	
   

  	
  5.30:1.00

  
	
  First Fiscal Quarter of 2009

  	
   

  	
  5.20:1.00

  
	
  Second Fiscal Quarter of 2009

  	
   

  	
  5.00:1.00

  
	
  Third Fiscal Quarter of 2009

  	
   

  	
  4.90:1.00

  
	
  Fourth Fiscal Quarter of 2009

  	
   

  	
  4.90:1.00

  
	
  First Fiscal Quarter of 2010

  	
   

  	
  4.80:1.00

  
	
  Second Fiscal Quarter of 2010

  	
   

  	
  4.80:1.00”

  

 

 6
 

 

 

(x)            Section
10.6 of the Credit Agreement is hereby amended and restated in its entirety
as follows:

“10.6      Fixed Charge Coverage Ratio  The Borrower will not permit the Fixed Charge
Coverage Ratio for any Reference Period to be less than the ratio set forth
opposite such period set forth in such table:

	
  Period

  	
   

  	
  Ratio

  
	
  Fourth Fiscal Quarter of 2005

  	
   

  	
  1.05:1.00

  
	
  First Fiscal Quarter of 2006

  	
   

  	
  1.05:1.00

  
	
  Second Fiscal Quarter of 2006

  	
   

  	
  1.05:1.00

  
	
  Third Fiscal Quarter of 2006

  	
   

  	
  1.05:1.00

  
	
  Fourth Fiscal Quarter of 2006

  	
   

  	
  1.05:1.00

  
	
  First Fiscal Quarter of 2007

  	
   

  	
  1.00:1.00

  
	
  Second Fiscal Quarter of 2007

  	
   

  	
  1.00:1.00

  
	
  Third Fiscal Quarter of 2007

  	
   

  	
  1.00:1.00

  
	
  Fourth Fiscal Quarter of 2007

  	
   

  	
  1.00:1.00

  
	
  First Fiscal Quarter of 2008

  	
   

  	
  1.00:1.00

  
	
  Second Fiscal Quarter of 2008

  	
   

  	
  1.05:1.00

  
	
  Third Fiscal Quarter of 2008

  	
   

  	
  1.05:1.00

  
	
  Fourth Fiscal Quarter of 2008

  	
   

  	
  1.05:1.00

  
	
  First Fiscal Quarter of 2009

  	
   

  	
  1.05:1.00

  
	
  Second Fiscal Quarter of 2009

  	
   

  	
  1.05:1.00

  
	
  Third Fiscal Quarter of 2009

  	
   

  	
  1.10:1.00

  
	
  Fourth Fiscal Quarter of 2009

  	
   

  	
  1.10:1.00

  
	
  First Fiscal Quarter of 2010

  	
   

  	
  1.10:1.00

  
	
  Second Fiscal Quarter of 2010

  	
   

  	
  1.10:1.00”

  

 

 7
 

 

 

(y)           Schedule
1(f) of the Credit Agreement is hereby deleted in its entirety.

3.             DEFAULT. 
Borrower has informed
the Lender Group that the Borrower has failed to obtain, within the time period set forth therein,
such Concentration Account Agreements, Agency Account Agreements, and Control
Agreements with respect to the Deposit Accounts and securities accounts of
Borrower and the Guarantors as Administrative Agent shall reasonably require
pursuant to Section 8.20 of the Credit Agreement (the “Designated
Event of Default”).

4.             WAIVER. 
Anything in the
Credit Agreement to the contrary notwithstanding, and subject to the
satisfaction by the Borrower of the conditions precedent set forth in Section
5 hereof and the effectiveness of the amendments in Section 2, the
Lender Group hereby waives the Designated Event of Default; provided, however,
that failure by the Borrower to comply with Section 8.20 of the Credit
Agreement as amended by this Amendment, by the date specified in such Section
8.20 as so amended, shall constitute an immediate Event of Default.

5.             CONDITIONS PRECEDENT TO THIS AMENDMENT.  The satisfaction of each of the following
shall constitute conditions precedent to the effectiveness of this Amendment
and each and every provision hereof:

(a)           Administrative Agent shall have
received this Amendment, duly executed and delivered by the Lenders and the
Borrower, and the same shall be in full force and effect;

 8
 

 

 

(b)           Administrative Agent shall have
received the reaffirmation and consent of each Guarantor attached hereto as Exhibit
A (the “Consent”), duly executed and delivered by such Guarantor;

(c)           Within 45 days of the date hereof,
Administrative Agent shall have received that certain Amendment to Security
Agreement, in form and substance satisfactory to Administrative Agent, duly
executed and delivered by the Borrower and the Restricted Subsidiaries, and the
same shall be in full force and effect;

(d)           Within 45 days of the date hereof,
Administrative Agent shall have received the Mortgage Amendments,  duly executed and delivered by the Borrower,
and the same shall be in full force and effect;

(e)           Administrative Agent shall have
received that certain Amendment to Amended and Restated Fee Letter, dated
concurrently herewith, in form and substance satisfactory to Administrative
Agent, duly executed and delivered by the Borrower, and the same shall be in
full force and effect:

(f)            After giving effect to this
Amendment, the representations and warranties in this Amendment, the Credit
Agreement, and the other Loan Documents shall be true and correct in all
respects on and as of the date hereof, as though made on such date (except to
the extent that such representations and warranties relate solely to an earlier
date);

(g)           After giving effect to this
Amendment, no Default or Event of Default shall have occurred and be continuing
on the date hereof or as of the date of the effectiveness of this Amendment;
and

(h)           No injunction, writ, restraining
order, or other order of any nature prohibiting, directly or indirectly, the
consummation of the transactions contemplated herein shall have been issued and
remain in force by any Governmental Authority against the Borrower, any
Guarantor, or any member of the Lender Group.

6.             REPRESENTATIONS AND WARRANTIES.  Borrower hereby represents and warrants to
the Lender Group as follows:

(a)           After giving effect to this
Amendment, the representations and warranties in this Amendment, the Credit
Agreement, and the other Loan Documents are true and correct in all respects on
and as of the date hereof, as though made on such date (except to the extent
that such representations and warranties relate solely to an earlier date);

(b)           The execution, delivery, and
performance of this Amendment and of the Credit Agreement, as amended by this
Amendment, are within the Borrower’s corporate powers, have been duly
authorized by all necessary corporate action, and are not in contravention of
any law, rule, or regulation, or any order, judgment, decree, writ, 

 9
 

 

injunction, or award of any arbitrator, court, or
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its
properties may be bound or affected;

(c)           This Amendment and the Credit
Agreement, as amended by this Amendment, constitute the Borrower’s legal,
valid, and binding obligation, enforceable against the Borrower in accordance
with its terms;

(d)           This Amendment has been duly executed
and delivered by the Borrower;

(e)           After giving effect to this
Amendment, no Default or Event of Default has occurred and is continuing on the
date hereof or as of the date of the effectiveness of this Amendment;

(f)            No injunction, writ, restraining
order, or other order of any nature prohibiting, directly or indirectly, the
consummation of the transactions contemplated herein has been issued and
remains in force by any Governmental Authority against the Borrower, any
Guarantor, or any member of the Lender Group;

(g)           The execution, delivery, and
performance of the Consent is within each Guarantor’s corporate power, has been
duly authorized by all necessary corporate action, and is not in contravention
of any law, rule or regulation, or any order, judgment, decree, writ, injunction,
or award of any arbitrator, court or governmental authority, or of the terms of
its charter or bylaws, or of any contract or undertaking to which it is a party
or by which any of its properties may be bound or affected;

(h)           The Consent constitutes each
Guarantor’s valid, and binding obligations, enforceable against each such
Guarantor in accordance with its terms; and

(i)            The Consent has been duly executed
and delivered by each Guarantor.

7.             CONSTRUCTION.  THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF MASSACHUSETTS APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF MASSACHUSETTS.

8.             ENTIRE AMENDMENT; EFFECT OF AMENDMENT.  This Amendment, and terms and provisions
hereof, constitute the entire agreement among the parties pertaining to the
subject matter hereof and supersedes any and all prior or contemporaneous
amendments relating to the subject matter hereof. Except for the amendments to
the Credit Agreement expressly set forth in Section 2 hereof, the Credit
Agreement and other Loan Documents shall remain unchanged and in full force and
effect. The execution, delivery, and performance of this Amendment shall not
operate as a waiver of or, except as expressly set forth herein, as an amendment
of, any right, power, or remedy of the Lender Group as in effect prior to the
date hereof.  The amendments set  

 10
 

 

forth herein are limited to the specifics hereof,
shall not apply with respect to any facts or occurrences other than those on
which the same are based, and except as expressly set forth herein, shall
neither excuse any future non-compliance with the Credit Agreement, nor shall
operate as a waiver of any Default or Event of Default.  To the extent any terms or provisions of this
Amendment conflict with those of the Credit Agreement or other Loan Documents,
the terms and provisions of this Amendment shall control.  This Amendment is a Loan Document.

9.             COUNTERPARTS; TELEFACSIMILE EXECUTION.  This Amendment may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.  Delivery of an
executed counterpart of this Amendment by telefacsimile or electronic mail
shall be equally as effective as delivery of an original executed counterpart
of this Amendment.  Any party delivering
an executed counterpart of this Amendment by telefacsimile or electronic mail
also shall deliver an original executed counterpart of this Amendment, but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Amendment.

10.           MISCELLANEOUS.

(a)           Upon the effectiveness of this
Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”,
“herein”, “hereof” or words of like import referring to the Credit Agreement
shall mean and refer to the Credit Agreement as amended by this Amendment.

(b)           Upon the effectiveness of this
Amendment, each reference in the Loan Documents to the “Credit Agreement”, “thereunder”,
“therein”, “thereof” or words of like import referring to the Credit Agreement
shall mean and refer to the Credit Agreement as amended by this Amendment.

[signature page
follows]

 11

 

 

IN WITNESS WHEREOF, the parties have caused this
Amendment to be executed and delivered as of the date first written above.

	
  

  	
  FRIENDLY ICE CREAM CORPORATION

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ PAUL V. HOAGLAND

  
	
   

  	
  Name: 

  	
  Paul V. Hoagland

  
	
   

  	
  Title: 

  	
  Executive Vice President

  of Administration and

  Chief Financial Officer

  

 

 

 

	
  

  	
  WELLS FARGO FOOTHILL, INC.,

  
	
   

  	
  as Administrative Agent and as a Lender

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ ILENE SILBERMAN

  
	
   

  	
  Name:

  	
  Ilene Silberman

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TD BANKNORTH, N.A.,

  
	
   

  	
  as a Lender

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ MARIA GONCALVES

  
	
   

  	
  Name:

  	
  Maria Goncalves

  
	
   

  	
  Title:

  	
  Senior Vice President

  

 

 

 

Exhibit
A

REAFFIRMATION
AND CONSENT

All capitalized terms used herein but not otherwise
defined herein shall have the meanings ascribed to them in that certain Amended
and Restated Revolving Credit Agreement, by and among FRIENDLY ICE
CREAM CORPORATION, a Massachusetts corporation (the “Borrower”),
the lenders signatory
thereto (each a “Lender” and collectively, the “Lenders”),
and WELLS FARGO FOOTHILL, INC.,
a California corporation, as administrative agent for the Lenders (in such
capacity, the “Administrative Agent”), dated as of March 15, 2006 (as
amended, restated, supplemented or otherwise modified, the “Credit Agreement”).  Reference is hereby made to that certain
Amendment Number One to Amended and Restated Revolving Credit Agreement, dated
as of August 1, 2006 the “Amendment”), among the Borrower and the
Lender Group.  The undersigned each
hereby (a) represent and warrant to the Lender Group that the execution,
delivery, and performance of this Reaffirmation and Consent are within its powers,
have been duly authorized by all necessary action, and are not in contravention
of any law, rule, or regulation, or any order, judgment, decree, writ,
injunction, or award of any arbitrator, court, or governmental authority, or of
the terms of its charter or bylaws, or of any contract or undertaking to which
it is a party or by which any of its properties may be bound or affected; (b)
consents to the amendment of the Credit Agreement by the Amendment; (c)
acknowledges and reaffirms its obligations owing to the Lender Group under any
Loan Documents to which it is a party; and (d) agrees that each of the Loan
Documents to which it is a party is and shall remain in full force and
effect.  Although the undersigned has
been informed of the matters set forth herein and has acknowledged and agreed
to same, it understands that the Lender Group has no obligations to inform it
of such matters in the future or to seek its acknowledgment or agreement to
future amendments, and nothing herein shall create such a duty.  Delivery of an executed counterpart of this
Reaffirmation and Consent by telefacsimile or electronic mail shall be equally
as effective as delivery of an original executed counterpart of this
Reaffirmation and Consent.  Any party
delivering an executed counterpart of this Reaffirmation and Consent by
telefacsimile or electronic mail also shall deliver an original executed
counterpart of this Reaffirmation and Consent but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability,
and binding effect of this Reaffirmation and Consent.  This Reaffirmation and Consent shall be
governed by the laws of the State of Massachusetts.

[signature page
follows]

 

 

IN WITNESS WHEREOF, the undersigned have each caused
this Reaffirmation and Consent to be executed as of the date of the Amendment.

	
  

  	
  FRIENDLY’S RESTAURANTS FRANCHISE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ PAUL V. HOAGLAND

  
	
   

  	
  Name:

  	
  Paul V. Hoagland

  
	
   

  	
  Title:

  	
  Executive Vice President of

  Administration and Chief Financial Officer

  

 

	
  

  	
  FRIENDLY’S INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ PAUL V. HOAGLAND

  
	
   

  	
  Name:

  	
  Paul V. Hoagland

  
	
   

  	
  Title:

  	
  Executive Vice President of

  Administration and Chief Financial Officer

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