8-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.    20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
August 21, 2003
THE EXPLORATION COMPANY OF DELAWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware	0-9120		84-0793089
(State of	(Commission File		(IRS Employer
incorporation)	Number)		Identification No.)
500 North Loop 1604 East, Suite 250
San Antonio, Texas		78232
(Address of principal executive offices)		(Zip Code)
(210) 496-5300
(Registrant's telephone number,
including area code)

Item 5:  Other Events
The Registrant's previously announced private placement of 16,000 shares of Series B Preferred Stock ("Preferred") and 2,133,333 shares of common stock, with Kayne Anderson Energy Fund II, L.P. and Gryphon Master Fund, L.P., closed and funded on August 21, 2003, raising a total of approximately $15.1 million after offering costs. The common stock issued will be restricted from trading in a public transaction; one-half of the shares will be restricted from trading for one year from issuance, and one-half will be restricted from trading for two years from issuance. The Company has the option to repurchase up to one-half of the common stock at a purchase price of $6.00 per share for a period of two years from closing.
The Preferred yields dividends at 8.0% per annum, payable quarterly in cash, for the first three years, increasing to 10% per annum at that time. The Preferred must be redeemed at the end of six years, and is redeemable at the Company's option anytime after issuance at 100% of the stated value. The Preferred has a liquidation preference equal to the stated value, an aggregate of $16 million. The Preferred shares have certain rights such as information rights as well as representation on the Company's Board of Directors. The board representation comes in the form of one board director and one board observer.
Mr. Charles W. Yates III is joining the Company's Board of Directors as the designee from the investors. Mr. Yates is a Managing Director for Kayne Anderson Capital Advisors ("Kayne Anderson") where he is responsible for the origination and execution of private equity transactions in the energy industry. Prior to joining Kayne Anderson in March 2001, Mr. Yates was Senior Vice President and head of the Power Technology Group at Stephens Inc., an integrated merchant and investment bank. A member of Phi Beta Kappa, Mr. Yates received his Bachelor of Arts, magna cum laude in 1991 and his Master of Business Administration in 1994 from Rice University. Mr. Yates also serves on the Board of Directors for Cannon Energy Inc.
Mr. Michael Heinz has been designated as the board observer. Mr. Heinz is a Managing Director of Energy Investments with Kayne Anderson. Prior to joining Kayne Anderson Mr Heinz was a Senior Vice-President of Netherland, Sewell & Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Heinz began his career in the oil and gas industry in 1984 as a reservoir and operations engineer for Exxon Company U.S.A. Mr. Heinz graduated from the University of Tulsa in 1984 with a Bachelor of Science degree in Petroleum Engineering. Mr Heinz currently serves on the Board of Directors of Cannon Energy, Inc.
Item 7:  Financial Statements and Exhibits
(c)	Exhibits:
	Exhibit Number	Description
	4.1	Subscription Agreement among The Exploration Company of Delaware, Inc., Kayne Anderson Energy Fund II, L.P. and Gryphon Master Fund, L.P., dated as of August 1, 2003.
	4.2	Certificate of Designation of Redeemable Preferred Stock, Series B of The Exploration Company of Delaware, Inc.
	4.3	Rights Agreement, between the Registrant and Kayne Anderson Energy Fund II, L.P. and Gryphon Master Fund, L.P.
	4.4	Amendment to Subscription Agreement, dated August 5, 2003.

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 26, 2003
THE EXPLORATION COMPANY OF DELAWARE, INC.
	/s/ P. Mark Stark
	P. Mark Stark
	Chief Financial Officer
	(Principal Accounting and Financial Officer)

EX-4

Exhibit 4.1

SUBSCRIPTION AGREEMENT

among

THE EXPLORATION COMPANY OF DELAWARE, INC.,

KAYNE ANDERSON ENERGY FUND II, L.P.

and

GRYPHON MASTER FUND, L.P.


Dated as of August 1, 2003

	TABLE OF CONTENTS
ARTICLE I.	THE PURCHASED SHARES .........................................................	1
Section 1.01	Issuance, Sale and Delivery of the Shares to KAEF ..................	1
Section 1.02	Issuance, Sale and Delivery of the Shares to Gryphon ..............	1
Section 1.03	Closing ........................................................................................	1
Section 1.04	Redemption Option .....................................................................	2
ARTICLE II.	REPRESENTATIONS AND WARRANTIES OF THE COMPANY..	3
Section 2.01	Organization, Qualifications and Corporate Power ....................	3
Section 2.03	Consents and Approvals .............................................................	4
Section 2.04	Validity .........................................................................................	4
Section 2.05	Authorized Capital Stock .............................................................	4
Section 2.06	Financial Statements ...................................................................	5
Section 2.07	No Undisclosed Liabilities ............................................................	6
Section 2.08	Events Subsequent to the Audited Balance Sheet Date ............	6
Section 2.09	Litigation; Compliance with Law ...................................................	8
Section 2.10	Proprietary Information of Third Parties .......................................	9
Section 2.11	Intellectual Property .....................................................................	9
Section 2.12	Real Property ...............................................................................	9
Section 2.13	Assets (other than Oil and Gas Properties) .................................	9
Section 2.14	Insurance .....................................................................................	10
Section 2.15	Taxes ...........................................................................................	10
Section 2.16	Agreements .................................................................................	11
Section 2.17	Loans and Advances ...................................................................	12
Section 2.18	Assumptions, Guaranties, Etc. of Indebtedness of Other             Persons .................................................................................	12
Section 2.19	Offering of the Purchased Shares ...............................................	12
Section 2.20	Brokers; Financial Advisors .........................................................	12
Section 2.21	Transactions With Affiliates .........................................................	13
Section 2.22	Employees ..................................................................................	13
Section 2.23	Environmental and Safety Laws .................................................	13
Section 2.24	Employee Benefits ......................................................................	14
Section 2.25	Foreign Corrupt Practices Act .....................................................	14
Section 2.26	Illegal or Unauthorized Payments; Political Contributions ..........	15
Section 2.27	Pending Changes ........................................................................	15
Section 2.28	Investment Company Act ............................................................	15
Section 2.29	Registration Rights ......................................................................	15
Section 2.30	Books and Records .....................................................................	15
Section 2.31	Disclosure ...................................................................................	15
Section 2.32	Oil and Gas Properties ...............................................................	16
Section 2.33	Marketing of Production .............................................................	16
Section 2.34	Plugging and Abandonment Obligations ....................................	16
Section 2.35	Construction ...............................................................................	16
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ARTICLE III.	REPRESENTATIONS, WARRANTIES AND COVENANTS OF      THE PURCHASER ...................................................................	16
Section 3.01	Representations and Warranties of the Purchasers ..................	16
Section 3.02	Certain Covenants of the Purchasers ........................................	17
Section 3.03	Legend .......................................................................................	18
ARTICLE IV.	CONDITIONS TO THE OBLIGATIONS OF THE      PURCHASERS AND THE COMPANY .....................................	19
Section 4.01	Conditions to the Purchasers' Obligations at the Closing ..........	19
Section 4.02	Conditions to the Company's Obligations at the Closing ...........	21
ARTICLE V.	COVENANTS OF THE COMPANY ...............................................	22
Section 5.01	Use of Proceeds ........................................................................	22
Section 5.02	Indemnity ...................................................................................	22
Section 5.03	Preemptive Rights .....................................................................	22
ARTICLE VI.	MISCELLANEOUS ........................................................................	23
Section 6.01	Expenses ...................................................................................	23
Section 6.02	Survival of Agreements ..............................................................	23
Section 6.03	Brokerage ..................................................................................	23
Section 6.04	Parties in Interest ......................................................................	23
Section 6.05	Specific Performance ................................................................	24
Section 6.06	Further Assurances ...................................................................	24
Section 6.07	Arbitration ..................................................................................	24
Section 6.08	Notices ......................................................................................	25
Section 6.09	Governing Law ..........................................................................	27
Section 6.10	Entire Agreement ......................................................................	27
Section 6.11	Counterparts .............................................................................	27
Section 6.12	Amendments and Waivers ........................................................	27
Section 6.13	Successors and Assigns ...........................................................	27
Section 6.14	Severability ................................................................................	28
Section 6.15	Titles and Subtitles ....................................................................	28
Section 6.16	Adjustments for Stock Splits, Etc ..............................................	28
Section 6.17	Aggregation of Stock ................................................................	28
Section 6.18	Like Treatment of Holders ........................................................	28
Section 6.19	Exculpation Among Purchasers ...............................................	28
Section 6.20	Construction .............................................................................	28
Section 6.21	Remedies .................................................................................	29
Section 6.22	Certain Defined Terms .............................................................	29
Section 6.23	Incorporation of Exhibits, Annexes and Schedules ..................	30
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INDEX TO SCHEDULES
SCHEDULE 2.05	Authorized Capital Stock
SCHEDULE 2.11	Intellectual Property
SCHEDULE 2.14	Insurance Policies
SCHEDULE 2.16	Agreements
SCHEDULE 2.21	Transactions with Affiliates
SCHEDULE 2.22	Employees
SCHEDULE 2.24	Employee Benefits
SCHEDULE 2.29	Registration Rights
SCHEDULE 2.32	Oil and Gas Properties
SCHEDULE 2.33	Marketing of Production
INDEX TO EXHIBITS
EXHIBIT A	Certificate of Designation
EXHIBIT B	Form of Opinion Letter
EXHIBIT C	Form of Rights Agreement
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This SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of August 1, 2003, is entered into by and among The Exploration Company of Delaware, Inc., a Delaware corporation (the "Company"), Gryphon Master Fund, L.P., a Bermuda limited partnership ("Gryphon"), and Kayne Anderson Energy Fund II, L.P. ("KAEF" and together with Gryphon, the "Purchasers"). Certain capitalized terms used herein are defined in Section 6.22 of this Agreement.
RECITALS
WHEREAS, the Company wishes to issue and sell to the Purchasers 16,000 shares of the Company's authorized but unissued shares of Series B Preferred Stock, par value $.01 per share (the "Preferred Shares");
WHEREAS, the Purchasers desire to purchase the Preferred Shares on the terms and subject to the conditions set forth in this Agreement;
WHEREAS, the Company wishes to issue and sell to the Purchasers 2,133,333 shares of the Company's authorized but unissued shares of Common Stock, par value $0.01 per share (the "Common Shares" and, together with the Preferred Shares, the "Purchased Shares"); and
WHEREAS, the Purchasers desire to purchase the Purchased Shares on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, representations, warranties and the mutual covenants contained in this Agreement, the parties agree as follows:
ARTICLE I.
THE PURCHASED SHARES
Section 1.01  Issuance, Sale and Delivery of the Shares to KAEF.  At the Closing (as defined in Section 1.03), on the terms and subject to the conditions of this Agreement, the Company shall issue and sell to the KAEF, and the KAEF shall purchase from the Company, (a) 14,000 Preferred Shares and (b) 1,866,666 Common Shares, for an aggregate of $14,000,000.
Section 1.02  Issuance, Sale and Delivery of the Shares to Gryphon. At the Closing, on the terms and subject to the conditions of this Agreement, the Company shall issue and sell to the Gryphon, and the Gryphon shall purchase from the Company, (a) 2,000 Preferred Shares and (b) 266,667 Common Shares, for an aggregate of $2,000,000.
Section 1.03  Closing.  The Closing shall take place at the offices of Akin Gump Strauss Hauer & Feld LLP in Houston, Texas on August 25, 2003, or at such other location, date and time as may be agreed upon between the Company and the Purchasers (such closing being called the "Closing" and such date and time being called the "Closing Date"). At the Closing, the Company shall issue and deliver to each Purchaser a stock certificate or certificates in definitive form, registered in the name of such Purchaser, representing, in the case of KAEF, 14,000 Preferred Shares and 1,866,666 Common Shares and, in the case of Gryphon, 2,000 Preferred Shares and 266,667 Common Shares. As payment in full for the Preferred Shares and Common
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Shares being purchased by it under this Agreement, and against delivery of the stock certificate or certificates therefor as aforesaid, on the Closing Date, KAEF and Gryphon shall pay to the Company by wire transfer or by such other method as may be reasonably acceptable to the Company, immediately available funds in the amounts contemplated by Section 1.01 and Section 1.02.
Section 1.04  Redemption Option.
(a)          Subject to Section 6.16, at anytime before the second anniversary of the Closing, the Company may, upon 10 days' notice to the Purchasers, purchase from the Purchasers up to 1,066,667 Common Shares (the number of shares to be purchased by the Company being the "Redemption Shares") at a purchase price per share equal to $6.00. Upon the exercise of such option, each Purchaser shall sell to the Company its Pro Rata Portion of the Redemption Shares; provided, however as a condition to redeem any of the Redemption Shares, if requested by such Purchaser, the Company shall redeem from such Purchaser not less than that number of Redemption Shares that is required to be redeemed so that: (x) the ratio which the voting stock of the Company owned by such Purchaser immediately after the redemption bears to all of the voting sto ck of the Company at such time is less than 80% of the ratio which the voting stock of the Company owned by such Purchaser immediately before the redemption bears to all of the voting stock of the Company at such time and (y) the ratio which the common stock (for purposes of section 302 of the Internal Revenue Code) of the Company owned by such Purchaser immediately after the redemption bears to all of the common stock of the Company at such time is less than 80% of the ratio which the common stock of the Company owned by such Purchaser immediately before the redemption bears to all of the common stock of the Company at such time; provided, further that notwithstanding the above, either Purchaser may elect to not be redeemed if such Purchaser reasonably determines that the redemption would not qualify as a "substantially disproportionate redemption of stock" under section 302(b)(2) of the Internal Revenue Code unless the Company provides such Purchaser with a tax opinion of nationally recognized tax c ounsel, experienced in such matters, to the effect that such a redemption will qualify as a "substantially disproportionate redemption of stock."
(b)          For purposes of this Section 1.04, "Pro Rata Portion" means a fraction, the numerator of which is the number of Common Shares that the applicable Purchaser purchases hereunder, the denominator of which is 2,133,333; provided, that such number shall be increased or decreased, as appropriate, in the event that prior to such purchase there shall have occurred any subdivision, split-up, combination or reverse split of shares of the Company's common stock.
(c)          The purchase price for all Redemption Shares shall be payable in cash and shall be made by wire transfer of immediately available funds to an account or accounts designated by the Purchasers in writing not later than at least two business days prior to the date of the purchase.
(d)          The respective options to purchase Redemption Shares pursuant to this Agreement may not be assigned without the applicable Purchaser's consent.
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Section 1.05  Obligation of Each Purchaser to Purchase.  Each Purchaser's obligation to purchase Purchased Shares hereunder is several and not joint. If KAEF does not purchase its portion of the Purchased Shares hereunder when obligated to do so, the Company's obligation to issue and sell Purchased Shares to Gryphon shall terminate. If Gryphon does not purchase its portion of the Purchased Shares hereunder when obligated to do so, KAEF's and the Company's obligation to purchase and sell the amount of Purchased Shares KAEF is obligated to purchase hereunder shall continue and KAEF shall have the option to purchase the Purchased Shares allocated to Gryphon hereunder by giving notice within 15 days of it receiving notice of Gryphon's failure to perform hereunder.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that:
Section 2.01  Organization, Qualifications and Corporate Power.
(a)          The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification. The Company has full corporate power and authority to own and hold its properties and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform each Transaction Document, to issue, sell and deliver the Purchased Shares.
Section 2.02  Authorization; No Conflict; No Violation.  The Company's: (a) execution and delivery of each Transaction Document and performance of its obligations thereunder, (b) execution and filing of the Certificate of Designation, in the form of Exhibit A attached hereto (the "Certificate of Designation") and (c) issuance, sale and delivery of the Purchased Shares, have been duly authorized by all requisite corporate action and will not (v) result in a violation of the Certificate of Incorporation of the Company dated January 23, 1995, as amended by the Certificate of Amendment of Certificate of Incorporation of the Company dated January 12, 1999 (as amended, the "Charter") or the Company's Bylaws (the "Bylaws"), (w) result in a violation of any applicable law, rule or regulation, or any order, injunctio n, judgment or decree of any court or other agency of government, (x) conflict with, result in a breach of, or constitute (or, with due notice or lapse of time or both, would constitute) a default under, or give rise to any right of termination, acceleration or cancellation under, any indenture, agreement, contract, license, arrangement, understanding, evidence of indebtedness, note, lease or other instrument to which the Company or any of its properties or assets is bound, (y) result in the creation or imposition of any Lien, charge, restriction, claim or encumbrance of any nature whatsoever upon the Company or any of the Company's properties or assets or (z) require any consent, approval, notification, waiver or other similar action from any third party. No provision of any Transaction Document violates, conflicts with, results in a breach of or constitutes (or, with due notice or lapse of time or both, would constitute) a default by any other party under any indenture, agreement, contract, license, arrang ement, understanding, evidence of indebtedness, note, lease or other instrument to which the Company is a party.
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Section 2.03  Consents and Approvals.  Subject to the accuracy of the Purchasers' representations and warranties set forth in Article III, no registration or filing with, or consent or approval of or other action by, any federal, state or other governmental agency or instrumentality or any third party is or will be necessary for the Company's valid execution, delivery and performance of the Transaction Documents and the issuance, sale and delivery of the Purchased Shares, other than those (a) which have previously been obtained or made or (b) those which are required to be made under federal or state securities laws, which will be obtained or made, and will be effective within the time periods required by law.
Section 2.04  Validity.  Each Transaction Document has been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms.
Section 2.05  Authorized Capital Stock.
(a)          The Company's authorized capital stock consists of 10,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), of which 30,000 shares have been designated Series A Junior Participating Preferred Stock, 16,000 shares have been designated Series B Preferred Stock, and 50,000,000 shares of Common Stock, par value $0.01 per share. Immediately prior to the Closing, 20,009,716 shares of Common Stock and no shares of Preferred Stock will be validly issued and outstanding, fully paid and nonassessable. In addition, immediately prior to the Closing, not more than 3,174,429 shares of Common Stock will be reserved for issuance upon exercise of outstanding options, warrants or other securities exchangeable for or convertible into Common Stock, 254,900 additional shares of Common Stock reserved for issuance upon exercise of options available for grant under any stock option plan, and 99,800 shares are held in the Company's treasury. The holders of subscriptions, warrants, options, convertible securities, and other rights (contingent or other) to purchase or otherwise acquire equity securities of the Company, and the number of shares of Common Stock and the number of such subscriptions, warrants, options, convertible securities, and other such rights held by each and the vesting schedule thereof are as set forth in the Schedule 2.05. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of the Company's authorized capital stock are as set forth in the Charter and Certificates of Designation for the Preferred Stock, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. Except as set forth in the Schedule 2.05: (i) n o subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company is authorized or outstanding and (ii) there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible or exchangeable securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset. Except as set forth in the Schedule 2.05, the Company has no obligation (contingent or other) to purchase, repurchase, redeem, retire or otherwise acquire any .of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. Except for the Company's Series A Junior Participating Preferred Stock, the warrants and options described in Schedule 2.05 and the Company's 1995 Flexible Incentive Plan, no stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any e quity securities of the Company or rights to purchase equity securities of the Company provides for acceleration or other changes in the
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vesting provisions or other terms of such securities, as the result of any merger, sale of stock or assets, change in control or other similar transaction by the Company. Except for the Rights Agreement, there are no voting trusts or agreements, stockholders' agreements, pledge agreements, buy-sell agreements, rights of first refusal, preemptive rights or other similar rights or proxies relating to any of the Company's securities, or agreements relating to the issuance, sale, redemption, transfer or other disposition of the Company's securities. All of the outstanding securities of the Company were issued in compliance with all applicable federal and state securities laws.
(b)          The Purchased Shares have been duly authorized and, when issued in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable shares of the applicable sort and will be free and clear of all Liens, charges, restrictions, claims and encumbrances, other than Liens, charges, restrictions, claims and encumbrances that were created by a Purchaser and restrictions on transfer imposed by this Agreement, the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities laws. The issuance, sale and delivery of the Purchased Shares is not subject to any preemptive right of the Company's stockholders or to any right of first refusal or other right in favor of any Person. The consummation of the transactions contemplated hereunder will not result in any anti-dilution adjust ment or other similar adjustment to any of the Company's outstanding securities. Any Person with any right (other than a Purchaser) to purchase securities of the Company, which would be triggered as a result of the transactions contemplated under this Agreement, has waived such rights.
Section 2.06  Financial Statements.  The Company has furnished or made available to the Purchasers true and complete copies of all reports or registration statements it has filed with the Securities and Exchange Commission (the "SEC") under the Securities Act and the Exchange Act, for all periods subsequent to December 31, 1999, all in the form so filed (collectively the "Company SEC Documents"). As of their respective filing dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and none of the Company SEC Documents filed under the Exchange Act contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in whic h they were made, not misleading, except to the extent corrected by a subsequently filed document with the SEC. None of the Company SEC Documents filed under the Securities Act contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading at the time such Company SEC Documents became effective under the Securities Act. The Company's financial statements, including the notes thereto, included in the Company SEC Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles consistently applied ("GAAP") (except as may be indicated in the notes thereto) and present fairly the Company's consolidated financial position at the dates thereof and of its o perations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal audit adjustments). Since the date of the most recent Company SEC Document, the Company has not effected any change in any method of accounting or accounting practice, except for any such change required because of a concurrent change in GAAP.
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Section 2.07  No Undisclosed Liabilities.  The Company has no liabilities (whether accrued, absolute, contingent or otherwise, known or unknown, and whether due or to become due or asserted or unasserted), except (a) liabilities provided for on the face of the Financial Statements, (b) liabilities (including accounts payable) incurred since December 31, 2002 (the "Audited Balance Sheet Date") in the ordinary course of business consistent with past practice that are no greater than $19,000,000 and (c) such other liabilities which are no more than $400,000 individually or $1,000,000 in the aggregate. The Company knows of no basis for the assertion against the Company of any liabilities not adequately reflected or reserved against in the Financial Statements.
Section 2.08  Events Subsequent to the Audited Balance Sheet Date.  Since the Audited Balance Sheet Date and except as herein expressly disclosed in the Company's most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q:
(a)          there has been no Material Adverse Change nor, to the Company's knowledge, has any event occurred which could reasonably be expected to result in any Material Adverse Change;
(b)          there has not been any payment of, setting of a record date for, or declaration, setting aside or authorizing the payment of, any dividend or other distribution in respect of any shares of capital stock of the Company or any purchase, repurchase, retirement, redemption or other acquisition by the Company, of any of the outstanding shares of capital stock or other securities of, or other ownership interest in, the Company;
(c)          Except as shown in Schedule 2.05 or made pursuant to the Company's 1995 Flexible Incentive Plan, there has not been any transfer, issue, sale or other disposition by the Company of any shares of capital stock or other securities of the Company or any grant of options, warrants, calls or other rights to purchase or otherwise acquire shares of such capital stock or such other securities;
(d)          the Company has not materially increased the compensation payable or to become payable, or awarded or paid any bonuses to employees, officers, directors, consultants, advisors, agents, stockholders or representatives of the Company nor has the Company either entered into any employment, deferred compensation, severance or similar agreements (nor amended any such agreement) or agreed to materially increase the compensation payable or to become payable by it to any of the Company's employees, officers, directors, consultants, independent contractors, advisors, agents, stockholders or representatives or agreed to materially increase the coverage or benefits available under any severance pay, deferred compensation, bonus or other incentive compensation, pension or other employee benefit plan, payment or arrangement made to, for or with such employ ees, officers, directors, consultants, independent contractors, advisors, agents, stockholders or representatives, other than in the ordinary course of business consistent with past practice and with the Company's operating expense budget;
(e)          the Company has not made any loans, advances, guarantees or capital contributions to, or investments in, any Person, or acquired any assets or securities of any Person other than ordinary advances for expenses incurred in the ordinary course of business;
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(f)          there has not been satisfaction or discharge of any Lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that has not resulted in a Material Adverse Change;
(g)          there has not been any termination or material change to a material contract or arrangement by which the Company or any of its assets is bound or subject;
(h)          there has not been any resignation or termination of employment of any officers or directors of the Company;
(i)          the Company has not transferred or granted any rights under any contracts, leases, licenses, agreements or Intellectual Property (as defined in Section 2.11) used by the Company in its business which could reasonably be expected to result in a Material Adverse Change;
(j)          there has not been any damage, destruction or loss, whether or not covered by insurance, with respect to the property or assets of the Company;
(k)          the Company has not mortgaged, pledged or subjected to any Lien or encumbrance any of its assets, acquired any assets, or sold, assigned, transferred, conveyed, leased or otherwise disposed of any assets, except for assets acquired or sold, assigned, transferred, conveyed, leased or otherwise disposed of in the ordinary course of business consistent with the Company's past practice or Liens for taxes not yet due or payable;
(l)          the Company has not canceled or compromised any debt or claim, or amended, canceled, terminated, relinquished, waived or released any contract or right or settled any claim except in the ordinary course of business consistent with past practice, and which, individually or in the aggregate, has not resulted, and could not reasonably be expected to result, in a Material Adverse Change;
(m)          the Company has not made, or entered into any binding commitment to make, any capital expenditures or capital additions or betterments in excess of $2,000,000 in the aggregate;
(n)          the Company has not incurred any debts, obligations or liabilities, whether due or to become due, except current liabilities incurred in the usual and ordinary course of business, none of which current liabilities (individually or in the aggregate) has resulted in, or could reasonably be expected to result in, a Material Adverse Change;
(o)          the Company has not entered into any material transaction except for the Transaction Documents;
(p)          the Company has not encountered, or been threatened with, any labor disputes, strikes, slowdowns, work stoppages or labor union organizing activities;
(q)          the Company has not made any change in the Company's accounting principles, methods or practices or depreciation or amortization policies or rates theretofore adopted;
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(r)          the Company has not disclosed to any Person any trade secrets or confidential information, except for disclosures made to Persons subject to valid and enforceable confidentiality agreements or as required by applicable law;
(s)          the Company has not suffered or experienced any change in the relationship or course of dealings between the Company and any of its suppliers or customers which supply goods or services to the Company or purchase goods or services from the Company, which has resulted in, or could reasonably be expected to result in, a Material Adverse Change;
(t)          the Company has not made any payment to, or received any payment from, or made or received any investment in, or entered into any transaction or series of related transactions (including without limitation, the purchase, sale, exchange or lease of assets, property or services, or the making of a loan or guarantee) with any Affiliate or any members of their immediate families or any legal entity controlled by either one of them; and
(u)          the Company has not entered into any agreement or commitment (contingent or otherwise) to do any of the foregoing.
Section 2.09  Litigation; Compliance with Law
(a)          There is no (i) action, suit, claim, proceeding or investigation pending or, to the best of the Company's knowledge, threatened, against or affecting the Company or its properties or assets, at law or in equity, or before or by any federal, state, municipal or other governmental body, department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) arbitration proceeding pending or, to the best of the Company's knowledge, threatened, against or affecting the Company or its properties or assets or (iii) governmental inquiry pending or, to the best of the Company's knowledge, threatened, against or affecting the Company or its properties or assets (including any inquiry as to the Company's qualification to hold or receive any license or permit), and to the best of the Company's knowledge, there is no basis for a ny of the foregoing. The Company is not in default with respect to any order, writ, judgment, injunction or decree known to or served upon the Company of any court or of any federal, state, municipal or other governmental body, department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action, suit, proceeding or investigation by the Company pending, threatened or contemplated against others.
(b)          The Company has not received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business, prospects, financial condition, operations, property or affairs. The Company has complied, in all material respects, with all laws, rules, regulations and orders applicable to its business, operations, properties, assets, products and services, the Company has all necessary permits, licenses and other authorizations required to conduct its business as conducted and as proposed to be conducted and the Company has been operating its business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations. There is no existing law, rule, regulation or order, and the Company after due inquiry is not aware of any proposed law, rule, regulation or order, whether federal, state, county or local, which would prohibit or restrict the Company from, or otherwise adversely
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affect the Company in, conducting its business in any jurisdiction in which it is now conducting business or in which it proposes to conduct business.
Section 2.10  Proprietary Information of Third Parties.  No third party has claimed or, to the best of the Company's knowledge, has reason to claim, that any Person employed or retained by or affiliated with the Company has (a) violated or may be violating any of the terms or conditions of an employment, non-competition or non-disclosure agreement with such third party, (b) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (c) interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. No third party has requested information from the Company which suggests that such a claim might be contemplated. Neither the execution or delivery of this Agreement or any of the other Transaction Documents, nor the co nduct or proposed conduct of the Company's business, nor the participation of any of the Company's officers, directors or employees in the conduct of the Company's business, will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any material contract, covenant or instrument under which any such Person is obligated to a third party.
Section 2.11  Intellectual Property.  Except as set forth in Schedule 2.11, the Company owns, or possesses adequate rights to use, all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, processes, formulae, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, industrial models, processes, designs, methodologies, computer programs (including all source codes) and related documentation, technical information, manufacturing, engineering and technical drawings, know-how, concepts and all pending applications for and registrations of patents, trademarks, service marks and copyrights (together, "Intellectual Property") used in its business as currently, or as current ly proposed to be, conducted. No consent of any Person is required for the Company's interest in such Intellectual Property to continue to be enforceable by the Company following the transactions contemplated the Transaction Documents. The Company's use of such Intellectual Property in its business as currently conducted (and the operation of its business) does not, and the use of such Intellectual Property by the Company and its Affiliates after any Closing will not, infringe upon any rights any other Person owns or holds.
Section 2.12  Real Property.  Except for interests in Oil and Gas Properties and incidental real property interests held in connection with its oil and gas operations, the Company owns no real property.
Section 2.13  Assets (other than Oil and Gas Properties).  The Company has good, legal and defensible title to all of its personal property and assets, in each case free and clear of all Liens, charges, restrictions or claims other than Permitted Encumbrances and Liens under the Permitted Bank Debt. With respect to the personal property and assets that the Company leases (each a "Personal Property and Capital Lease," and collectively, the "Personal Property and Capital Leases") (a) the Company is in compliance with such Personal Property and Capital Leases in all material respects, (b) the Personal Property and Capital Leases are enforceable in accordance with their terms and (c) except with respect to the rights of the lessors thereunder, the Company holds a valid leasehold interest free and clear of any Liens, charges, restrictions or
9
claims of any nature whatsoever. Each of the Personal Property and Capital Leases is a valid and subsisting agreement, duly authorized and entered into and enforceable in accordance with its terms, and there is no default under any Personal Property and Capital Lease by the Company or by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder. The Company has delivered or otherwise made available to the Purchasers true, correct and complete copies of the Personal Property and Capital Leases, together with all amendments, modifications, supplements or side letters affecting the obligations of any party thereunder. All items of personal property and assets owned or leased by the Company are in good operating condition, normal wear and tear excepted, are reasonably fit and usable for the purposes for which they are being used, are adequate and sufficient for the Company's business, and conform in all material respects with all applicable laws. The carrying value of the Company's assets on the Financial Statements is not overstated in any respect as of the date of the respective Financial Statement.
Section 2.14  Insurance.  There is in full force and effect one or more policies of insurance issued by insurers of recognized responsibility, insuring the Company and its properties, business and projects against such losses and risks, and in such amounts, on both a per occurrence and an aggregate basis, as are customary in the case of corporations of established reputation engaged in the same or similar business and similarly situated. The Company has not received any notice or communication, either oral or written (a) regarding the actual or possible cancellation or invalidation of any of such policies or regarding any actual or possible adjustment in the amount of premiums payable with respect to any of said policies, (b) regarding any actual or possible refusal of coverage under, or any actual or possible rejection of any claim under, any of such policies, (c) tha t the Company will be unable to renew its existing insurance coverage as and when the same shall expire or (d) that the issuer of any such policies may be unwilling or unable to perform any of its obligations thereunder. There is no pending claim under any of the Company's insurance policies, and, to the Company's knowledge, no event has occurred or condition or circumstance exists that might (with or without notice or lapse of time) directly or indirectly give rise to, or serve as a basis for, any such claim. To its knowledge, the Company is not in default with respect to any provision contained in any insurance policy, and the Company has not failed to give any notice or present any presently existing claims under any insurance policy in due and timely fashion. Schedule 2.14 hereto sets forth a list of each insurance policy (specifying the insurer, the amount of coverage, the type of insurance, the policy number, the expiration date, the annual premium (current and for each of the last three (3) years)) maintained by the Company relating to its properties, assets, business or personnel.
Section 2.15  Taxes.  The Company has accurately and timely filed all federal, state, county and local tax returns and reports required to be filed by it within the applicable period, and the Company has paid all taxes shown to be due by such returns as well as all other taxes, assessments and governmental charges which have become due or payable. Such returns and reports are true and correct in all material respects. The Company has established adequate reserves on the Financial Statements for all taxes accrued but not yet payable. All material tax elections of any type which the Company has made as of the date hereof are set forth in the Financial Statements. The Company's federal income tax returns have never been audited by the Internal Revenue Service. No claim or deficiency assessment with respect to or proposed adjustment of the Company's federal, state, cou nty or local taxes is currently assessed or pending or, to the best of the Company's knowledge, threatened, and there is no basis for any such claim, assessment or adjustment. There is no tax Lien (other than for current taxes not yet
10
due and payable), whether imposed by any federal, state, county or local taxing authority, outstanding against the Company's assets, properties or business. The Company has not executed any waiver of the statute of limitations on the assessment or collection of any tax or governmental charge. The Company is not a party to any agreement relating to the sharing, allocation or indemnification of taxes. Neither the Company nor any of its present or former stockholders has ever made an election pursuant to Section 1362 or Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"), that the Company be taxed as a Subchapter S corporation or a collapsible corporation or any other election pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would result in a Material Adverse Change. The Company's net operating losses for federal income tax purposes as set forth in the Financial Statements are not subject to any limitations imposed by Section 382 of the Code and the full amount of such net operating losses are available to offset the Company's taxable income for the current fiscal year and, to the extent not so used, succeeding fiscal years. Consummation of the transactions contemplated by the Transaction Documents or by any other agreement, understanding or commitment (contingent or otherwise) to which the Company is a party or by which it is otherwise bound will not have the effect of limiting the Company's ability to use such net operating losses in full to offset such taxable income. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. The Company has properly cha rged, collected and paid all applicable severance, sales, use and other similar taxes.
Section 2.16  Agreements.
(a)          Except with respect to the Transaction Documents, the Permitted Bank Debt and the contracts set forth on Schedule 2.16, the Company is not a party to or otherwise bound by any written or oral agreement, instrument, commitment or restriction the terms of which could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Change.
(b)          The Company and, to the Company's knowledge, each other party thereto: (i) has performed in all material respects all the obligations required to be performed by them to date (or each non-performing party has received a valid, enforceable and irrevocable written waiver with respect to its non-performance) and (ii) has received no notice of default and are not in default (or, with due notice or lapse of time or both, would be in default) under any agreement listed on Schedule 2.16. The Company has no present expectation or intention of terminating or not fully performing any of its obligations under any agreement listed on Schedule 2.16 and the Company has no knowledge of any breach or anticipated breach by the other party thereof. The Company is in full compliance with all of the terms and provisions of its certificate of incorpora tion and bylaws.
(c)          No previous or current party to any agreement listed in Schedule 2.16 has given written notice to the Company of, or made any claim with respect to, a desire or intention to exercise any optional termination, cancellation or acceleration right thereunder, and the Company has no knowledge of any notice of, or claim with respect to, any such desire or intention. The Company has delivered or otherwise made available to the Purchasers true, correct and complete
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copies of each of the agreements listed in Schedule 2.16, together with all amendments, modifications, supplements or side letters affecting the obligations of any party thereunder. Each of these agreements is valid and enforceable against the Company in accordance with its terms, except to the extent limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application related to the enforcement of creditors' rights generally and (b) general principles of equity, and except that enforcement of rights to indemnification and contribution contained therein may be limited by applicable federal or state laws or the public policy underlying such laws, regardless of whether enforcement is considered in a proceeding in equity or at law.
Section 2.17  Loans and Advances.  The Company does not have any outstanding loans or advances to any Person and is not obligated to make any such loans or advances, except, in each case, for ordinary course advances to employees of the Company in respect of reimbursable business expenses anticipated to be incurred by them in connection with their performance of services for the Company.
Section 2.18  Assumptions, Guaranties, Etc. of Indebtedness of Other Persons.  The Company has not assumed, guaranteed, endorsed or otherwise become directly or contingently liable for any indebtedness of any other Person (including liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in such Person, or to otherwise assure any creditor of such Person against loss), except for guaranties by endorsement of negotiable instruments for deposit or collection in the ordinary course of business.
Section 2.19  Offering of the Purchased Shares.  Assuming the accuracy of the Purchasers' representations and warranties set forth in Article III, the Company has complied with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Purchased Shares. Neither the Company nor any Person acting on its behalf has taken or will take any other action (including any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with the Purchased Shares under the Securities Act or the rules and regulations of the Commission promulgated thereunder), in either case so as to subject the offering, issuance or sale of the Purchased Shares to the registration provisions of the Securities Act. Neither the Company nor any Person acting on its behalf has offered the Purcha sed Shares to any Person by means of general or public solicitation or general or public advertising, such as by newspaper or magazine advertisements, by broadcast media, or at any seminar or meeting whose attendees were solicited by such means.
Section 2.20  Brokers; Financial Advisors.  Other than Energy Capital Solutions who shall be paid a fee of no more than $875,000 for which the Company is solely responsible at closing, no agent, broker, investment banker, finder, financial advisor or other Person is or will be entitled to any broker's or finder's fee or any other commission or similar fee from the Company, directly or indirectly, in connection with the transactions contemplated by the Transaction Documents, and no Person is entitled to any fee or commission or like payment from the Company in respect thereof based in any way on agreements, arrangements or understandings made by or on the Company's behalf.
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Section 2.21  Transactions With Affiliates.  Except as set forth in Schedule 2.21, no employee, officer, director, independent contractor, consultant, advisor, agent, stockholder or representative of the Company, or member of the family of any such Person, or any corporation, limited liability company, partnership, trust or other entity in which any such Person, or any member of the family of any such Person, is an officer, director, trustee, partner or holder of more than 5% of the outstanding equity interests thereof, is a party to, or during the past 36 months has been a party to, any transaction with the Company, including any contract, agreement or other arrangement providing for the employment of, furnishing of services by, rental of real or personal property from or otherwise requiring payments to any such Person, other than employment-at-will arrangements in the ordinary course of business. None of the Persons described in this Section 2.21 has any direct or indirect ownership interest in any Person that the Company is an Affiliate of or with which the Company has a business relationship, or any Person that competes with the Company.
Section 2.22  Employees.  Except as set forth in Schedule 2.22, to the Company's knowledge, no executive, key employee or independent contractor and no group of the Company's executives, key employees or independent contractors has any plans to terminate his, her or its employment or relationship as an employee or independent contractor with the Company. The Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. The Company has not committed any unfair labor practice (as determined under any law). The Company has no knowledge of any organizational effort currently being made or threatened by or on behalf of any labor union with respect to the Company's employees.
Section 2.23  Environmental and Safety Laws.  The Company has not caused or allowed, or contracted with any party for, the generation, use, transportation, treatment, storage or disposal of any Hazardous Substances (as defined below) in connection with the operation of its business or otherwise except in compliance with all Environmental Laws. The Company, the operation of its business, and any real property that the Company owns, leases or otherwise occupies or uses (the "Premises") are in compliance with all applicable Environmental Laws and orders or directives of any governmental authorities having jurisdiction under such Environmental Laws, including any Environmental Laws or orders or directives with respect to any cleanup or remediation of any release or threat of release of Hazardous Substances and no amounts are presently required to comply with any such applicable Environmental Laws. The Company has not received any citation, directive, letter or other communication, written or oral, or any notice of any proceeding, claim or lawsuit, from any Person arising out of the ownership or occupation of the Premises or the conduct of its operations, and the Company is not aware of any basis therefor. The Company has obtained and is maintaining in full force and effect all permits, licenses and approvals required by all Environmental Laws applicable to the Premises and the business operations conducted thereon (including operations conducted by tenants on the Premises) and is in compliance with all such permits, licenses and approvals. Except as permitted by all Environmental Laws, the Company has not caused or allowed a release, or a threat of release, of any Hazardous Substance onto, at or near the Premises, and, to the best of the Company's knowledge, neither the Premises nor any property at or near the Premises has ever been subject to a release, or a threat of release, of any Hazardous Substance. The term "Environmental Laws" means any federal, state or local law or ordinance or regulation pertaining to the protection of human health or the environment, including, without limitation, the
13
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 et seq., the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq. The term "Hazardous Substances" includes oil and petroleum products, asbestos, polychlorinated biphenyls, urea formaldehyde and any other materials classified as hazardous or toxic under any Environmental Laws. All representations and warranties in this Section 2.23 are to the best of the Company's knowledge.
Section 2.24  Employee Benefits.  Except as set forth in Schedule 2.24, the Company does not have in effect any employment agreements, consulting agreements with individuals, deferred compensation, incentive compensation, stock option or other equity-based stock awards, pension or retirement agreements whether or not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or arrangements, bonus, incentive or profit-sharing plans or arrangements, or labor or collective bargaining agreements, written or oral, other than oral at-will employment agreements ("Benefit Plans"). All Benefit Plans covering employees (the "Plans"), to the extent subject to ERISA, are in compliance with ERISA, the Code and all other applicable law. Each Plan which is an "employee pension benefit plan" within the meaning of S ection 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the Internal Revenue Service and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter. There is no pending or, to the best of the Company's knowledge, threatened litigation relating to the Plans. Neither the Company nor any of its Affiliates has engaged in a transaction with respect to any Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or any Affiliate to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. No Pension Plan of the Company or any ERISA Affiliate (as defined below) is, nor has any Pension Plan of the Company or any ERISA Affiliate ever been, subject to Title IV of ERISA or Section 412 of the Code. Neither the Comp any, any of its Affiliates nor an entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate") has contributed to a "multi-employer plan", within the meaning of Section 3(37) of ERISA, at any time on or after September 26, 1980. All contributions required to be made under the terms of any Benefit Plan have been timely made or have been reflected on the Financial Statements. No ERISA Affiliate maintains or has ever maintained any "employee benefit plan" as that term is defined in Section 3(3) of ERISA or any other employee benefit policy, arrangement or the like which could result in any liability of the Company.
Section 2.25  Foreign Corrupt Practices Act.  Neither the Company, nor to the best of the Company's knowledge, any employees, officers, directors, consultants, advisors, agents, stockholders or representatives of the Company or other Person acting on behalf of the Company, has taken any action which would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), or any rules and regulations thereunder. Each of the Company's internal management and accounting practices and controls are adequate to ensure compliance with the FCPA. There is not now, and there has never been, any employment by the Company of any foreign governmental or political official in any country in the world.
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Section 2.26  Illegal or Unauthorized Payments; Political Contributions.  Neither the Company nor, to the best of the Company's knowledge, any of the Company's employees, officers, directors, consultants, advisors, agents, stockholders or representatives has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, in contravention of applicable law: (a) as a kickback or bribe to any Person or (b) to any political organization, or the holder of or any aspirant to any elective or appointive public office, except for personal political contributions not involving the direct or indirect use of the Company's funds.
Section 2.27  Pending Changes.  There is no pending or, to the Company's knowledge, threatened change in any law, rule, regulation or order applicable to its business, operations, properties, assets, products and services which is likely to result in a Material Adverse Change.
Section 2.28  Investment Company Act.  The Company is not, nor is it directly or indirectly controlled by or acting on behalf of, any Person that is an "investment company" within the meaning of the Investment Company Act of 1940, as amended.
Section 2.29  Registration Rights.  Except as described in Schedule 2.29 and except for the rights granted to the Purchasers under the Rights Agreement, no Person has demand or other rights to cause the Company to file any registration statement under the Securities Act relating to any securities of the Company or any right to participate in any such registration statement, including piggyback registration rights.
Section 2.30  Books and Records.  The Company's books of account, ledgers, order books, records and documents accurately and completely reflect in accordance with usual and customary prudent business practices all material information relating to the Company's business, the location and collection of the Company's assets and the nature of all transactions giving rise to the Company's obligations and accounts receivable. The Company has previously delivered or made available to the Purchasers and their counsel complete and correct copies of the Charter and Bylaws and all amendments thereto, as in effect at the time of the Closing and all minutes and consents reflecting meetings and actions taken by the Company's Board of Directors (the "Board") and its stockholders. Such minutes and consents constitute complete and accurate records of all meetings and con sents in lieu of meetings of the Board and its committees, or body performing a similar function and holders of its securities since its date of incorporation or formation.
Section 2.31  Disclosure.  The Company has disclosed to the Purchasers all facts material to the Company's business, operations, assets, liabilities, prospects, properties, condition (financial or otherwise) and results of operations. Neither this Agreement, nor any Schedule or Exhibit to this Agreement, nor any other statements, documents or certificates made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein and therein not misleading in light of the circumstances under which such statements were made. None of the statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains an untrue statement of a material fact or omits to state a material fact neces sary to make the statements contained therein not misleading in light of the circumstances under which such statements were made. There is no
15
fact which the Company has not disclosed to the Purchasers and their counsel in writing and of which the Company is aware which has resulted in, or could result in, a Material Adverse Change.
Section 2.32  Oil and Gas Properties.  The Company has good and defensible title to all of the oil, gas and other mineral properties owned, or otherwise held in the name of, the Company or its affiliates (collectively, the "Oil and Gas Properties"), free and clear of all Liens and defects other than Permitted Encumbrances and other than as disclosed in Schedule 2.32; provided, that no representation or warranty is made with respect to any Oil and Gas Property or interest to which no proved oil or gas reserves are properly attributed. All proceeds from the sale of the Company's share of the hydrocarbons being produced from its oil and gas properties are currently being paid in full to such party by the purchasers thereof on a timely basis and none of such proceeds are currently being held in suspense by such purchaser or any other party other than in i mmaterial amounts.
Section 2.33  Marketing of Production.  Except for contracts listed on Schedule 2.33 (with respect to all of which contracts the Company represents that it or its affiliates are receiving a price for all production sold thereunder which is computed in accordance with the terms of the relevant contract and are not having deliveries curtailed substantially below the subject property's delivery capacity), there exist no material agreements for the sale of production from the leasehold and other interests in the Oil and Gas Properties (including calls on, or other rights to purchase, production, whether or not the same are currently being exercised) other than (i) agreements or arrangements pertaining to the sale of production at a price equal to or greater than a price that is the market price from time to time existing in the areas where the Oil and Gas Properties su bject to such agreement or arrangement are located and (ii) agreements or arrangements that are cancelable on 90 days notice or less without penalty or detriment.
Section 2.34  Plugging and Abandonment Obligations. Except for wells which will be plugged and abandoned by the Company in due course over the 6 month time period following the date of this Agreement with an aggregate net plugging liability not to exceed $75,000, there are no wells located on the Oil and Gas Properties that (a) Company is currently obligated by law or contract to currently plug and abandon; (b) are subject to exceptions to a requirement to plug and abandon issued by a governmental body or (c) to Company's knowledge, have been plugged and abandoned, but have not been plugged in accordance in all material respects with all applicable requirements of any governmental body.
Section 2.35  Construction.  Where applicable in this ARTICLE II, references to the "Company" shall be deemed to include the Subsidiaries.
ARTICLE III.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER
Section 3.01  Representations and Warranties of the Purchasers.  Each Purchaser severally and not jointly represents and warrants to the Company that:
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(a)          it is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act;
(b)          it has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof;
(c)          it has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Purchased Shares to be purchased by such Purchaser under this Agreement. Such Purchaser further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Purchased Shares and to obtain additional information necessary to verify any information furnished to the Purchaser or to which such Purchaser had access. The foregoing, however, does not in any way limit or modify the representations and warranties made by the Company in Article II;
(d)          the Purchased Shares being purchased by it are being acquired for its own account for the purpose of investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act;
(e)          it understands that (i) the Purchased Shares have not been registered under the Securities Act because of their issuance in a transaction exempt from the registration requirements of the Securities Act, (ii) the Purchased Shares must be held indefinitely (subject, however, to the Company's obligation to redeem the Preferred Shares in accordance with the terms thereof, and to the Company's obligation to effect the registration of registrable securities in accordance with the Rights Agreement) unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration, and (iii) the Purchased Shares will bear the legends to such effect set forth in Section 3.03; and
(f)          Each Transaction Document to which it is a party constitutes such Purchaser's valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) the effect of rules of law governing the availability of equitable remedies. Such Purchaser represents that it has full power and authority to enter into each Transaction Document to which it is a party.
Section 3.02  Certain Covenants of the Purchasers.
(a)          Without in any way limiting the representations set forth in Section 3.01, each Purchaser agrees not to make any disposition of all or any portion of its Purchased Shares unless and until:
(i)      there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or
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(ii)     such Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and, at the expense of such Purchaser or its transferee if requested by the Company, with an opinion of counsel that such disposition will not require registration of such securities under the Securities Act.
Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be required: (i) for any transfer of any Preferred Shares or Common Shares in compliance with Rule 144 or Rule 144A under the Securities Act or (ii) for any transfer of Preferred Shares or Common Shares by the either Purchaser to (A) a partner of such Purchaser or shareholder of such Purchaser, (B) a retired partner of such Purchaser who retires after the date hereof, (C) the estate of any such partner or shareholder; provided, however, that in each of the foregoing cases, the transferee agrees in writing to be subject to the terms of this Article III to the same extent as if the transferee were an original Purchaser hereunder.
(b)          Each Purchaser agrees not to dispose of any of the Common Shares such Purchaser purchases hereunder before the first anniversary of the Closing. Each Purchaser agrees not to dispose of more than 50% of the Common Shares such Purchaser purchases hereunder before the second anniversary of the Closing.
Section 3.03  Legend.  Each Purchaser acknowledges that the certificates evidencing the Purchased Shares will bear the legend set forth below:
	THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
In addition, certificates with respect to 50% of the Common Shares issued to each Purchaser will have the legend set forth below:
	THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED OR SOLD UNTIL AUGUST 21, 2004.
Certificates with respect to the remaining 50% of the Common Shares issued to each Purchaser will have the legend set forth below:
	THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED OR SOLD UNTIL AUGUST 21, 2005.
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The legend set forth above shall be removed by the Company from any certificate evidencing Purchased Shares, and the Company shall issue a certificate without such legend to the holder thereof, if requested, upon delivery to the Company of an opinion by counsel (which may be counsel for the Company) that a registration statement under the Securities Act is at that time in effect with respect to the legended security or that such security can be freely transferred in a public sale without such a registration statement being in effect and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to which the Company issued the Purchased Shares; provided, however, that the Company shall not require an opinion from counsel for transactions made pursuant to Rule 144 under the Securities Act except as required by the transfer agent; and provided, further, that except as required by the transfer agent, no opinion from counsel shall be required for any dispositions pursuant to Rule 144(k) under the Securities Act.
ARTICLE IV.
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS AND THE COMPANY
Section 4.01  Conditions to the Purchasers' Obligations at the Closing.  Each Purchaser's obligation to purchase and pay for the Preferred Shares being purchased by it on the Closing Date is, at its option, subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in whole or in part by such Purchaser:
(a)          Opinion of Company's Counsel. Such Purchaser shall have received from Barton, Schneider & Russell, L.L.P., counsel for the Company, an opinion dated the Closing Date, in form and scope satisfactory to such Purchaser and its counsel, in substantially the form set forth in Exhibit B.
(b)          Representations and Warranties to be True and Correct. The representations and warranties of the Company under this Agreement shall be true, complete and correct at and as of the Closing, except with respect to provisions including the word "material" or words of similar import, and except with respect to materiality, as reflected under GAAP, in the representations and warranties contained in Section 2.06 relating to the Financial Statements, with respect to which such representations and warranties must have been true and correct in all respects on and as of the Closing Date.
(c)          Performance. The Company shall have performed and complied with all agreements and covenants contained herein required to be performed or complied with by it prior to or at the Closing Date.
(d)          All Proceedings to be Satisfactory. All corporate and other proceedings to be taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in form and substance to such Purchaser and its counsel, and such Purchaser and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request.
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(e)          Approvals. The Company shall have obtained any and all consents, waivers, registrations, approvals or authorizations, with or by any governmental body and all consents, waivers, approvals or authorizations of any other Person required for the valid execution of the Transaction Documents and for the consummation of the transactions contemplated hereby and thereby.
(f)          No Injunction. No governmental body or any other Person shall have issued an order, injunction, judgment, decree, ruling or assessment which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby or under any of the other Transaction Documents, nor, shall any such order, injunction, judgment, decree, ruling or assessment be pending or, to the Company's knowledge, threatened.
(g)          Rights Agreement. The Company and such Purchaser shall have executed and delivered the Rights Agreement.
(h)          Certificate of Designation. The Certificate of Designation shall have been duly filed with Secretary of State of the State of Delaware.
(i)          Credit Facility Amendment. The Company and Hibernia National Bank shall have executed and delivered the Credit Facility Amendment, and the Company shall have delivered evidence of the fully executed Credit Facility Amendment to the Purchasers.
(j)          Election of Directors. The number of directors constituting the entire Board shall have been fixed at seven and Charles W. Yates III shall have been elected as a director and shall hold such position effective as of the Closing.
(k)          Preemptive Rights. All stockholders of the Company having any preemptive, first refusal or other rights with respect to the issuance of the Purchased Shares (other than those contemplated by the Transaction Documents) shall have irrevocably waived the same in writing.
(l)          Expenses. The Company shall have paid the fees and expenses of the Purchasers, including the fees and disbursements of the Purchasers' counsel invoiced at the Closing, in accordance with Section 6.01.
(m)          Supporting Documents. Such Purchaser and its counsel shall have received copies of the following documents:
(i)      (A) the Charter and the Certificate of Designation of the Preferred Shares, certified as of a recent date by the Secretary of State of the State of Delaware and (B) a certificate of said Secretary dated as of a recent date as to the Company's due incorporation and good standing and the Company's payment of all franchise taxes, and listing all documents of the Company on file with said Secretary;
(ii)      a certificate of the Company's Secretary dated the Closing Date, certifying: (A) that attached thereto is a true, correct and complete copy of the Bylaws as in effect on the date of such certification and that no amendments or modifications to such Bylaws have been authorized; (B) that attached thereto is a true, correct and complete copy of all resolutions adopted by the Board and the Company's stockholders authorizing the execution, delivery and
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performance of each of the Transaction Documents, the issuance, sale and delivery of the Purchased Shares, and that all such resolutions are in full force and effect, have not been amended, modified or rescinded and are the only resolutions adopted in connection with the transactions contemplated by the Transaction Documents; (C) that the Charter and Certificate of Designation have not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(A) above; and (D) to the incumbency and specimen signature of each officer of the Company executing any of the Transaction Documents, the stock certificates representing the Preferred Shares and any certificate or instrument furnished pursuant thereto, and a certification by another authorized officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this clause (ii); and
(iii)      a certificate, executed by an officer of the Company, dated the Closing Date, certifying to the fulfillment of the specific conditions set forth in Section 4.01(b) and (c) hereto and to the fulfillment of all of the conditions in this Article IV in general.
(iv)      such additional supporting documents and other information with respect to the Company's operations and affairs as the Purchasers or their counsel reasonably may request. All such documents shall be satisfactory in form and substance to the Purchasers and their counsel.
(n)          Due Diligence. Such Purchaser shall be satisfied in its reasonable discretion with the results of its due diligence investigation with respect to the current and historical operations, affairs, prospects, properties, assets, existing and potential liabilities, obligations, profits or condition (financial or otherwise) of the Company, including the review of the Company's oil and gas reserve engineering report by an independent petroleum engineering firm and legal and accounting due diligence investigations.
Section 4.02  Conditions to the Company's Obligations at the Closing.  The Company's obligation to sell and issue the Purchased Shares being sold and issued by it on each Closing Date is, at its option, subject to the satisfaction, on or before such Closing Date, of the following conditions, any of which may be waived in whole or in part by the Company:
(a)          Representations and Warranties to be True and Correct. The representations and warranties of each Purchaser contained in Article III shall be true, complete and correct at and as of the Closing, with the same effect as though such representations and warranties had been made on and as of such date.
(b)          Rights Agreement. Each Purchaser shall have executed and delivered the Rights Agreement.
(c)          HSR Waiting Act Period. Any applicable period under the HSR Act must have expired or been terminated.
(d)          Approvals. Each Purchaser shall have obtained any and all consents, waivers, approvals or authorizations, with or by any governmental body and all consents, waivers, approvals or authorizations of any other Person required for the valid execution of the Transaction Documents and for the consummation of the transactions contemplated hereby and thereby.
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(e)          No Injunction. No governmental body or any other Person shall have issued an order, injunction, judgment, decree, ruling or assessment which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby, nor, to the Company's knowledge, shall any such order, injunction, judgment, decree, ruling or assessment be threatened or pending.
(f)          Purchase Price Paid. Subject to Section 6.01, each Purchaser shall have paid the purchase price for the Purchased Shares to the Company as set forth in Section 1.01 and Section 1.02
(g)          Notwithstanding the foregoing, if one of Gryphon or KAEF fails to satisfy the conditions to the Company's obligation to close hereunder, Section 1.05 shall control.
ARTICLE V.
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchasers that:
Section 5.01  Use of Proceeds.  The Company shall use the proceeds from the sale of the Purchased Shares for acquisitions, drilling opportunities and general corporate purposes.
Section 5.02  Indemnity.
(a)          The Company agrees to indemnify, defend and hold harmless each Purchaser (and its partners (and each officer and director thereof), directors, managers, officers, members, stockholders, employees, Affiliates, agents and permitted assigns) (collectively, "Indemnified Parties") from and against any and all losses, claims, liabilities, damages, deficiencies, costs or expenses (including, without limitation, interest, penalties, reasonable attorneys' fees, disbursements and related charges and any costs or expenses that an Indemnified Party incurs to enforce its right to indemnification) (collectively, "Losses") based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representations, warranties, covenants or agreements of the Company contained in this Agreement or any of the other Transa ction Documents.
(b)          The provisions of this Section 5.02 shall not limit or impair any right or remedy arising from breach of this Agreement or any of the other Transaction Documents. In addition to any other remedy provided by law, injunctive relief may be obtained to enjoin the breach, or threatened breach, of any provision of this Agreement and each party shall be entitled to specific performance by the others of their obligations hereunder and thereunder. All remedies, either under this Agreement, by law or as may otherwise be afforded to the Purchasers or the Company, as the case may be, shall be cumulative.
Section 5.03  Preemptive Rights.  The Company agrees to use its best efforts to amend the Certificate of Incorporation of the Company on or prior to the next annual or special meeting of shareholders of the Company, to provide expressly (as a matter of clarification) that, notwithstanding any other provision contained therein, nothing therein precludes the Company from granting preemptive or subscription rights by contract or agreement to any Person. Promptly
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after such amendment is made effective, the Company shall deliver to the Purchasers an opinion of its counsel dated as of the date of such delivery. Such opinion will be in substantially the form set forth in Exhibit B, except with respect to exception paragraph D, which shall be omitted.
ARTICLE VI.
MISCELLANEOUS
Section 6.01  Expenses.  At the earlier to occur of (a) the Closing and (b) 20 days after the date hereof, notwithstanding the failure of the Closing to have occurred, the Company shall reimburse each Purchaser for all fees and expenses incurred by such Purchaser in connection with the transactions contemplated hereby, including the fees and disbursements of engineers and such Purchaser's counsel; provided that the Company shall have approved any such expense estimated to exceed $25,000 prior to its incurrence, which approval shall not be unreasonably withheld. The Company agrees that the fees and expenses incurred by the Purchasers through the Closing Date in connection with the transactions contemplated hereby may be paid directly by each Purchaser to the attorneys for such Purchaser and deducted from the purchase price payable at the Closing by such Purchaser . The Company further agrees to reimburse each Purchasers on demand for such Purchaser's reasonable out-of-pocket expenses incurred in connection with any amendment to, or waiver or enforcement of, this Agreement or the other Transaction Documents. The Company shall also pay all stamp and other taxes and duties levied in connection with the issuance of the Preferred Shares and the Common Shares.
Section 6.02  Survival of Agreements.  All covenants, agreements, representations and warranties made in any of the Transaction Documents or any certificate or instrument delivered to the Purchasers pursuant to or in connection with any of the Transaction Documents shall survive the execution and delivery of all of the Transaction Documents, the issuance, sale and delivery of the Purchased Shares, and all statements contained in any certificate or other instrument delivered by the Company hereunder or thereunder or in connection herewith or therewith shall be deemed to constitute representations and warranties made by the Company.
Section 6.03  Brokerage.  Each party hereto will indemnify and hold harmless the others against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party.
Section 6.04  Parties in Interest.  All representations, warranties, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Without limiting the generality of the foregoing, all representations, covenants and agreements benefiting the Purchasers shall inure to the benefit of any and all subsequent holders from time to time of Preferred Shares or Common Shares, as the case may be. Nothing in this Agreement shall create or be deemed to create any third-party beneficiary rights in any Person not a party to this Agreement except as provided below and except with respect to any Indemnified Parties under Section 5.02. Whether or not any express assignment has been made,
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the provisions of this Agreement which are for the benefit of the Purchasers as purchasers or holders of Preferred Shares or Common Shares are also for the benefit of and enforceable by any subsequent holder of such Preferred Shares or Common Shares who acquires at least $3.0 million in original purchase price value of such shares to the same extent they would have been enforceable by the Purchaser. Upon any permitted assignment, the references in this Agreement to the Purchasers shall also apply to any such assignee unless the context otherwise requires. The Purchasers' obligations hereunder shall be several and not joint.
Section 6.05  Specific Performance.  Each Party hereto acknowledges and agrees that the other parties hereto would be irreparably damaged if any provision of this Agreement is not performed in accordance with its specific terms or is otherwise breached. Accordingly, each Party hereto agrees that the other parties hereto will be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to specifically enforce this Agreement and its terms and provisions in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties in the matter, subject to Section 6.07 and Section 6.09, in addition to any other remedy to which they may be entitled, at law or in equity.
Section 6.06  Further Assurances.  The Company and the Purchasers each agree to take such actions and execute and deliver such other documents or agreements as may be necessary or desirable for the implementation of the Transaction Documents and the consummation of the transactions contemplated hereby and thereby.
Section 6.07  Arbitration.  Any and all claims, counterclaims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement or in any way relating to the subject matter of this Agreement or the relationship between the parties hereto created by this Agreement, involving the parties hereto or their respective representatives ("Disputes") even though all or some of the Disputes allegedly are extra-contractual in nature, whether such Disputes sound in contract, tort or otherwise, at law or in equity, under state, provincial or federal law, for damages or any other relief will be resolved as follows: first, representatives of the Company and the Purchasers will meet to attempt to resolve such Dispute. If the Dispute cannot be resolved by agreement of the parties hereto, any party may at a ny time make a written demand for binding arbitration of the Dispute in accordance with this Section 6.07; provided that the foregoing shall not preclude equitable or other judicial relief to enforce the provisions hereof or to preserve the status quo pending resolution of Disputes; and provided further that resolution of Disputes with respect to claims by third Persons will be deferred until any judicial proceedings with respect thereto are concluded. Subject to the provisions of this Section 6.07, the Purchasers and the Issuer will agree upon the rules of the arbitration prior to the arbitration and based upon the nature of the Dispute; provided that to the extent that the parties hereto cannot agree on the rules of the arbitration, then the Commercial Arbitration Rules of the American Arbitration Association in effect on the date hereof, and except as the applicable rules are modified by this Agreement, will apply. As a minimum set of rules in the arbitration the parties hereto agree as follows:
(a)          To the extent the claims asserted are in excess of $3.0 million, the arbitration will be held before a panel of three arbitrators consisting of one arbitrator selected by the Purchasers, the other selected by the Company, and the third then selected by those two arbitrators (such third arbitrator to be neutral). If agreement cannot be reached on a third arbitrator within 30 days
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of the need therefor, the Chief Judge of the U.S. District Court for the Southern District of Texas shall appoint an arbitrator. If the claims asserted are less than $3.0 million, the Chief Judge of the U.S. District Court for the Southern District of Texas shall appoint a sole arbitrator. All arbitrators shall be attorneys with at least ten years experience in oil and gas transactions.
(b)          The arbitrator(s) will deliver their decision in writing within 20 days after the termination of the arbitration hearings.
(c)          The non-prevailing party will bear the costs and fees of the arbitration.
(d)          The arbitrator(s) final decision will be in writing but will not specify the basis for their decision, the basis for the damages award or the basis of any other remedy. The arbitrator(s)' decision will be considered as a final and binding resolution of the disagreement, will not be subject to appeal and may be entered as an order in any court of competent jurisdiction in the United States; provided that this Agreement confers no power or authority upon the arbitrator(s) (i) to render any decision that is based on clearly erroneously findings of fact, (ii) that manifestly disregards the law, or (iii) that exceeds the powers of the arbitrator(s), and no such decision will be eligible for confirmation. Each party hereto agrees to submit to the jurisdiction of any such court for purposes of the enforcement of any such order. No party will s ue the other except for enforcement of the arbitrator(s)' decision if the other party is not performing in accordance with the arbitrator(s)' decision. The provisions of this Agreement will be binding on the arbitrator(s).
(e)          Any arbitration proceeding will be conducted on a confidential basis.
(f)          Any arbitration proceeding shall be held in Houston, Texas.
(g)          Any arbitration proceeding, including discovery, shall be conducted in accordance with the Texas Rules of Civil Procedure and the Texas Rules of Evidence.
Section 6.08  Notices.  Any notice, request, demand or other communication required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given under this Agreement on the earliest of: (a) the date of personal delivery, (b) the date of transmission by facsimile, with confirmed transmission and receipt, (c) two days after deposit with a nationally-recognized courier or overnight service such as Federal Express, or (d) five days after mailing via certified mail, return receipt requested. All notices not delivered personally or by facsimile will be sent with postage and other charges prepaid and properly addressed to the party to be notified at the address set forth for such party:
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If to KAEF:
		Kayne Anderson Energy Fund II, L.P. c/o Kayne Anderson Capital Advisors, L.P. 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 Phone: (310) 284-6438 Fax: (310) 284-6444 Attn:     David Shladovsky, General Counsel
		with a copy to (which does not constitute notice):
		Akin Gump Strauss Hauer & Feld LLP 1900 Pennzoil Place 711 Louisiana Houston, Texas 77002 Phone: (713) 220-5803 Fax: (713) 236-0822 Attn: Julien Smythe
If to Gryphon:
		Gryphon Master Fund, L.P. 500 Crescent Court, Suite 270 Dallas, TX 75201 Phone: (214) 871-6998 Fax: (214) 871-6909 Attn:     E.B. Lyon, IV, Partner
		with a copy to (which does not constitute notice):
		Warren W. Garden, P.C. 500 Crescent Court, Suite 270 Dallas, Texas 75201 Phone: (214) 871-6710 Fax: (214) 871-6711 Attn: Warren W. Garden
If to the Company:
		The Exploration Company of Delaware, Inc. 500 North Loop 1604 E., Suite 250 San Antonio, Texas 78232 Phone: (210) 496-5300 Fax     (210) 496-3232 Attn:    James E. Sigmon
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		with a copy to (which does not constitute notice):
		Barton, Schneider & Russell, L.L.P. 700 N. St. Mary's Street Suite 1825 San Antonio, Texas 78205 Phone: (210) 225-1655 Fax: (210) 225-8999 Attn: Frank Russell
Any party hereto (and such party's permitted assigns) may change such party's address for receipt of future notices hereunder by giving written notice to the Company and the other parties hereto.
Section 6.09  Governing Law.  This Agreement and the performance of the transactions and the obligations of the parties hereunder will be governed by and construed and enforced in accordance with the laws of the State of Texas, without giving effect to any choice of law principles.
Section 6.10  Entire Agreement.  This Agreement, together with the Exhibits and Schedules hereto, the certificates, documents, instruments and writings that are delivered pursuant hereto and each Transaction Document, constitutes the entire agreement and understanding of the parties hereto in respect of its subject matters and supersedes all prior understandings, agreements, or representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof or the transactions contemplated hereby.
Section 6.11  Counterparts.  This Agreement may be executed in two or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument.
Section 6.12  Amendments and Waivers.  This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the Purchasers. No action taken pursuant to this Agreement, including without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law.
Section 6.13  Successors and Assigns.  This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives.
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Section 6.14  Severability.  The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision hereof will not affect the validity or enforceability of the other provisions hereof; provided that if any provision of this Agreement, as applied to any party or to any circumstance, is adjudged by a court, governmental body or arbitrator not to be enforceable in accordance with its terms, the parties hereto agree that the court, governmental body, or arbitrator making such determination will have the power to modify the provision in a manner consistent with its objectives such that it is enforceable, and/or to delete specific words or phrases, and in its reduced form, such provision will then be enforceable and will be enforced.
Section 6.15  Titles and Subtitles.  The article and section headings contained in this Agreement are inserted for convenience only and will not affect in any way the meaning or interpretation of this Agreement.
Section 6.16  Adjustments for Stock Splits, Etc.  Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or Preferred Shares of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement will automatically be proportionally adjusted to reflect the effect of such subdivision, combination or stock dividend on the outstanding shares of such class or series of stock.
Section 6.17  Aggregation of Stock.  All shares held or acquired by an Affiliate will be aggregated together for the purpose of determining the availability of any rights under this Agreement.
Section 6.18  Like Treatment of Holders.  Neither the Company nor any of its Affiliates shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee, payment for the redemptions or exchange of Preferred Shares, or otherwise, to any holder of Preferred Shares for or as an inducement to, or in connection with solicitation of, any consent, waiver or amendment of any terms or provisions of the Preferred Shares, this Agreement or the Rights Agreement unless such consideration is paid to all holders of Preferred Shares bound by such consent, waiver or amendment, whether or not such holders so consent, waive or agree to amend and whether or not such holders tender their Preferred Shares for redemption or exchange.
Section 6.19  Exculpation Among Purchasers.  Each Purchaser acknowledges that it is not relying upon any Person (including any other Purchaser), other than the Company and its officers and directors (acting in their capacity as representatives of the Company), in deciding to invest and in making its investment in the Company. Each Purchaser agrees that no other purchaser nor the respective controlling persons, officers, directors, partners, agents or employees of any other Purchaser shall be liable to such Purchaser for any losses incurred by the Purchaser in connection with its investment in the Company.
Section 6.20  Construction.  The parties hereto have jointly participated in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties hereto and no presumption or burden of proof will arise favoring or disfavoring any party hereto because of the authorship of
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any provision of this Agreement. Any reference to any federal, state, local or foreign law will also be deemed to refer to such law as amended and all rules and regulations promulgated thereunder, unless the context otherwise requires. The words "include," "includes" and "including" will be deemed to be followed by "without limitation." Pronouns in masculine, feminine and neuter genders will be construed to include any other gender, and words in the singular form will be construed to include the plural and vice versa, unless the context otherwise requires. The words "this Agreement," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The parties hereto intend that each representation, warranty and covenant contained herein will have independent significance. If any party hereto has breached any representation, warranty or covenant containe d herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which such party has breached, will not detract from or mitigate the fact that such party is in breach of the first representation, warranty or covenant.
Section 6.21  Remedies.  The parties hereto shall have all remedies for breach of this Agreement available to them as provided by law or equity.
Section 6.22  Certain Defined Terms.  As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, with respect to any Person, (i) any other Person of which securities or other ownership interests representing more than thirty-five percent (35%) of the voting interests are, at the time such determination is being made, owned, Controlled or held, directly or indirectly, by such Person, or (ii) any other Person which, at the time such determination is being made, is Controlling, Controlled by or under common Control with, such Person. As used herein, "Control", whether used as a noun or verb, refers to the possession, directly or indirectly, of the power to direct, or cause the direction of, the management or policies of a Person, whether through the ownership of voting securities or otherwise.
"Credit Facility Amendment" shall mean an amendment to the Credit Facility in form and substance satisfactory to the Purchasers that (i) permits the issuance of Preferred Shares and declaration and payment of dividends (and the setting aside of funds for such purpose) as required hereunder and under the Certificate of Designation, (ii) amends the provision regarding minimum current ratio described in Section 5.15(a) of the Credit Facility so that such provision requires a ratio of not less than 1.00 to 1.00 and (iii) prohibits any decrease in the amount of the Borrowing Base (as such term is defined in the Credit Facility) until the first anniversary of the Closing Date.
"Lien" shall mean a mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or otherwise, including, without limitation, any lien for taxes), security interest, preference, participation interest, priority or security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic
29
effect as any of the foregoing and the filing of any document under the law of any applicable jurisdiction to evidence any of the foregoing.
"Material Adverse Change" shall mean a material adverse change in the Company's business, operations, assets, liabilities, prospects, properties, condition (financial or otherwise) or results of operations.
"Permitted Bank Debt" means the Revolving Credit Facility by and between the Company, as borrower, Hibernia National Bank, as Agent, and the lenders named therein, dated March 4, 2002 (the "Credit Facility"), as amended or refinanced from time to time, and any successors or replacement agreement or agreements with the same or any other agents, creditor, lender or group of creditors or lenders.
"Person" shall mean an individual, corporation, trust, partnership, limited liability company, joint venture, unincorporated organization, government body or any agency or political subdivision thereof, or any other entity.
"Rights Agreement" shall mean the Rights Agreement between the Company and the Purchasers, in the form attached hereto as Exhibit C.
"Subsidiary" shall mean, as to the Company, any Person of which more than fifty percent (50%) of the outstanding voting power of such Person (irrespective of whether or not at the time stock of any other class or classes of such Person shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly controlled by the Company, or by one or more of its subsidiaries, or by the Company and one or more of its subsidiaries.
"Transaction Documents" shall mean this Agreement, the Certificate of Designation and the Registration Agreement.
Section 6.23  Incorporation of Exhibits, Annexes and Schedules.  The exhibits, annexes and schedules identified in this Agreement are incorporated herein by reference and made a part hereof.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company and the Purchasers have executed this Agreement as of the day and year first above written.
COMPANY:			THE EXPLORATION COMPANY OF DELAWARE, INC.
			By:  /s/  James E. Sigmon
			Name:   James E. Sigmon
			Title:      President
PURCHASERS:			KAYNE ANDERSON ENERGY FUND II, L.P.
			By:   Kayne Anderson Capital Advisors, L.P.,          its General Partner
			By:   Kayne Anderson Investment                   Management, Inc., its General                   Partner
			By:  /s/  C. W. Yates
			Name:   Charles W. Yates III
			Title:      Managing Director
			GRYPHON MASTER FUND, L.P.
			By:   Gryphon Partners, L.P., its General          Partner
			By:   Gryphon Management Partners,                   L.P., its General Partner                   By:   Gryphon Advisors, LLC, its                   General Partner
			By:  /s/  E. B. Lyon, IV
			Name:   E. B. Lyon, IV
			Title:      Authorized Agent

EX-4

Exhibit 4.2

CERTIFICATE OF DESIGNATION

OF

REDEEMABLE PREFERRED STOCK, SERIES B

OF

THE EXPLORATION COMPANY OF DELAWARE, INC.

Pursuant to Section 151 of the

General Corporation Law of Delaware

            The Exploration Company of Delaware, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), does hereby certify that, pursuant to the authority conferred on the Board of Directors of the Company (the "Board") by the Certificate of Incorporation of the Company and in accordance with Section 151 of the General Corporation Law of Delaware ("DGCL"), on July 31, 2003, the Board duly adopted, by all necessary action on the part of the Company, the following resolutions establishing and designating a series of its preferred stock, par value $0.01 per share, designated "Redeemable Preferred Stock, Series B" and fixing and determining the relative rights, preferences and powers thereof.

            RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company (the "Board") in accordance with the provisions of its Certificate of Incorporation, a series of preferred stock, par value $0.01 per share, of the Company is hereby created, and that the designation and number of shares thereof and the powers, preferences, limitations and relative rights thereof are as follows:

            Section 1.               DESIGNATION, NUMBER OF SHARES AND STATED VALUE OF REDEEMABLE PREFERRED STOCK, SERIES B. There is hereby authorized and established a series of preferred stock that shall be designated as "Redeemable Preferred Stock, Series B" (the "Series B Preferred"), and the number of shares constituting such series shall be 16,000. Such number of shares may be increased or decreased, but not to a number less than the number of shares of Series B Preferred then issued and outstanding, by resolution adopted by the full Board. The "Stated Value" per share of Series B Preferred shall be equal to $1,000.00.

            Section 2.               DEFINITIONS. In addition to the definitions set forth elsewhere herein, the following terms shall have the meanings indicated:

            "Affiliate" of a Person means any Person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, such other Person. For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

            "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close.

            "Change of Control" means (a) the acquisition at any time by a "person" or "group" (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) who or which are the beneficial owners (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities representing more than 35% of the combined voting power in the election of directors of the then outstanding securities of the Company or any successor of the Company, unless the acquisition of securities resulting in such ownership by such person or group had been approved unanimously by the Board; (b) approval by the stockholders of the Company of any sale or disposition of all or substantially all of the assets or earnings power of the Company and/or its subsidiaries, taken as a whole; or (c) approval by the stockholders of the Company of any merger or consolidation , or statutory share exchange to which the Company is a party as a result of which the Persons who were stockholders of the Company immediately prior to the effective date of the merger or consolidation or share exchange have beneficial ownership of less than 35% of the combined voting power in the election of directors of the surviving corporation; provided, however, that the following shall not be deemed a, or result in a, Change of Control: (i) the acquisition or beneficial ownership of voting securities by either Initial Holder, its respective Affiliates, or any group of which either Initial Holder or its respective Affiliates is a member; (ii) any repurchase of voting securities by the Company or any subsidiary of the Company that causes the percentage ownership of any "person" or "group" to exceed the threshold specified in clause (a) above; (iii) any transaction pursuant to which securities are transferred by a Initial Holder or an Affiliate of such Initial Holder; or (iv) any transaction that causes a Person to become the beneficial owner of voting securities of the Company as a result of acquiring an interest in an Initial Holder, an Affiliate of an Initial Holder or a transferee of an Initial Holder.

            "Common Stock" means the common stock, $0.01 par value per share, of the Company.

            "Credit Facility Borrowing Base Deficiency" means a Loan Excess under, and as such term is defined in, the Credit Facility or any Permitted Bank Debt.

            "Credit Facility Default" means a Default of the Company under, and as such term is defined in, the Credit Facility or any Permitted Bank Debt that has not been cured or waived in writing by the expiration of the applicable cure period; provided, however, that any such cure or waiver shall permit the Company to pay timely cash dividends as provided hereunder.

            "Debt" means, without duplication, the following obligations of the Company and its subsidiaries:

                  (a)          all obligations for borrowed money or with respect to deposits or advances of any kind;

                  (b)          all obligations evidenced by bonds, debentures, notes or other similar instruments;

                  (c)          all obligations upon which interest charges are customarily paid;

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                  (d)          all obligations under conditional sale or other title retention agreements relating to property acquired by the Company and its subsidiaries;

                  (e)          all obligations in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business of the Company and its subsidiaries);

                  (f)          all debt of others secured by (or for which the holder of such debt has an existing right, contingent or otherwise, to be secured by) any lien on property owned or acquired by the Company or its subsidiaries, whether or not the debt secured thereby has been assumed;

                  (g)          all guarantees of debt of others;

                  (h)          all capital lease obligations in respect of which the Company or its subsidiaries is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations the Company or its subsidiaries otherwise assures a creditor against loss;

                  (i)           obligations arising under Hedging Obligations;

                  (j)           all obligations, contingent or otherwise, of the Company or its subsidiaries as an account party in respect of letters of credit and letters of guaranty; and

                  (k)          all obligations, contingent or otherwise, in respect of bankers' acceptances.

Debt shall include the Debt of any other entity (including any partnership in which the Company is a general partner) to the extent the Company is liable therefor as a result of the Company's ownership interest in or other relationship with such entity, except to the extent the terms of such Debt provide that the Company is not liable therefor.

            "EBITDAX" means (a) net income of the Company and its subsidiaries, minus (b) any non-cash income and gains included in net income, plus, to the extent deducted in determining net income, interest expense, taxes, depreciation, depletion and impairment, amortization of leasehold and intangibles, exploration expenses, other non-cash costs, expenses, charges, write-offs and similar items, excluding gains or losses on the disposition of assets not in the ordinary course of business.

            "Hedging Obligations" means, with respect to any Person, the net obligations (not the notional amount) of such Person under interest rate and commodity price swap agreements, interest rate and commodity price cap agreements, interest rate and commodity price collar agreements and foreign currency and commodity price exchange agreements, options or futures contracts or other similar agreements or arrangements or hydrocarbon hedging contracts or hydrocarbon forward sales contracts, in each case designed to protect such Person against fluctuations in interest rates, foreign exchange rates, or the commodities prices.

            "Holder" means any record holder of Series B Preferred.

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            "Initial Holders" means KAEF and Gryphon Master Fund, L.P., a Bermuda limited partnership.

            "Junior Securities" means the Common Stock or any other series of stock issued by the Company ranking junior (including the Series A Preferred) as to Series B Preferred with respect to payment of dividends, or upon liquidation, dissolution or winding up of the Company.

            "KAEF" means Kayne Anderson Energy Fund, II, L.P., a Delaware limited partnership.

            "Liquidity Ratio" means for any Rolling Period (a) Debt (other than that arising under Hedging Obligations) plus Preferred Obligations minus Working Capital, divided by (b) EBITDAX; provided, however, that for the Rolling Period that is the first full quarter after the Original Issue Date, the first two full quarters after the Original Issue Date and the first three full quarter after the Original Issue Date, such quotient shall be multiplied by 4, 2 and 4/3 respectively.

            "Measurement Date" means June 30 and December 31 of each year and any other date on which a Holder holding over 5,000 shares of Series B Preferred requests a proved oil and gas reserve report from the Company.

            "Original Issue Date" means the date on which the first shares of Series B Preferred are issued.

            "Parity Securities" means the Series B Preferred or any other class or series of stock issued by the Company ranking on a parity with the Series B Preferred with respect to payment of dividends, and upon liquidation, dissolution or winding up of the Company.

            "Permitted Bank Debt" means the Revolving Credit Facility by and between the Company, as borrower, Hibernia National Bank, as Agent, and the lenders named therein, dated March 4, 2002 (the "Credit Facility") as amended or refinanced from time to time, and any successors or replacement agreement or agreements with the same or any other agents, creditor, lender or group of creditors or lenders that provide for the incurrence of senior secured debt and have no equity component to such financing. If the Company replaces, refinances or changes the Credit Facility in any way, the changed or successor facility shall include the definition of "Default" and "Loan Excess" serving the same function therein as such terms serve in the Credit Facility.

            "Person" means an individual, corporation, trust, partnership, limited liability company, joint venture, unincorporated organization, government body or any agency or political subdivision thereof, or any other entity.

            "Preferred Obligations" means (a) the stated value of all outstanding shares of preferred stock of the Company or any of its Subsidiaries (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), plus (b) all accrued and unpaid dividends on such shares.

            "Proved PV10" means pre-tax present value, discounted at 10% per year, of the Company's estimated future net revenues, using the New York Mercantile Exchange ("NYMEX") strip prices

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(adjusted for quality and basis differential) as of such Measurement Date for the first 12 months and the second 12 months and held constant at the average second 12 months price thereafter and costs held constant, commencing with the month following the month during which the determination is to be made, for each of the appropriate crude oil or natural gas categories included in the Company's most recent reserve report (with consideration of price changes only to the extent provided by contractual arrangements with counterparties whose long term senior unsecured debt rating at such Measurement Date is BBB+/Baa3 (or their equivalent) or higher by Standard & Poor's Ratings Group, Moody's Investors Service, Inc. or any successors thereto that are nationally recognized rating agencies), attributable to the Company's estimated future production of proved oil and gas reserves as of such Measurement Date, minus estimated future expenditures (based on current costs) to be incurred in developi ng, producing and abandoning the proved reserves computed assuming continuation of existing economic conditions, in each case as determined in accordance with Securities and Exchange Commission guidelines.

            "Redemption" means any one of a Termination Date Redemption, an Optional Redemption or a Default Redemption.

            "Rolling Period" means at any time, the most recent to occur of (a) the first full fiscal quarter after the Original Issue Date, (b) first two full fiscal quarters after the Original Issue Date, (c) the first three full fiscal quarters after the Original Issue Date or (d) the immediately preceding four consecutive full fiscal quarters occurring after the Original Issue Date.

            "Termination Redemption Date" means the earlier of the sixth anniversary of the Original Issue Date and the effective date of a Change of Control.

            "Redemption Price" means either the Termination Date Redemption Price or the Optional Redemption Price.

            "Securities Act" means the Securities Act of 1933, as amended.

            "Semi-Annual Coverage Ratio" means (a) Proved PV10, divided by (b) Debt plus Preferred Obligations minus Working Capital.

            "Senior Securities" means any class or series of stock issued by the Company ranking senior to Series B Preferred with respect to payment of dividends, or upon liquidation, dissolution or winding up of the Company.

            "Series A Preferred" means the Company's Series A Junior Participating Preferred Stock, par value $.01 per share.

            "Working Capital" means the fair value of (a) the current assets minus (b) except to the extent included in Debt, the current liabilities of the Company and its subsidiaries on a consolidated basis.

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Section 3.               DIVIDENDS AND DISTRIBUTIONS.
(a)            Subject to the right of any series of preferred stock that may from time to time come into existence and Section 5(d), the Holders, in preference to the Junior Securities, shall be entitled to receive out of funds legally available therefor quarterly cash dividends, (i) during the period beginning on the Original Issue Date and ending on the third anniversary of the Original Issue Date, at the rate of 8.0% of the Stated Value, per share, per annum, and (ii) thereafter, at the rate of 10.0% of the Stated Value, per share, per annum. Such dividends shall be cumulative, whether or not declared by the Board, and shall be payable to the holders of record of the Series B Preferred on January 1, April 1, July 1 and October 1 in each year, not later than 5 Business Days after each corresponding record date (as a pplicable, each a "Dividend Payment Date").
(b)            Notwithstanding Section 3(a), if a Credit Facility Borrowing Base Deficiency or a Credit Facility Default exists under the Credit Facility or Permitted Bank Debt, as applicable, then the Company, for so long as such Credit Facility Borrowing Base Deficiency or the Credit Facility Default, as the case may be, is continuing, may defer payment of cash dividends otherwise payable on such Dividend Payment Date (herein "Deferred Dividends"), such dividends to accrue daily and compound on a quarterly basis (on the Stated Value plus all accrued and unpaid dividends hereunder) at a per annum rate equal to the rate then contemplated by Section 3(a) plus 2%. Upon waiver or cure of the Credit Facility Borrowing Base Deficiency or the Credit Facility Default, as the case may b e, the Company shall immediately give notice to the Holders of such wavier or cure and shall thereafter pay dividends to the Holders in accordance with Section 3(a), including the payment of all accrued Deferred Dividends within ten days of the effectiveness of the waiver or cure of the Credit Facility Borrowing Base Deficiency or the Credit Facility Default, as the case may be.
(c)            Dividends shall be calculated on the basis of the time elapsed from and including the date of issuance of such shares to and including the Dividend Payment Date or on any final distribution date relating to conversion or redemption or to a dissolution, liquidation or winding up of the Company.
(d)            Subject to Section 5(b), to the extent dividends are not paid on a Dividend Payment Date, such accrued and unpaid dividends shall accrue daily and compound on a quarterly basis at a rate per annum equal to 12%. Except as contemplated hereby no interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on Series B Preferred that are in arrears.
(e)            Dividends in arrears may be declared and paid at any time to holders of record on a date not more than 60 days preceding the payment date as may be fixed by the Board. Dividends paid on shares of Series B Preferred in an amount less than the total amount of such dividends at the time payable shall be allocated pro rata on a share by share basis among all shares outstanding.
(f)            So long as any shares of Series B Preferred are outstanding, without the consent of the holders of a majority of the outstanding shares of Series B Preferred, no dividend, whether in
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cash or property, shall be paid or declared, nor shall any other distribution be made on any Junior Security, nor shall any shares of any Junior Security of the Company be purchased, repurchased, redeemed, retired or otherwise acquired for value by the Company or any Person that the Company owns or controls at least a majority of the voting shares or voting equity interests of, directly or indirectly ("Subsidiaries") (except for acquisitions of Common Stock by the Company pursuant to agreements with employees, advisors, consultants or service providers that permit the Company to repurchase such shares upon termination of services to the Company or exercise of the Company's right of first refusal upon a proposed transfer which in the aggregate do not exceed $500,000 ("Permitted Purchases")).
(g)            All dividends payable hereunder shall be paid on the basis of a 360-day year consisting of twelve 30-day months and shall be adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares.
(h)            All dividends hereunder shall accrue daily whether or not there are (at the time such dividend becomes payable or at any other time) profits, surplus or other funds of the Company legally available for the payment of dividends.
Section 4.               LIQUIDATION PREFERENCE.
(a)            Preference. Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary (each a "Liquidation Event"), before any distribution or payment shall be made to the holders of any Junior Securities, subject to the rights of any preferred stock that may from time to time come into existence, each Holder shall be entitled to be paid out of the assets of the Company, an amount in cash per share equal to the sum of (i) the Stated Value of Series B Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) outstanding (the "Initial Series B Issuance Price"), and (ii) all accrued and unpaid dividends on such shares, and no more ((i) and (ii) together, the "Liquidation P reference"). If, upon any Liquidation Event, the assets of the Company are insufficient to make payment in full to all Holders of the Liquidation Preference and any liquidation preference owing with respect to its Parity Securities, subject to the rights of any series of preferred stock that may from time to time come into existence, then the entire assets and funds of the Company legally available for distribution shall be distributed to each holder of Series B Preferred and Parity Securities on a pro rata basis based on their respective liquidation preferences.
(b)            Remaining Assets. After the payment of the full Liquidation Preference as set forth in Section 4(a), the holders of the Series B Preferred shall have no further right to participate in or receive the distribution of assets to the stockholders of the Company.
(c)            Additional Liquidation Events. A Change of Control shall be considered a Liquidation Event under this Section 4.
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(d)            Notice of Liquidation Event. The Company shall give each Holder written notice of any impending Liquidation Event no later than 20 days prior to the stockholders' meeting called to approve such transaction, or 20 days prior to the closing of such Liquidation Event, whichever is earlier, and shall also notify such holders in writing of the final approval of such Liquidation Event. The first of such notices shall describe the material terms and conditions of the impending Liquidation Event (including the estimated amount and nature of proceeds to be paid to each share of Series B Preferred in connection with the Liquidation Event) and the provisions of this Section 4, and the Company shall thereafter give such holders prompt notice of any material changes. The Liquidation Ev ent shall in no event take place sooner than 20 days after the Company has given the first notice provided for herein or sooner than 10 days after the Company has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of a majority of the Series B Preferred.
(e)            Effect of Noncompliance. If the requirements of Section 4(d) are not complied with, the Company shall forthwith either cause the closing of the transaction to be postponed until such requirements have been complied with, or cancel such transaction, in which event the rights, preferences and privileges of the Holders shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 4(d).
Section 5.                REDEMPTION BY THE COMPANY. Subject to compliance with this Section 5, the Series B Preferred will be redeemed out of funds legally available therefor as follows:
(a)            If on the Termination Redemption Date there are shares of Series B Preferred outstanding, the Company will redeem all of the then outstanding shares of Series B Preferred (a "Termination Date Redemption") at a price per share of Series B Preferred, paid in cash, equal to the Liquidation Preference (the "Termination Date Redemption Price").
(b)           At anytime after the Original Issue Date, the Company may redeem any outstanding shares of Series B Preferred, in whole or in part (an "Optional Redemption"), from time to time, at a price per share of Series B Preferred paid in cash equal to the Liquidation Preference (the "Optional Redemption Price"); provided, however as a condition to redeem any of the Series B Preferred held by a Holder, if requested by such Holder, the Company shall redeem from such Holder not less than that number of shares of Series B Preferred and shares of Common Stock that is required to be redeemed so that: (x) the ratio which the voting stock of the Company owned by the Holder immediately after the redemption bears to all of the voting stock of the Company at such time is less than 80% of the ratio which the voting stoc k of the Company owned by the Holder immediately before the redemption bears to all of the voting stock of the Company at such time and (y) the ratio which the common stock (for purposes of section 302 of the Internal Revenue Code) of the Company owned by the Holder immediately after the redemption bears to all of the common stock of the Company at such time is less than 80% of the ratio which the common stock of the Company owned by the Holder immediately before the redemption bears to all of the
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common stock of the Company at such time; provided, further that notwithstanding the foregoing, either Initial Holder may elect to not be redeemed if the Holder reasonably determines that the redemption would not qualify as a "substantially disproportionate redemption of stock" under section 302(b)(2) of the Internal Revenue Code unless the Company provides such Initial Holder with a tax opinion of nationally recognized tax counsel, experienced in such matters, to the effect that such a redemption will qualify as a "substantially disproportionate redemption of stock."
	(c)      If the Company:
	(i)           fails to pay any dividends payable hereunder on the applicable Dividend Payment Date or as contemplated by the last sentence of Section 3(b), unless the Company defers the payment of such dividends under Section 3(b);
	(ii)         materially breaches either (A) the Subscription Agreement by and among the Company and the Initial Holders, dated August 1, 2003, as amended from time to time or (B) the Rights Agreement dated as of the Original Issue Date, by and among the Company and the Initial Holders;
	(iii)        fails to pay the Termination Date Redemption Price or the Optional Redemption Price to the holders of record of Series B Preferred in cash within the time and in the manner required by Section 5(g);
	(iv)        permits its Liquidity Ratio for the most recent Rolling Period to be more than 3.0 to 1.0; or
	(v)         permits its Semi-Annual Coverage Ratio to be less than 1.0 to 1.0 on any Measurement Date (clauses (i) through (v), a "Default"),
	then the Company will redeem each then outstanding share of Series B Preferred (a "Default Redemption") in cash at a price equal to the Liquidation Preference.
(d)     Upon a Redemption, a notice of Redemption ("Redemption Notice") will be delivered at least ten days prior thereto by or on behalf of the Company to each Holder. The Redemption Notice will (i) set forth the proposed initial date for such Redemption, which date shall be no less than 20 and no more than 60 days from the date the Redemption Notice is delivered (the "Redemption Date"), (ii) notify each Holder of the number of shares of Series B Preferred being called for Redemption, (iii) state the place or places at which such shares of Series B Preferred will, upon presentation and surrender of the certificate or certificates evidencing such shares, be redeemed and the Redemption Price, and (iv) state the name and address of the Redemption Agent selected. Upon receipt of the Redemption Notice and to receive the Redemption Price, the Holder of any shares of Series B Preferred shall cause to be delivered to the Company (x) the certificates representing the shares of Series B Preferred to be redeemed (or delivery of a customary affidavit of loss with an indemnity reasonably satisfactory to the Company) and (y) transfer instrument(s) reasonably satisfactory to the Company and sufficient to transfer such shares of Series B Preferred to the Company free of any adverse interest.
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(e)        If a Redemption Notice is given in accordance with Section 5(d) then, except as provided by law, each Holder of shares of Series B Preferred called for Redemption is entitled to all preferences and relative and other rights accorded by this resolution until and including the date prior to the Redemption Date.
(f)         If a Default occurs and the Company fails to redeem all shares required to be redeemed, in addition to all other remedies available to Holders:
	(i)         the dividend rate under Section 3 shall increase to 12%; and
	(ii)       the Holders of the Series B Preferred shall have the right to elect directors as provided under Section 6(b).
(g)        The Company may (i) act as the redemption agent or (ii) appoint as its agent, for the purpose of acting as the Company' redemption agent, a bank or trust company in good standing, organized under the laws of the United States of America or any jurisdiction thereof and any replacement thereof or successors thereto (such Person, the "Redemption Agent"). Following such appointment, if any, and prior to any Redemption, the Company will deliver to the Redemption Agent irrevocable written instructions authorizing the Redemption Agent, on the Company's behalf and expense, to cause a Redemption Notice to be duly delivered in accordance with Section 5(d), as soon as practicable after receipt of such irrevocable instructions. All funds necessary for the Redemption will be deposited with the Redemption Age nt, in trust, at least two Business Days prior to the Redemption Date, for the pro rata benefit of the holders of the shares of Series B Preferred called for Redemption. Neither failure to deliver any such notice to one or more Holders nor any defect in any notice will affect the sufficiency of the proceedings for Redemption as to other Holders.
(h)        From and after the Redemption Date, if the Redemption payment has been funded under Section 5(g), the shares of Series B Preferred called for Redemption will no longer be deemed to be outstanding and all rights of the holders of such shares of Series B Preferred will cease and terminate, except the right of the holders of such shares of Series B Preferred, upon surrender of the certificate or certificates therefor, to receive the applicable Redemption Price. The deposit of monies in trust with the Redemption Agent by the Company will be irrevocable, except that the Company will be entitled to receive from the Redemption Agent the interest or other earnings, if any, earned on any monies so deposited in trust, and the holders of any shares of Series B Preferred redeemed will have no claim to such interest or oth er earnings. Any balance of monies so deposited by the Company and unclaimed by the holders of the Series B Preferred entitled thereto at the expiration of 180 days after the Redemption Date will be repaid, together with any interest or other earnings thereon, to the Company, and after any such repayment, the Holders entitled to the funds so repaid to the Company will look only to the Company for payment of the Redemption Price, without interest, unless the Company has been required under applicable law to deliver such amounts to a state escheater or similar official, in which case the holder shall look solely to such official for payment.
Section 6.                VOTING RIGHTS.
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(a)        So long as any shares of Series B Preferred are outstanding, the Company shall not without the consent of holders of a majority of the outstanding shares of Series B Preferred (the "Series B Preferred Holders"): (i) authorize, create or issue, or increase the authorized or issued amount of, any class or series of capital stock, or any security convertible into or exchangeable for shares of capital stock constituting Parity Securities or Senior Securities, or reclassify or modify any Junior Securities so as to become Parity Securities or Senior Securities; (ii) amend, repeal or change (whether by merger or otherwise) any of the provisions of the Certificate of Incorporation of the Company (including this Certificate of Designation) in a manner that adversely affects the Holders; (iii) redeem, repurchase or otherwise reac quire for value (other than in a Permitted Purchase) any shares of a class or series of Junior Securities or Parity Securities; (iv) enter into any transaction with an Affiliate of the Company other than KAEF unless such transaction is approved by a majority of the Board, including the Series B Preferred Directors (as defined); (v) authorize or take any action in one or more transactions resulting in the sale of 15% or more of the Proved PV10 of the Company, unless the proceeds of which are used exclusively to pay (A) corporate income taxes payable as a result of such sale after taking advantage of all tax benefits available to the Company at such time or (B) the Holders in connection with the redemption of their Series B Preferred or Common Stock; or (vi) approve a Change of Control that does not contemplate the full payment of the Liquidation Preference of the Series B Preferred in cash.
(b)        So long as any shares of Series B Preferred are outstanding, the Series B Holders, as such holders, may vote as a separate class for the election of the following number of directors of the Company (the "Series B Preferred Directors"):
	(i)        at all times, one member of the Board;
	(ii)       if (A) a Default has occurred or (B) the Company defers the payment of dividends under Section 3(b) for one Dividend Payment Date: that whole number of directors constituting at least 25% of the total members of the Board, but only to the extent such right would increase the total number of Series B Preferred Directors from the number elected under clause (i) above; and
	(iii)      if (A) a Default has occurred and continued for more than one year or (B) the Company defers paying dividends under Section 3(b) for four consecutive Dividend Payment Dates: at the option of holders of greater than 50% of the Series B Preferred, that whole number of directors constituting at least 51% of the total members of the Board, only to the extent such right would increase the total number of Series B Preferred Directors from the number elected under clause (i) or (ii) above; provided, however, that if the rights contemplated by this clause (iii) arise due to the Company's deferral of dividend payments under Section 3(b) for four consecutive Dividend Payment Dates, the rights contemplated by this clause (iii) shall terminate when all Dividends are paid in cash.
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                  (c)        For purposes of electing Series B Preferred Directors, the then-existing Series B Preferred Directors or, if there are no Series B Preferred Directors, holders of a majority of the Series B Preferred then outstanding shall be entitled to nominate the nominees for election as Series B Preferred Directors.

                  (d)        At any meeting having as a purpose the election of Series B Preferred Directors, the presence, in person or by proxy, of the holders of a majority of the shares of the Series B Preferred then outstanding shall be required and be sufficient to constitute a quorum of such class or classes for the election of any director by such holders. Each Series B Preferred Director shall be elected by the vote or written consent required under the DGCL of the Series B Preferred Holders. At any such meeting or adjournment thereof, in the absence of a quorum of the Series B Preferred Holders, the holders of a majority of the Series B Preferred, present in person or by proxy, may adjourn the meeting for the election of the Series B Preferred Directors, from time to time, without notice other than announcement at the meeting, until a quorum is presen t.

                  (e)        Any vacancy in the office of a Series B Preferred Director may be filled by the remaining Series B Preferred Directors, unless such vacancy occurred because of the removal (with or without cause) of such Series B Preferred Director by the Series B Preferred Holders, in which event such vacancy shall be filled by the affirmative vote of the holders of a majority of the outstanding Series B Preferred. Any or all of the Series B Preferred Directors may be removed, with or without cause, by vote or by written consent in each case in accordance with the DGCL by the holders of the Series B Preferred. Any Series B Preferred Director elected to fill a vacancy shall serve the same remaining term as that of his or her predecessor, subject, however, to prior death, resignation, retirement, disqualification, or removal from office.

                  (f)         With respect to actions by the Series B Preferred Holders upon those matters on which such holders are entitled to vote as a separate class, such actions may be taken without a stockholders meeting by the written consent of the Series B Preferred Holders who would be entitled to vote at a meeting having voting power to cast not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of Series B Preferred entitled to vote were present and voted. Notice shall be given in accordance with the applicable provisions of the DGCL of the taking of corporate action without a meeting by less than unanimous written consent to those Holders on the record date whose shares were not represented on the written consent. In addition, the holders of a majority of Series B Pr eferred will have the right to call a special meeting of the Company's stockholders upon the occurrence of the events described above by providing notice of the exercise of such right to the Company and the Company will take all steps necessary to hold such meeting as soon as possible.

                  Section 7.                RECORD HOLDERS. The Company may deem and treat the record holder of any shares of Series B Preferred as the true and lawful owner thereof for all purposes, and the Company shall not be affected by any notice to the contrary.

                  Section 8.                NOTICE. Except as may otherwise be provided by law or provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed

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to have been given upon receipt upon the earlier of receipt of such notice or three Business Days after the mailing of such notices sent by Registered Mail (unless first-class mail shall be specifically permitted for such notice under the terms hereof) with postage prepaid, addressed: If to the Company, to its principal executive offices (Attention: Corporate Secretary) or to any agent of the Company designated as permitted hereby; or if to a Holder, to such Holder at the address of the Holder as listed in the stock record books of the Company, or to such other address as the Company or holder as the case may be, shall have designated by notice similarly given.

                  Section 9.               SUCCESSORS AND TRANSFEREES. The provisions applicable to shares of Series B Preferred shall bind and inure to the benefit of and be enforceable by the Company, the respective successors to the Company, and by any Holder.

                  Section 10.             HEADINGS OF SUBDIVISIONS. The headings of the various subdivisions hereof are for convenience of reference only and will not affect the interpretation of any of the provisions hereof.

                  Section 11.             STATUS OF REACQUIRED SHARES. No shares of Series B Preferred acquired by the Company by reason of redemption, purchase, or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares of preferred stock that the Company is authorized to issue.

                  Section 12.              SEVERABILITY OF PROVISIONS. If any right, preference, or limitation of Series B Preferred set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful, or incapable of being enforced by reason of any rule of law or public policy, all other rights, preferences, and limitations set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable right, preference, or limitation will, nevertheless, remain in full force and effect, and no right, preference, or limitation herein set forth will be deemed dependent upon any other such right, preference, or limitation unless so expressed herein.

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IN WITNESS WHEREOF, The Exploration Company of Delaware, Inc., by its duly authorized officer, has executed this Certificate of Designation this 13th day of August, 2003.

THE EXPLORATION COMPANY OF DELAWARE, INC

By:    /s/ P. Mark Stark

Name:    P. Mark Stark

Title:      Vice President and Chief Financial                Officer

EX-4

Exhibit 4.3
RIGHTS AGREEMENT
This RIGHTS AGREEMENT (this "Agreement") dated as of August 21, 2003, is entered into by and between The Exploration Company of Delaware, a Delaware corporation (the "Company") Kayne Anderson Energy Fund II, L.P., a Delaware limited partnership ("KAEF"), and Gryphon Master Fund, L.P., a Bermuda limited partnership ("Gryphon" and together with KAEF, the "Purchasers").
W I T N E S S E T H
WHEREAS, the Company and the Purchasers are parties to the Subscription Agreement dated as of August 1, 2003 (the "Subscription Agreement") pursuant to which the Company has agreed to sell, and the Purchasers have agreed to purchase, shares of Common Stock of the Company ("Common Stock");
WHEREAS, the Company's and the Purchasers' respective obligations under the Subscription Agreement are conditioned upon the execution and delivery of this Agreement; and
WHEREAS, in connection with the purchase by the Purchasers of the Common Stock pursuant to the Subscription Agreement, the Company desires to grant to the Purchasers certain information rights, registration rights and first offer rights with respect to the stock of the Company held by them.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows.
ARTICLE I.
REGISTRATION RIGHTS
Section 1.01  Definitions. For purposes of this Agreement:
(a)       "Affiliate" of a Person means any Person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, such other Person. For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
(b)       "Agreement" is defined in the preamble.
(c)       "Board" means the board of directors of the Company.
(d)       "Claim" is defined in Section 1.05(a).
(e)       "Common Stock" is defined in the preamble.
(f)       "Company" is defined in the preamble.
(g)       "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time.
(h)       "Holder" means a Person that (i) is a party to this Agreement (or a permitted transferee hereunder) and (ii) owns Registrable Securities.
(i)       "Holder Indemnified Parties" is defined in Section 1.05(a).
(j)       "Indemnified Party" is defined in Section 1.05(c).
(k)       "Indemnifying Party" is defined in Section 1.05(c).
(l)       "Inspector(s)" is defined in Section 1.03(a)(ii).
(m)       "KAEF" is defined in the preamble.
(n)       "Losses" is defined in Section 1.05(a).
(o)       "NASD" means the National Association of Securities Dealers, Inc.
(p)       "New Securities" is defined in Section 3.02.
(q)       "New Securities Notice" is defined in Section 3.03.
(r)       "Nonpurchasing Holder" is defined in Section 3.03.
(s)       "Participating Holders" means Holders participating, or electing to participate, in an offering of Registrable Securities.
(t)       "Person" means any individual, firm, corporation, company, partnership, trust, incorporated or unincorporated association, limited liability company, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of any such entity.
(u)       "Pro Rata Share" is defined in Section 3.01.
(v)       "Purchasers" is defined in the preamble.
(w)       "Registrable Securities" means any shares of Common Stock held by a Purchaser or a permitted transferee under the Subscription Agreement including any shares issued, by virtue of the effect of antidilution provisions or combination, merger, consolidation or other similar event; provided, however, that shares of Common Stock that are considered to be Registrable Securities shall cease to be Registrable Securities (i) upon the sale thereof pursuant to an effective registration statement, (ii) upon the sale thereof pursuant to Rule 144 (or successor rule) under the Securities Act or (iii) when such securities cease to be outstanding.
(x)       "Registration Expenses" means all expenses (other than underwriting discounts and commissions) arising from or incident to the performance of, or compliance with, this Article 1, including, (i) SEC, stock exchange, NASD and other registration and filing fees, (ii) all fees and expenses
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incurred in connection with complying with any securities or blue sky laws (including, fees, charges and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) all printing, messenger and delivery expenses, (iv) the fees, charges and disbursements of counsel to the Company and of its independent public accountants and any other accounting and legal fees, charges and expenses incurred by the Company (including, any expenses arising from any special audits or "comfort letters" required in connection with or incident to any registration), (v) the fees, charges and disbursements of any special experts retained by the Company in connection with any registration pursuant to the terms of this Agreement, (vi) all internal expenses of the Company (including, all salaries and expenses of its officers and employees performing legal or accounting duties), (vii) the fees and expenses incurred in connection with the listing of the Registrab le Securities on any securities exchange or Nasdaq and (viii) Securities Act liability insurance (if the Company elects to obtain such insurance), regardless of whether the Registration Statement filed in connection with such registration is declared effective. "Registration Expenses" shall also include fees, charges and disbursements of one firm of counsel to all of the Participating Holders participating in any underwritten public offering pursuant to this Article 1 (which shall be selected by a majority, based on the number of Registrable Securities to be sold, of the Participating Holders, plus, to the extent necessary, one firm of local counsel for all of the Participating Holders in each state or country where reasonably necessary).
(y)       "Registration Statement" means the registration statement of the Company filed with the SEC on the appropriate form pursuant to the Securities Act which covers shares of Common Stock pursuant to the provisions of this Agreement and all amendments and supplements to the Registration Statement, including post-effective amendments, in each case including the prospectus contained therein, all exhibits thereto and all materials incorporated by reference therein.
(z)       "Rights Holder" is defined in Section 3.01.
(aa)       "SEC" or "Commission" means the United States Securities and Exchange Commission.
(bb)       "Secondary Share" is defined in Section 3.03.
(cc)       "Securities Act" means the Securities Act of 1933, as amended from time to time.
(dd)       "Selling Expenses" means the underwriting fees, discounts, selling commissions and stock transfer taxes applicable to all Registrable Securities registered by the Participating Holders.
(ee)       "Series B Preferred Stock" means the Company's Series B Preferred Stock, par value $0.01 per share.
(ff)       "Subscription Agreement" is defined in the preamble.
Section 1.02  Shelf Registration
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(a)       Registration Statement. Before the first anniversary of the date hereof, the Company will file and make effective a Registration Statement with the SEC, seeking to register the offer and sale of the Registrable Securities by the Holders thereof from time to time pursuant to Rule 415 under the Securities Act. Upon effectiveness under the Securities Act of the Registration Statement, the Company will cause the Registration Statement to remain effective through the period ending when each Holder ceases to own at least one percent of the then outstanding number of shares of Common Stock.
(b)       Selection of Underwriters. If a proposed public offering of Registrable Securities is to be an underwritten public offering, the managing underwriter shall be one or more reputable nationally recognized investment banks selected by a majority in interest of the Holders and reasonably acceptable to the Company, which consent shall not be unreasonably withheld, delayed or conditioned.
Section 1.03  Registration Procedures
(a)       Obligations of the Company. The Company shall use its best efforts to effect the registration and sale of the Registrable Securities in accordance with the intended method of distribution thereof as promptly as possible, and in connection with any such request, the Company shall, as expeditiously as possible:
(i)       Preparation of Registration Statement; Effectiveness. Prepare and file with the SEC a Registration Statement on any form on which the Company then qualifies, which counsel for the Company shall deem appropriate and pursuant to which such offering may be made in accordance with the intended method of distribution thereof (except that the Registration Statement shall contain such information as may reasonably be requested for marketing or other purposes by the managing underwriter), and use its best efforts to cause any registration required hereunder to become effective before the first anniversary of the Closing Date;
(ii)       Participation in Preparation. Provide any Participating Holder, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any Participating Holder or underwriter (each, an "Inspector" and, collectively, the "Inspectors"), the opportunity to participate (including reviewing, commenting on and attending all meetings) in the preparation of the Registration Statement, each prospectus included therein or filed with the SEC and each amendment or supplement thereto;
(iii)       Due Diligence. For a reasonable period prior to the filing of the Registration Statement pursuant to this Agreement, make available for inspection and copying by the Inspectors such financial and other information and books and records, pertinent corporate documents and properties of the Company and its subsidiaries and cause the officers, directors, employees, counsel and independent certified public accountants of the Company and its subsidiaries to respond to such inquiries and to supply all information reasonably requested by any such Inspector in connection with the Registration Statement, as shall be reasonably necessary, in the judgment of the respective counsel referred to in Section 1.03(a)(ii), to conduct a reasonable investigation within the meaning of the Securities Act;
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(iv)       General Notifications. Promptly notify in writing the Participating Holders, the sales or placement agent, if any, therefor and the managing underwriter of the securities being sold, (A) when the Registration Statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to any the Registration Statement or any post-effective amendment, when the same has become effective, (B) when the SEC notifies the Company whether there will be a "review" of the Registration Statement (C) of any comments (oral or written) by the SEC and by the blue sky or securities commissioner or regulator of any state with respect thereto and (D) of any request by the SEC for any amendments or supplements to the Registration Statem ent or the prospectus or for additional information;
(v)       10b-5 Notification. Promptly notify in writing the Participating Holders, the sales or placement agent, if any, therefor and the managing underwriter of the securities being sold pursuant to the Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act upon discovery that, or upon the happening of any event as a result of which, any prospectus included in the Registration Statement (or amendment or supplement thereto) contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and the Company shall promptly prepare a supplement or amendment to such prospectus and file it with the SEC (in any event no later than ten days following notice of the occurrence of such event to each Participating Holder, the sales or placement agent and the managing underwriter) so that after delivery of such prospectus, as so amended or supplemented, to the purchasers of such Registrable Securities, such prospectus, as so amended or supplemented, shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made;
(vi)       Notification of Stop Orders; Suspensions of Qualifications and Exemptions. Promptly notify in writing the Participating Holders, the sales or placement agent, if any, therefor and the managing underwriter of the securities being sold of the issuance by the SEC of (A) any stop order issued or threatened to be issued by the SEC or (B) any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and the Company agrees to use its best efforts to (x) prevent the issuance of any such stop order, and in the event of such issuance, to obtain the withdrawal of any such stop order and (y) obtain the withdrawal of any order suspe nding or preventing the use of any related prospectus or suspending the qualification of any Registrable Securities included in the Registration Statement for sale in any jurisdiction at the earliest practicable date;
(vii)       Amendments and Supplements; Acceleration. Prepare and file with the SEC such amendments, including post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement continuously effective for the applicable time period required hereunder and, if applicable, cause the related prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all securities covered by the Registration Statement
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during such period in accordance with the intended methods of disposition by the sellers thereof set forth in the Registration Statement as so amended or in such prospectus as so supplemented. In addition to the foregoing, on two occasions, at the request of Holders of greater than 50% of the Registrable Securities, the Company shall prepare and file a prospectus supplement containing the information reasonably requested by underwriters (which may include "S-1 level" information) in connection with an underwritten offering of Registrable Securities. The Holders may only make such a request if it is with respect to the greater of (i) a sale of Registrable Securities with expected proceeds in excess of $3.0 million and (ii) a sale of greater than 30% of the Registrable Securities. To the extent any such supplement is not permitted under law at the time of such request, the Company shall file a new registration statement with respect to such securities on the form requested by the underwriters and such Holders. If a majority in interest of the Participating Holders so request, request acceleration of effectiveness of the Registration Statement from the SEC and any post-effective amendments thereto, if any are filed; provided that at the time of such request, the Company believes in good faith that it is unnecessary to amend further the Registration Statement to comply with this subparagraph. If the Company wishes to further amend the Registration Statement prior to requesting acceleration, it may take five days to so amend prior to requesting acceleration;
(viii)       Copies. Furnish as promptly as practicable to each Participating Holder and Inspector prior to filing the Registration Statement or any supplement or amendment thereto, copies of the Registration Statement, supplement or amendment as it is proposed to be filed, and after such filing such number of copies of the Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in the Registration Statement (including each preliminary prospectus) and such other documents as each such Participating Holder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Participating Holder;
(ix)       Blue Sky. Use its best efforts to, prior to any public offering of the Registrable Securities, register or qualify (or seek an exemption from registration or qualifications) such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any Participating Holder or underwriter may request, and to continue such qualification in effect in each such jurisdiction for as long as is permissible pursuant to the laws of such jurisdiction, or for as long as a Participating Holder or underwriter requests or until all of such Registrable Securities are sold, whichever is shortest, and do any and all other acts and things which may be reasonably necessary or advisable to enable any Participating Holder to consummate the disposition in such jurisdictions of the Regist rable Securities;
(x)       Other Approvals. Use its best efforts to obtain all other approvals, consents, exemptions or authorizations from such governmental agencies or authorities as may be necessary to enable the Participating Holders and underwriters to consummate the disposition of Registrable Securities;
(xi)       Agreements. Enter into customary agreements (including any underwriting agreements in customary form), and take such other actions as may be reasonably required in order to expedite or facilitate the disposition of Registrable Securities;
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(xii)       "Cold Comfort" Letter. Obtain a "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as the managing underwriter may reasonably request, and reasonably satisfactory to a majority in interest of the Participating Holders;
(xiii)       Legal Opinion. Furnish, at the request of any underwriter of Registrable Securities on the date such securities are delivered to the underwriters for sale pursuant to such registration, an opinion, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the Holders, and the placement agent or sales agent, if any, thereof and the underwriters, if any, thereof, covering such legal matters with respect to the registration in respect of which such opinion is being given as such underwriter may reasonably request and as are customarily included in such opinions, and reasonably satisfactory to a majority in interest of the Participating Holders;
(xiv)       SEC Compliance, Earnings Statement. Comply with all applicable rules and regulations of the SEC and make available to its shareholders, as soon as reasonably practicable, but no later than 15 months after the effective date of the Registration Statement, an earnings statement covering a period of 12 months beginning after the effective date of the Registration Statement, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(xv)       Certificates, Closing. Provide officers' certificates and other customary closing documents;
(xvi)       NASD. Cooperate with each Participating Holder and each underwriter participating in the disposition of such Registrable Securities and underwriters' counsel in connection with any filings required to be made with the NASD;
(xvii)       Road Show. Cause appropriate officers as are requested by an managing underwriter to participate in a "road show" or similar marketing effort being conducted by such underwriter with respect to an underwritten public offering;
(xviii)       Listing. Use its best efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and if not so listed, to be listed on the NASD automated quotation system;
(xix)       Transfer Agent, Registrar and CUSIP. Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities, in each case, no later than the effective date of such registration;
(xx)       Private Sales. Use its best efforts to assist a Holder in facilitating private sales of Registrable Securities by, among other things, providing officers' certificates and other customary closing documents; and
(xxi)       Best Efforts. Use its best efforts to take all other actions necessary to effect the registration of the Registrable Securities contemplated hereby.
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(b)       Seller Information. The Company may require each Participating Holder as to which any registration of such Holder's Registrable Securities is being effected to furnish to the Company with such information regarding such Participating Holder and such Participating Holder's method of distribution of such Registrable Securities as the Company may from time to time reasonably request in writing. If a Participating Holder refuses to provide the Company with any of such information on the grounds that it is not necessary to include such information in the Registration Statement, the Company may exclude such Participating Holder's Registrable Securities from the Registration Statement if the Company provides such Participating Holder with an opinion of counsel to the effect that such information must be included in the Registration Statement and such Participa ting Holder continues thereafter to withhold such information. The exclusion of a Participating Holder's Registrable Securities shall not affect the registration of the other Registrable Securities to be included in the Registration Statement.
(c)       Notice to Discontinue. Each Participating Holder whose Registrable Securities are covered by the Registration Statement filed pursuant to this Agreement agrees that, upon receipt of written notice from the Company of the happening of any event of the kind described in Section 1.03(a)(v), such Participating Holder shall forthwith discontinue the disposition of Registrable Securities until such Participating Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 1.03(a)(v) or until it is advised in writing by the Company that the use of the prospectus may be resumed and has received copies of any additional or supplemental filings which are incorporated by reference into the prospectus, and, if so directed by the Company in the case of an event described in Section 1.03(a)(v), such Participating Holder shall delive r to the Company (at the Company's expense) all copies, other than permanent file copies then in such Participating Holder's possession, of the prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company gives any such notice, the Company shall extend the period during which the Registration Statement is to be maintained effective by the number of days during the period from and including the date of the giving of such notice pursuant to Section 1.03(a)(v) to and including the date when the Participating Holder shall have received the copies of the supplemented or amended prospectus contemplated by, and meeting the requirements of, Section 1.03(a)(v).
Section 1.04  Registration Expenses  Except as otherwise provided herein, all Registration Expenses shall be borne by the Company. All Selling Expenses relating to Registrable Securities registered shall be borne by the Participating Holders of such Registrable Securities pro rata on the basis of the number of shares so registered.
Section 1.05  Indemnification
(a)       Indemnification by the Company. The Company agrees, notwithstanding termination of this Agreement, to indemnify and hold harmless to the fullest extent permitted by applicable law, each Holder, each of its directors, officers, employees, advisors, agents and general or limited partners (and the directors, officers, employees, advisors and agents thereof), their respective Affiliates and each Person who controls (within the meaning of the Securities Act or the Exchange Act) any of such Persons, and each
8
underwriter and each Person who controls (within the meaning of the Securities Act or the Exchange Act) any underwriter (collectively, "Holder Indemnified Parties") from and against any and all losses, claims, damages, expenses (including, reasonable costs of investigation and fees, disbursements and other charges of counsel and any amounts paid in settlement effected with the Company's consent, which consent shall not be unreasonably withheld or delayed) or other liabilities (collectively, "Losses") to which any such Holder Indemnified Party may become subject under the Securities Act, Exchange Act, any other federal law, any state or common law or any rule or regulation promulgated thereunder or otherwise, insofar as such Losses (or actions or proceedings, whether commenced or threatened, in respect thereof) are resulting from or arising out of or based upon (i) any untrue, or alleged untrue, statement of a material fact contained in the Registrat ion Statement, prospectus or preliminary prospectus (as amended or supplemented) or any document incorporated by reference in any of the foregoing or resulting from or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made), not misleading, or (ii) any violation by the Company of the Securities Act, Exchange Act, any other federal law, any state or common law or any rule or regulation promulgated thereunder or otherwise incident to any registration, qualification or compliance and in any such case, the Company will promptly reimburse each such Holder Indemnified Party for any legal and any other Losses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability, action or investigation or proceeding (collectively, a "Claim"). Such indemnity obligation shall remain in full force and effect regardless of any investigation made by or on behalf of the Holder Indemnified Parties and shall survive the transfer of Registrable Securities by such Holder Indemnified Parties.
(b)       Indemnification by Holders. In connection with any proposed registration in which a Holder is participating pursuant to this Agreement, each such Holder shall furnish to the Company in writing such information with respect to such Holder as the Company may reasonably request or as may be required by law for use in connection with the Registration Statement or prospectus or preliminary prospectus to be used in connection with such registration and each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, any underwriter retained by the Company and their respective directors, officers, partners, employees, advisors and agents, their respective Affiliates and each Person who controls (within the meaning of the Securities Act or the Exchange Act) any of such Persons to the same extent as the foregoing indemnity from the Compa ny to the Holders as set forth in Section 1.05(a) (subject to the exceptions set forth in the foregoing indemnity, the proviso to this sentence and applicable law), but only with respect to any such information furnished in writing by such Holder expressly for use therein; provided, however, that, unless such liability is directly caused by such Holder's willful or intentional misconduct, the liability of any such Holder under this Section 1.05(b) shall be limited to the amount of the net proceeds received by such Holder in the offering giving rise to such liability. Such indemnity obligation shall remain in full force and effect regardless of any investigation made by or on behalf of the Holder Indemnified Parties (except as provided above) and shall survive the transfer of Registrable Securities by such Holder.
(c)       Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder (the "Indemnified Party") agrees to give prompt written notice to the indemnifying party (the "Indemnifying Party") after the receipt by the Indemnified Party of any written notice of the
9
commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which the Indemnified Party intends to claim indemnification or contribution pursuant to this Agreement; provided, however, that, the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to the Indemnified Party hereunder unless and to the extent such Indemnifying Party is materially prejudiced by such failure. If notice of commencement of any such action is given to the Indemnifying Party as above provided, the Indemnifying Party shall be entitled to participate in and, to the extent it may wish, jointly with any other Indemnifying Party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and reasonably satisfactory to such Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party fails to assume the defense of such action with counsel satisfactory to the Indemnified Party in its reasonable judgment or (iii) the named parties to any such action (including, but not limited to, any impleaded parties) reasonably believe that the representation of such Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct. In the case of clause (ii) above and (iii) above, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party. No Indemnifying Party shall be liable for any settlement entered into without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the written consent of the Indemnified Party, effect the settlement or co mpromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (A) includes an unconditional release of the Indemnified Party from all liability arising out of such action or claim and (B) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of any Indemnified Party. The rights afforded to any Indemnified Party hereunder shall be in addition to any rights that such Indemnified Party may have at common law, by separate agreement or otherwise.
(d)       Contribution. If the indemnification provided for in this Section 1.05 from the Indemnifying Party is unavailable or insufficient to hold harmless an Indemnified Party in respect of any Losses referred to herein, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by the Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party, as well as any other relevant equitable considerations. The relative faults of the Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, was made by, or re lates to information supplied by, such Indemnifying Party or Indemnified Party, and the Indemnifying Party's and Indemnified Party's relative intent, knowledge, access to information and opportunity to correct or prevent such action; provided, however, that, unless such liability is directly caused by such Holder's willful or intentional misconduct, the liability of any such Holder under this Section 1.05(d) shall be limited to the amount of the net proceeds received by such Holder in the offering giving rise to such liability. The amount paid or payable by a party as a result of the Losses or other liabilities referred to above shall be deemed to include, subject to the limitations set forth in Section
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1.05(a), (b) and (c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 1.05(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution pursuant to this Section 1.05(d).
Section 1.06  Rule 144 and Rule 144A; Other Exemptions.  With a view to making available to the Holders the benefits of Rule 144 and Rule 144A promulgated under the Securities Act and other rules and regulations of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company shall (i) file in a timely manner all reports and other documents required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder and (ii) take such further action as each Holder may reasonably request (including, but not limited to, providing any information necessary to comply with Rule 144 and Rule 144A, if available with respect to resales of the Registrable Securities under the Securities Act), all to the extent required from time to time to enable such Holder to sell Reg istrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (x) Rule 144 and Rule 144A (if available with respect to resales of the Registrable Securities) under the Securities Act, as such rules may be amended from time to time or (y) any other rules or regulations now existing or hereafter adopted by the SEC. Upon the written request of a Holder, the Company shall deliver to the Holder a written statement as to whether it has complied with such requirements.
Section 1.07  Certain Limitations On Registration Rights.  No Holder may participate in the Registration Statement hereunder unless such Holder completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents reasonably required under the terms of such underwriting arrangements and agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting agreement approved by the Holder or Holders entitled hereunder to approve such arrangements; provided, however, that no such Holder shall be required to make any representations or warranties to the Company or the underwriters in connection with any such registration other than representations and warranties as to (i) such Holder's ownership of its Registrable Securities to be sold or transferred, (ii) such Holder's power and authority to effect such tran sfer and (iii) such matters pertaining to compliance with securities laws as may be reasonably requested. Such Holders of Registrable Securities to be sold by such underwriters may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Holders and that any or all of the conditions precedent to the obligations of the underwriters under the underwriting agreement be conditions precedent to the obligations of the Holders.
Section 1.08  Limitations on Subsequent Registration Rights.  The Company represents and warrants that, except as described in Schedule 1.08, it is not a party to any agreement granting registration rights that have not expired. The Company agrees that from and after the date of this Agreement,
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it shall not, without the prior written consent of the Holders of at least 66-2/3% of the Registrable Securities then outstanding, enter into any agreement (or amendment or waiver of the provisions of any agreement) with any holder or prospective holder of any securities of the Company that would grant such holder registration rights that are more favorable, pari passu or senior to those granted to the Holders hereunder.
Section 1.09  Transfer of Registration Rights.  The rights of a Holder hereunder may be transferred or assigned in connection with a transfer of Registrable Securities to (i) any Affiliate of a Holder, (ii) any subsidiary, parent, partner, retired partner, limited partner, shareholder or member of a Holder or (iii) any family member or trust for the benefit of any Holder, or (iv) any transferee who, after such transfer, holds at least 50,000 shares of Registrable Securities (as adjusted for any stock dividends, stock splits, combinations and reorganizations and similar events). Notwithstanding the foregoing, such rights may only be transferred or assigned provided that all of the following additional conditions are satisfied: (a) such transfer or assignment is effected in accordance with applicable securities laws; (b) such transferee or assignee agrees in writing to become sub ject to the terms of this Agreement; and (c) the Company is given written notice by such Holder of such transfer or assignment, stating the name and address of the transferee or assignee and identifying the Registrable Securities with respect to which such rights are being transferred or assigned.
ARTICLE II.
INFORMATION RIGHTS
Section 2.01  Financial Information to Holders.  Other than for any period the Holders request to not receive the following information, the Company shall:
(a)       Monthly Reports.  Furnish to each holder of more than 4,000 shares of Series B Preferred Stock, as soon as available, but in any event within 30 days after the end of each calendar month (except the last month of the Company's fiscal year), monthly unaudited financial statements, including a consolidated balance sheet as of the end of such month, a consolidated statement of income and a consolidated statement of cash flows for such month and the current fiscal year to date, in each case setting forth in comparative form the figures for the corresponding periods of the previous fiscal year and the Company's projected financial statements for the current fiscal year and showing deviations from the Company's budget, such financial statements to be prepared in accordance with U.S. generally accepted accounting principles consistently applied (with t he exception of footnotes). Monthly financial statements shall be accompanied by a certification of the principal financial or accounting officer of the Company as to the conformity of the financial statements with this paragraph (a).
(b)       Business Plan and Operating Budget.  Furnish to each holder of more than 4,000 shares of Series B Preferred Stock, as soon as practicable, but in any event within five (5) days after adoption by the Board and no later than thirty (30) days prior to the commencement of each fiscal year of the Company, an annual business plan and operating budget approved by the Board and the holders for the next immediate fiscal year, which business plan shall include a projection of income and projected cash flow statement for each fiscal quarter in such fiscal year and a projected balance sheet as of the end of each fiscal quarter in such fiscal year. The Company will also furnish to each holder of more than 4,000 shares of Series B Preferred Stock, within a reasonable time after its preparation, any amendment to such previously delivered annual busines s plan and operating budget (which amendments shall require the consent of such holders).
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(c)       Document Delivery.  Promptly furnish to each holder of more than 4,000 shares of Series B Preferred Stock (i) all documents that are, or would be, required to be filed under the Exchange Act by a company whose securities are listed on a national securities exchange; (ii) copies of any document relating to the affairs of the Company that has been delivered to any other stockholder of the Company or broadly to the financial community; (iii) copies of all management letters from accountants; and (iv) all documents prepared by or for the Company as to compliance, defaults, material adverse changes, material litigation, disputes or similar matters.
(d)       Reserve Reports.  Furnish to each holder of more than 4,000 shares of Series B Preferred Stock, as soon as available, but in any event within five days after receipt by the Company thereof, each oil and gas reserve engineering report created on behalf of the Company.
(e)       Requests from Holders. Furnish to each holder of more than 4,000 shares of Series B Preferred Stock, promptly upon request, such other information relating to the financial condition, business, prospects, litigation, regulatory or governmental matters or corporate affairs of the Company that such holders may from time to time reasonably request.
Section 2.02  Board Observation Rights.  So long as any shares of Series B Preferred Stock are outstanding, the Company shall permit a representative of KAEF to attend all meetings of the Board (whether such meeting is held by telephone or other telecommunications equipment or in person) and shall furnish to KAEF notice of such meetings and a copy of all communications made to or among the members of the Board contemporaneously with the initial delivery of such communications.
Section 2.03  Confidentiality.  Any Holder receiving non-public information concerning the Company pursuant to Section 2.01 and/or Section 2.02 ("Confidential Information") agrees and acknowledges that, except as required by applicable law, it will take all measures reasonably practicable to ensure Confidential Information will not be disclosed to anyone except its employees, affiliates, officers, directors, partners, agents, advisors or representatives (collectively, the "Representatives") to extent such Representatives are subject to substantially similar terms and conditions as are referred to in this Section 2.03. For purposes of this Section 2.03, Confidential Information shall not include any information that, with respect to any Holder (i) becomes generally available to the public other than as a result of a disclosure by a Holder or any Repres entative of a Holder in violation of Section 2.03, (ii) was in such Holder's possession prior to the disclosure of the Confidential Information pursuant to this Section 2.03 or (iii) becomes available to such Holder or such Holder's Representative on a non-confidential basis from a source other than the Company.
Section 2.04  Acknowledgement Regarding Confidential Information.  KAEF acknowledges and agrees that certain laws prohibit KAEF from trading securities of the Company on the basis of material Confidential Information, though this Section 2.04 shall not be enforceable against, and shall not give rise to a cause of action against, KAEF.
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ARTICLE III.
RIGHTS OF FIRST OFFER
Section 3.01  General.  Each Purchaser, and any party to whom a Holders' rights under this Article 3 have been duly assigned in accordance with this Agreement (each Purchaser and each such assignee hereinafter referred to as a "Rights Holder"), may purchase all or any portion of such Rights Holder's Pro Rata Share (as defined herein) of any New Securities (as defined herein) and, if such Rights Holder elects to purchase all of its Pro Rata Share, all or any portion of its Secondary Share (as defined herein) of any New Securities, that the Company may from time to time propose to issue after the date of this Agreement. A Rights Holder's "Pro Rata Share" for purposes of this right is the ratio of (a) the number of shares of Common Stock held by such Rights Holder to (b) the number of shares of all outstanding Common Stock.
Section 3.02  New Securities.  For purposes of this Article 3, "New Securities" means any of the Company's capital stock, whether now authorized or not, and rights, options or warrants to purchase such capital stock and securities of any type whatsoever that are, or may become, convertible into, exercisable or exchangeable into such capital stock; provided, however, that the term "New Securities" does not include:
(a)       securities issued or issuable under the Subscription Agreement;
(b)       securities issued or issuable to officers, directors or employees ofthe Company pursuant to stock option or stock purchase plans or agreements on terms approved by a majority of the Board, including the directors appointed by the holders of the or Series B Preferred Stock, subject to adjustment for all subdivisions and combinations; provided that any such issuances, in the aggregate, equal less than 10% of the current outstanding shares of Common Stock (calculated on a fully diluted basis), unless otherwise unanimously approved by the Board;
(c)       securities issued pursuant to the acquisition of another corporation or entity by the Company by consolidation, merger, purchase of all or substantially all of the assets, or other reorganization in which the Company acquires, in a single transaction or series of related transactions, all or substantially all of the assets of such other corporation or entity or 50% or more of the voting power of such other corporation or entity or 50% or more of the equity ownership of such other entity; and
(d)       any right, option or warrant to acquire any securities listed on Section 3.02 attached hereto or excluded from the definition of New Securities pursuant to subsections (a) through (c) above.
Section 3.03  Procedure.  The Company will give each Rights Holder at least 20 days prior written notice of the Company's intention to issue New Securities (the "New Securities Notice"), describing the type and amount of New Securities to be issued and the price and the general terms and conditions upon which the Company proposes to issue such New Securities. Each Rights Holder may purchase at least such Rights Holder's Pro Rata Share of such New Securities, by delivering to the Company, within 15 days after the date of receipt of any such New Securities Notice by the Company, a written notice specifying such
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number of New Securities which such Rights Holder desires to purchase (which may be all or any part of such Rights Holder's Pro Rata Share of such New Securities), for the price and upon the general terms and conditions specified in the New Securities. If any Rights Holder fails to notify the Company in writing within such 15 day period of its election to purchase any or all of such Rights Holder's Pro Rata Share of an offering of New Securities (a "Nonpurchasing Holder"), then such Nonpurchasing Holder will forfeit the right hereunder to purchase that part of such Rights Holder's Pro Rata Share of such New Securities that such Rights Holder did not agree to purchase. If any Rights Holder fails to elect to purchase the full amount of such Rights Holder's Pro Rata Share of the New Securities, the Company shall give notice of such failure to the Rights Holders who did so elect (a "Participating Holder"). Such notice may be made by telephone if conf irmed in writing in two days. Each Participating Holder shall have five days from the date such notice was received to notify the Company in writing of its election to purchase its pro rata portion of the total number of New Securities not subscribed for by the Nonpurchasing Holders (a "Secondary Share"). Each Participating Holder's Secondary Share will be equal to the total of the number of shares of Common Stock held by such Participating Holder on the date of the New Securities Notice, as a percentage of the total number of shares of Common Stock held by all Participating Holders on the date of the New Securities Notice.
Section 3.04  Failure to Exercise.  If the Rights Holders fail to exercise in full the right of first offer within such 15 day period, then the Company will have 60 days thereafter to sell the New Securities with respect to which the Rights Holders' rights hereunder were not exercised, at a price and upon terms and conditions not more favorable to the purchasers thereof than specified in the Company's New Securities Notice to the Rights Holders. If the Company has not issued and sold the New Securities within such 60 day period, then the Company shall not thereafter issue or sell any New Securities without again first offering such New Securities to the Rights Holders pursuant to this Article 3.
Section 3.05  Assignment.  The rights set forth in this Article 3 may not be assigned or transferred, except the rights of a Rights Holder hereunder may be transferred or assigned in connection with a transfer of Registrable Securities to (i) any Affiliate of a Rights Holder, (ii) any subsidiary, parent, partner, retired partner, limited partner, shareholder or member of a Rights Holder, (iii) any family member or trust for the benefit of any Rights Holder, or (iv) purchaser of greater than 50,000 Registrable Securities.
ARTICLE IV.
GENERAL PROVISIONS
Section 4.01  Accounting.  The Company covenants that it will not make any change in the Company's accounting principles, methods or practices or depreciation or amortization policies or rates currently in effect, including any change from "successful efforts" to "full cost pool" accounting.
Section 4.02  Subsidiaries.  The Company covenants that, with respect to any Person of which more than fifty percent (50%) of the outstanding voting power of such Person (irrespective of whether or not at the time stock or other equity of any other class or classes of such Person shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly controlled by the
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Company, or by one or more of its subsidiaries, or by the Company and one or more of its subsidiaries (any such Person, a "Company Subsidiary"), it will cause such Company Subsidiaries to not issue any securities (or other rights to purchase or otherwise acquire equity securities) of such Company Subsidiaries. The Company covenants that neither it nor any Company Subsidiary will in any manner acquire a Person which, after such acquisition, would be a Company Subsidiary, unless 100% of the outstanding voting power of such Person is directly controlled by the Company or a Company Subsidiary.
Section 4.03  Insurance.  The Company will obtain and maintain customary directors and officers liability insurance and will at all times maintain and exercise the powers granted to it by its Charter, its Bylaws, and by applicable law to indemnify and hold harmless to the fullest extent permitted by applicable law present or former directors and officers of the Company against any threatened or actual claim, action, suit, proceeding or investigation made against them arising from their service in such capacities (or service in such capacities for another enterprise at the request of the Company).
Section 4.04  Further Assurances.  The Company and the Purchasers agree to take such actions and execute and deliver such other documents or agreements as may be necessary or desirable for the implementation of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby.
Section 4.05  Submission to Jurisdiction; Consent to Service of Process.
(a)       The parties hereto hereby irrevocably submit to the jurisdiction of any federal or state court located within the County of Harris, State of Texas, over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby and each party hereby irrevocably agrees that all claims in respect of such dispute or any suit, action or proceeding related thereto shall be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum for the maintenance of such dispute. Each of the parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
(b)       Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action or proceeding by the mailing of a copy thereof in accordance with the provisions of Section 4.06 hereof.
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Section 4.06  Notices.  Any notice, request, demand or other communication required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given under this Agreement on the earliest of: (a) the date of personal delivery, (b) the date of transmission by facsimile, with confirmed transmission and receipt, (c) two days after deposit with a nationally-recognized courier or overnight service such as Federal Express, or (d) five days after mailing via certified mail, return receipt requested. All notices not delivered personally or by facsimile will be sent with postage and other charges prepaid and properly addressed to the party to be notified at the address set forth for such party:
If to KAEF:
	Kayne Anderson Energy Fund II, L.P. c/o Kayne Anderson Capital Advisors, L.P. 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 Phone: (310) 284-6438 Fax: (310) 284-6444 Attn: David Shladovsky, General Counsel
	with a copy to (which does not constitute notice):
	Akin Gump Strauss Hauer & Feld LLP 1900 Pennzoil Place 711 Louisiana Houston, Texas 77002 Phone: (713) 220-5800 Fax: (713) 236-0822 Attn: Julien Smythe
If to Gryphon:
	Gryphon Master Fund, L.P. 500 Crescent Court, Suite 270 Dallas, TX 75201 Phone: (214) 871-6998 Fax: (214) 871-6909 Attn: E.B. Lyon, IV, Partner
	with a copy to (which does not constitute notice):
	Warren W. Garden, P.C. 500 Crescent Court, Suite 270 Dallas, Texas 75201 Phone: (214) 871-6710 Fax: (214) 871-6711 Attn: Warren W. Garden
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If to the Company:
	The Exploration Company of Delaware, Inc. 500 North Loop 1604 East, Suite 250 San Antonio, Texas 78232 Phone: (210) 496-5300 Fax: (210) 496-3232 Attn: James E. Sigmon
	with a copy to (which does not constitute notice):
	Barton, Schneider & Russell, L.L.P. 700 N. St. Mary's Street Suite 1825 San Antonio, Texas 78205 Phone: (210) 225-1655 Fax: (210) 225-8999 Attn: Frank Russell
Any party hereto (and such party's permitted assigns) may change such party's address for receipt of future notices hereunder by giving written notice to the Company and the other parties hereto.
Section 4.07  Governing Law.  This Agreement and the performance of the transactions and the obligations of the parties hereunder will be governed by and construed and enforced in accordance with the laws of the State of Texas, without giving effect to any choice of law principles.
Section 4.08  Entire Agreement.  This Agreement and each of the other Transaction Documents, constitutes the entire agreement and understanding of the parties hereto in respect of its subject matters and supersedes all prior understandings, agreements, or representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof or the transactions contemplated hereby.
Section 4.09  Counterparts.  This Agreement may be executed in two or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument.
Section 4.10  Successors and Assigns.  This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives.
Section 4.11  Severability.  The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision hereof will not affect the validity or enforceability of the other provisions hereof; provided that if any provision of this Agreement, as applied to any party or to any circumstance, is adjudged by a court, governmental body, arbitrator not to be enforceable in accordance with its terms, the parties agree that the court, governmental body, arbitrator making such determination will have the power to modify the provision in a manner consistent with its objectives such that it is enforceable, and/or to delete specific words or phrases, and in its reduced form, such provision will then be enforceable and will be enforced.
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Section 4.12  Titles and Subtitles.  The article and section headings contained in this Agreement are inserted for convenience only and will not affect in any way the meaning or interpretation of this Agreement.
Section 4.13  Third Parties.  Nothing in this Agreement, express or implied, is intended to confer upon any Person other than the parties hereto and the Indemnified Parties and their successors and assigns, any rights or remedies under or by reason of this Agreement.
Section 4.14  Construction.  The parties hereto have jointly participated in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties hereto and no presumption or burden of proof will arise favoring or disfavoring any party hereto because of the authorship of any provision of this Agreement. Any reference to any federal, state, local or foreign law will also be deemed to refer to such law as amended and all rules and regulations promulgated thereunder, unless the context otherwise requires. The words "include," "includes" and "including" shall be deemed to be followed by "without limitation." Pronouns in masculine, feminine and neuter genders will be construed to include any other gender, and words in the singular form will be construed to include the p lural and vice versa, unless the context otherwise requires. The words "this Agreement," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The parties hereto intend that each representation, warranty and covenant contained herein will have independent significance. If any party hereto has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which such party has breached, will not detract from or mitigate the fact that such party is in breach of the first representation, warranty or covenant.
Section 4.15  Remedies.  The parties shall have all remedies for breach of this Agreement available to them as provided by law or equity. Without limiting the generality of the foregoing, the parties agree that in addition to any other rights and remedies available at law or in equity, the parties shall be entitled to obtain specific performance of the obligations of each party to this Agreement and immediate injunctive relief and that, in the event any action or proceeding is brought in equity or to enforce the same, no party will urge, as a defense, that there is an adequate remedy at law. No single or partial assertion or exercise of any right, power or remedy of a party hereunder shall preclude any other or further assertion or exercise thereof.
Section 4.16  Attorneys' Fees.  If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or any other agreement or document to be executed or delivered pursuant hereto, the prevailing party shall be entitled to reasonable attorneys' fees, costs, and disbursements in addition to any other relief to which such party may be entitled.
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Section 4.17  Adjustments for Stock Splits, Etc.  Wherever in this Agreement there is a reference to a specific number of shares of Common Stock of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement will automatically be proportionally adjusted to reflect the effect of such subdivision, combination or stock dividend on the outstanding shares of such class or series of stock.
Section 4.18  Aggregation of Stock.  All shares held or acquired by Affiliates or persons will be aggregated together for the purpose of determining the availability of any rights under this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Rights Agreement as of the date first above written.
COMPANY:		THE EXPLORATION COMPANY OF DELAWARE, INC.
		By:	/s/  James E. Sigmon
			Name:  James E. Sigmon
			Title:    President
PURCHASERS:		KAYNE ANDERSON ENERGY FUND II, L.P.
		By:	Kayne Anderson Capital Advisors, L.P. its General Partner
			By:    Kayne Anderson Investment          Management, Inc., its General          Partner
		By:	/s/  C. W. Yates
			Name:  Charles W. Yates III
			Title:    Managing Director
		GRYPHON MASTER FUND, L.P.
		By:	Gryphon Partners, L.P., its General Partner
			By:    Gryphon Management Partners,          L.P., its General Partner          By:   Gryphon Advisors, LLC, its          General Partner
		By:	/s/  E. B. Lyons
			Name:  Edwin B. Lyon, IV
			Title:    Authorized Agent

EX-4

Exhibit 4.4
KAYNE ANDERSON ENERGY FUND II, L.P. 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067
August 5, 2003
The Exploration Company of Delaware, Inc. 500 North Loop 1604 E., Suite 250 San Antonio, Texas 78232
Gryphon Master Fund, L.P. 500 Crescent Court, Suite 270 Dallas, TX 75201
Re:     Amendment to Subscription Agreement
Ladies and Gentlemen:
As you know, Kayne Anderson Energy Fund II, L.P., The Exploration Company of Delaware, Inc. and Gryphon Master Fund, L.P. are parties to that certain Subscription Agreement dated as of August 1, 2003 (the "Subscription Agreement"). For ease of reference, capitalized terms not defined in this letter agreement (this "Agreement") shall have the meanings given such terms in the Subscription Agreement.
The Company and the Purchasers agree to amend the Subscription Agreement by deleting in its entirety clause (iii) of the definition of "Credit Facility Amendment" contained in Section 6.22 of the Subscription Agreement (the "Original Language") and replacing such clause with the following (the "Amended Language"):
	"waives any breach, default and any recourse resulting from the Company's noncompliance with the minimum current ratio obligation described in Section 5.15(a) of the Credit Facility on or prior to the Closing Date"
The Company and the Purchasers (i) acknowledge and agree that the Amended Language shall be substituted for, and shall replace the Original Language for all purposes, and the Original Language shall have no further force or effect and (ii) acknowledge and agree that the Amended Language, and not the Original Language, shall be deemed to have been incorporated within the Subscription Agreement for all purposes at all times from and after the time of execution of the Subscription Agreement on August 1, 2003.
This Agreement (i) shall be deemed to be a contract under, and shall be construed, interpreted and governed by, the laws of the State of Texas, excluding any conflict of laws principles, (ii) may be executed in multiple counterparts, each of which, when executed, shall be deemed an original, and all of which shall constitute but one and the same instrument, and (iii) shall be binding upon and shall inure to the benefit of the Company and the Purchasers and their respective successors and assigns.
********

If the foregoing accurately reflects our agreement with respect to the foregoing, please execute this Agreement in the space provided below.
			Sincerely,
			KAYNE ANDERSON ENERGY FUND II, L.P.
			By:       Kayne Anderson Capital Advisors, L.P., its
				General Partner
				By:       Kayne Anderson Investment
					Management, Inc., its General
					Partner
			By:	/s/  C. W. Yates
			Name:	Charles W. Yates III
			Title:	Managing Director
AGREED TO AND ACCEPTED AS OF THE DATE OF THIS AGREEMENT, BY:
THE EXPLORATION COMPANY OF DELAWARE, INC.
By:	/s/  James E. Sigmon
Name:	James E. Sigmon
Title:	President
GRYPHON MASTER FUND, L.P.
By:	Gryphon Partners, L.P., its General Partner
	By:	Gryphon Management Partners, L.P., its General Partner By:    Gryphon Advisors, LLC, its          General Partner
By:	/s/  E. B. Lyon
Name:	E. B. Lyon, IV
Title:	Authorized Agent