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EXHIBIT 10.1




SEPARATION AGREEMENT AND GENERAL RELEASE




     THIS SEPARATION AGREEMENT AND GENERAL RELEASE (this “Agreement”), dated as of December 8,
2005, is made and entered into by and between JOHN H. KARNES (“Executive”) and THE HOUSTON
EXPLORATION COMPANY, a Delaware corporation (the “Company”).



RECITALS:




     A. Executive has been employed by the Company as its Senior Vice President and Chief Financial
Officer pursuant to the terms of an amended and restated employment agreement entered into on
February 7, 2005 (the “Employment Agreement”).



     B. Executive is, pursuant hereto and in connection with his termination hereunder, resigning
from all positions as an officer or director of the Company and all entities affiliated with the
Company effective December 8, 2005 (the “Effective Date”).



     C. Executive and the Company have reached an agreement regarding the termination of
Executive’s employment with the Company effective as of the Effective Date.



     D. Without making any admission of liability whatsoever, it is the desire of Executive and the
Company to settle fully and finally all differences or potential differences between them,
including all differences or potential differences that arise out of or relate to Executive’s
employment or termination of employment with the Company.



STATEMENT OF AGREEMENTS




     NOW, THEREFORE, in consideration of the foregoing and the representations, warranties,
covenants and agreements set forth in this Agreement, the sufficiency of which is hereby
acknowledged, and intending to be legally bound by the terms of this Agreement, Executive and the
Company agree as follows:



     1. Termination of Employment and Resignation of Positions. As of the Effective Date,
Executive’s employment by and with the Company and any subsidiaries or controlled affiliates shall
terminate. In consideration of the promises herein described, the sufficiency of which is hereby
acknowledged, as of the Effective Date, the Employment Agreement shall terminate and cease to have
any effect notwithstanding any survival clauses therein contained (other than Section 7 thereof
and, to the extent applicable, Section 9(f) thereof, which shall survive such termination), and the
parties acknowledge and agree that, pursuant hereto, the Executive is voluntarily terminating his
employment with the Company as of the Effective Date. Executive acknowledges that, pursuant
hereto, the Executive is voluntarily resigning from all positions as an officer or director of the
Company and as an officer or director of all entities affiliated with the Company as of the
Effective Date. Executive agrees to execute such documents and take such actions as the Company
may deem necessary or desirable to effectuate the foregoing, including, without limitation, the
resignation letters attached hereto as Exhibit A.



 









 





     2. Consideration. Executive shall receive, in full settlement (except as provided herein)
of any compensation and benefits to which he would otherwise be entitled under the Employment
Agreement or under any other compensation or benefits plan, program, policy or arrangement
maintained by the Company in which Executive has at any time been a participant, including without
limitation, accrued vacation and other paid time off:



          2.1 Executive shall be entitled to payment for accrued and unpaid base salary through the Effective
Date, less applicable income and employment tax withholding and benefit plan deductions. The net
amount paid pursuant to this Section 2.1 after applicable deductions and withholding shall be paid
on the earlier of the next regular payroll date of the Company following the Effective Date or such
earlier date as may be required by law.




          2.2 Executive shall be entitled to payment for accrued and unpaid vacation through the Effective
Date, less applicable income and employment tax withholding. The net amount paid pursuant to this
Section 2.2 after applicable withholding shall be paid on the earlier of the next regular payroll
date of the Company following the Effective Date or such earlier date as may be required by law.
Such amount shall be paid in complete satisfaction of any liability for accrued vacation and other
paid time off.




          2.3 Executive shall be entitled to payment of a cash severance payment in the amount of
$1,461,811.00, less applicable income and employment tax withholding. The net amount after
applicable withholding shall be paid within thirty (30) days after the Effective Date; provided,
that, if Executive revokes or attempts to revoke the release contemplated herein, the Company shall
have no obligation to make the payment contemplated in this Section 2.3.




          2.4 Executive agrees that he will submit to the Company, before the Effective Date, a request for
all expenses to which he is entitled to receive reimbursement pursuant to Company policies or his
Employment Agreement. The Company agrees to pay such amounts within 10 days of the date the
Executive submits such requests. Executive agrees that no reimbursable expenses shall be incurred
by Executive after the Effective Date.




          2.5 Executive may elect to continue health benefit coverage under the Company’s group health plan
(medical and dental coverages) for himself and eligible dependants to the extent available under
the terms of the plan pursuant to the healthcare coverage continuation provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), at the same coverage
level provided immediately prior to the Effective Date (subject to any changes in employee coverage
under the plan that may be made from time to time with respect to the coverage generally applicable
to the Company’s senior executives). If Executive makes the election contemplated under this
Section 2.5 and does not revoke the release contemplated hereunder, the Company shall pay
Executive’s COBRA premiums for the lesser of (a) twelve (12) months following the Effective Date;
(b) until such time as Executive is no longer eligible for COBRA coverage; or (c) until such time
as Executive becomes eligible for comparable benefits from a subsequent employer. Executive will
pay the cost of such COBRA coverage.




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          2.6 Executive shall be entitled to such benefits under the Company’s employee benefit plans which
are required to be provided under the Employee Retirement Income Security Act of 1974, as amended
and in according to the terms of such plan and his rights and the Company’s obligations thereunder
shall not be affected by this Agreement. In addition, any vesting, lapse of time or similar
requirements under any stock option plan, restricted stock or other non-qualified deferred
compensation plan shall be accelerated to the date of the Effective Date and any conditions to
Executive’s entitlement to any benefit under any such plans or programs shall be deemed to have
been satisfied. Except as specifically provided in the prior sentence, the terms and conditions of
any awards under any such plans or programs shall continue to be governed under such plans and
programs, as applicable.




          2.7 If any annual bonus is paid out under the incentive compensation plan in which Executive
participated with respect to the 2005 plan year, then Executive shall be entitled to a bonus for
the 2005 plan year equal to Executive’s target bonus amount times the bonus achievement percentage
relating to the plan, as determined by the compensation committee, which bonus shall be paid in the
timing and manner as the Company’s other annual bonuses generally, less applicable income and
employment tax withholding. This provision shall not entitle Executive to receive any bonus if
bonuses are not paid out under the plan in which Executive was a participant.




     3. Equity Amounts. Except as specially provided in Section 2.6 hereof, the terms and
conditions of any stock option or restricted stock awards granted to Executive by the Company shall
continue to be governed by the terms and conditions of such awards.



     4. Non-Admission of Discrimination or Wrongdoing.



          4.1 This Agreement shall not in any way be construed as an admission that the Company, Executive or
any other individual has any liability to or acted wrongfully in any way with respect to Executive,
the Company or any other person. The Company specifically denies that it has any liability to or
that it has done any wrongful or discriminatory acts against Executive or any other person on the
part of itself, or its officers, employees and/or agents.




          4.2 Executive understands and agrees that he has not suffered any discrimination in terms,
conditions or privileges of his employment based on age, race, gender, religious creed, color,
national origin, ancestry, physical disability, mental disability, medication condition, marital
status, sexual orientation and/or sexual or racial harassment. Executive understands and agrees
that he has no claim for employment discrimination under any legal or factual theory.




     5. Separation of Employment. Executive acknowledges that his employment with the Company
shall terminate as of the Effective Date, and that such employment will not be resumed at any time.
In addition, Executive will not apply for or otherwise seek employment with the Company at any
time in the future.



     6. Company Property. Executive represents and agrees that he has turned over to the
Company all equipment, files, memoranda, records, and other documents and confidential



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information that is in physical form and any other physical or personal property which is the
property of the Company and which he has in his possession, custody or controls at the time this
Agreement is executed. Executive will return to the Company any additional company property in his
possession, including, but not limited to, company files, work product, computer equipment,
computer software, pagers, corporate credit cards, identification cards, manuals, company documents
and company keys. Executive further agrees to reasonably cooperate and work with Company’s
officers and employees to ensure his compliance with this Section 6.




     7. Releases.



          7.1 In exchange for the accommodations by the Company Released Parties (as defined below) provided
herein (including the Release of Executive), and except for claims related to the obligations of
the Company Released Parties or the rights of Executive set forth or referenced herein and
Executive’s rights to indemnification under the Company’s Bylaws, Certificate of Incorporation or
otherwise (the “Excluded Executive Claims”), Executive knowingly and voluntarily waives and
releases all rights and claims, known and unknown, which Executive may have against the Company,
any of the Company’s subsidiaries or controlled affiliates (the “Company Group”), and any of the
Company’s parents and/or their respective subsidiaries and related or affiliated entities or
successors, or any of their respective current or former officers, directors, managers, employees,
shareholders, partners, members, consultants or representatives thereof respectively, (the “Company
Released Parties”) arising out of or relating to (i) Executive’s employment or termination of
employment with the Company, (ii) the Employment Agreement, (iii) any acts, occurrences or
omissions taking place prior to the date of execution of this Agreement by the Company Released
Parties (the “Release of the Company Released Parties”), including any and all charges, complaints,
claims, liabilities, obligations, promises, agreements, contracts, controversies, damages, actions,
causes of action, suits, rights, demands, costs, losses, debts and expenses of any kind, at law,
equity or otherwise, arising in tort, contract or otherwise, whether known or unknown, suspected or
unsuspected (other than the Excluded Executive Claims), which Executive has or may have against
them. This Release extends to and includes, but is not limited to, claims (other than Excluded
Executive Claims) for employment discrimination, wrongful termination, constructive termination,
violation of public policy, breach of any express or implied contract, breach of any implied
covenant, fraud, intentional or negligent misrepresentation, emotional distress, or any other
claims relating to Executive’s employment or termination of employment with the Company. This
Release also includes a release of any claims (other than Excluded Executive Claims) by Executive
under federal, state or local employment laws or regulations, including, but not limited to: (1)
Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000(e), et. seq. (race, color,
religion, sex, and national origin discrimination); (2) the Age Discrimination in Employment Act,
29 U.S.C. §§ 621, et. seq. (age discrimination); (3) Section 1981 of the Civil Rights Act of 1866,
42 U.S.C. § 1981 (race discrimination); (4) the Equal Pay Act of 1963, 29 U.S.C. § 206 (equal pay);
(5) the Fair Labor Standards Act, 29 U.S.C. §§ 201, et. seq. (wage and hour matters, including
overtime pay); (6) COBRA; (7) Executive Order 11141 (age discrimination); (8) Section 503 of the
Rehabilitation Act of 1973, 29 U.S.C. §§ 701, et. seq. (disability discrimination); (9) the
Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001, et. seq. (employment benefits);
(10) Title I of the Americans with Disabilities Act (disability discrimination); (11) the Sarbanes
Oxley Act; and (12) any applicable Texas employment laws.




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          7.2 In exchange for the accommodations by Executive provided herein (including the Release of the
Company Released Parties) and the mutual obligations set forth herein, and except for claims
related to the obligations of Executive or the rights of Company set forth or referenced herein, or
any claims relating to fraud, criminal activity or willful misconduct, the “Excluded Company
Claims”), the Company (on behalf of itself and the Company Group) knowingly and voluntarily waives
and releases all rights and claims, known and unknown, which the Company may have against Executive
arising out of or relating to (i) Executive’s employment or termination of employment with the
Company, (ii) the Employment Agreement, or (iii) any acts, occurrences or omissions taking place
prior to the date of execution of this Agreement by Executive, including any and all charges,
complaints, claims, liabilities, obligations, promises, agreements, contracts, controversies,
damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of
any kind, at law, equity or otherwise, arising in tort, contract or otherwise, whether known or
unknown, suspected or unsuspected (other than the Excluded Company Claims), which the Company has
or may have against them.




     8. No Lawsuits.



          8.1 Executive promises never to file a lawsuit of any kind with any court or arbitrator against the
Company or any Company Released Parties, asserting any claims that are released in this Agreement
(which specifically excludes Excluded Executive Claims).




          8.2 Executive represents and agrees that, prior to signing this Agreement, he has not filed or
pursued any complaints, charges or lawsuits of any kind with any court, governmental or
administrative agency or arbitrator against the Company, any Company Released Parties asserting any
claims.




     9. Ownership of Claims. Executive represents and agrees that Executive has not assigned or
transferred, or attempted to assign or transfer, to any person or entity, any of the claims
Executive is releasing in this Agreement.



     10. No Benefits. Executive understands that Executive’s participation in all benefit
plans, programs, policies, insurance plans or other arrangements maintained by the Company or
provided by the Company, if any, will end at the Effective Date, except to the extent noted herein.
Except as set forth herein, Executive also understands that the Company will not pay for any
business-related or other charges incurred by him after the Effective Date unless such expenses are
expressly approved in advance by the Chief Executive Officer of the Company. Executive further
understands that Executive will cease to accrue vacation as of the Effective Date and upon
satisfying its obligations to Executive under Section 2 hereof, the Company owns no other amounts
or benefits to Executive.



     11. Tax Withholdings. All payments and benefits under this Agreement are gross amounts and
will be subject to taxes and lawful withholding deductions, if any.



     12. Cooperation. Executive will furnish any information in his possession to and
reasonably cooperate with the Company and its affiliates as may be requested by the Company in



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connection with any proceedings or legal actions in which the Company or its affiliates is or may
become involved. Executive represents and agrees that he will give truthful and, to Executive’s
knowledge, accurate testimony in any such proceedings or legal actions. Except as required by law
or legal process (provided that Executive gives the Company prompt notice of such requirement and
uses reasonable efforts to allow the Company an opportunity to seek a protective order or other
relief limiting or barring such disclosure), Executive further represents and agrees that he will
not furnish information to or cooperate with any non-governmental entity (other than the Company
and its affiliated entities) which is a party to a proceeding or legal action involving the
Company.




     13. Governing Law and Venue. The venue for the litigation of any dispute arising out of
this Agreement shall be a court of competent jurisdiction in Harris County, Texas. Texas law shall
govern the interpretation and enforcement of this Agreement, notwithstanding the conflict-of-law
principles of such jurisdiction.



     14. Effective Date; Entire Agreement. Executive is entering into this Agreement freely and
voluntarily. Executive has carefully read and understands all of the provisions of this Agreement.
Executive understands that it sets forth the entire agreement between him and the Company.
Executive acknowledges that Executive has been advised to consult legal counsel concerning this
Agreement prior to signing the Agreement, and that Executive has had sufficient opportunity to do
so. Executive understands that Executive may have up to twenty-one (21) days from the date of this
Agreement to consider this Agreement. Executive understands that if Executive signs this
Agreement, Executive will then have seven (7) days to cancel it if Executive so chooses. Executive
may cancel this Agreement by delivering a written notice of cancellation to the Senior Vice
President of Administration of the Company. However, if Executive elects to cancel this Agreement,
Executive and the Company understand and agree that Executive will not be entitled to certain of
the benefits, compensation, or other consideration referenced in this Agreement. Executive
understands that the Company will have no duty to pay him or provide him with the compensation and
benefits (other than compensation and benefits to which he is otherwise entitled, such as salary,
expense reimbursements, Company benefit plans, etc.) listed in this Agreement until after the
revocation period has expired and provided Executive has not elected to make such revocation.
Executive understands that he is not waiving any age discrimination claim that may arise after the
Effective Date. Except as specifically provided in this Agreement, in consideration of the
payments and benefits provided herein, the sufficiency of which is hereby acknowledged, the
Employment Agreement is terminated as of the Effective Date and shall cease to have any force or
effect notwithstanding any survival clauses therein contained.



     15. Indemnification; Directors and Officer’s Insurance. The Company shall fulfill and
honor in all respects the obligations of the Company pursuant to any indemnification provisions
under the Certificate of Incorporation or Bylaws or otherwise, each as in effect on the date
hereof. The Company will also take such actions necessary to cause Executive to be treated at
least as favorably as the most favorably situated director or officer of the Company under the
Company’s professional indemnity policies as in effect from time to time.



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     16. No Representations. The parties and each of them represent and agree that no promises,
statements or inducements have been made to them that have caused them to sign this Agreement other
than those expressly stated in this Agreement.



     17. Successors. All of the terms and provisions contained in this Agreement shall inure to
the benefit of and shall be binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.



     18. Severability. Should any of the provisions in this Agreement be declared or be
determined to be illegal or invalid, all remaining parts, terms or provisions shall be valid, and
the illegal or invalid part, term or provision shall be deemed not to be a part of this Agreement.



     19. Proper Construction.



          19.1 The language of all parts of this Agreement shall in all cases be construed as a whole
according to its fair meaning, and not strictly for or against any of the parties.




          19.2 As used in this Agreement, the term “or” shall be deemed to include the term “and/or” and the
singular or plural number shall be deemed to include the other whenever the context so indicates or
requires.




          19.3 The paragraph headings used in this Agreement are intended solely for convenience of reference
and shall not in any manner amplify, limit, modify or otherwise be used in the interpretation of
any of the provisions hereof.




[signature page next]




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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first
above written.



	 	 	 	 	 
	 	Executive

 	 
	 	/s/ JOHN H. KARNES
 	 
	 	John H. Karnes 	 
	 	 	 
	 
	 	Company





THE HOUSTON EXPLORATION COMPANY

 	 
	 	By:  	/s/ ROGER B. RICE
 	 
	 	Name:  	Roger B. Rice 	 
	 	Title:  	Senior Vice President -- Human Resources &
Administration