Document:

exh105.htm

     

    
      

      

    

    Exhibit
      10.5

     

     

    
      AMENDED
        AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT

      

      

      THIS
        AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT is dated this
        14th day of
        December
        2007, among First Federal Bancshares of Arkansas, Inc., a Texas corporation
        (the
        "Corporation"), First Federal Bank, a federally chartered savings bank (the
        "Bank"), and Jeffrey L. Brandt (the "Executive").  The Corporation and
        the Bank are collectively referred to as the "Employers".

      

      WITNESSETH

      

      WHEREAS,
        the Bank was previously known
        as First Federal Bank of Arkansas, F.A.;

      

      WHEREAS,
        the Executive is currently employed as the Executive Vice President-Eastern
        Division of the Corporation and the Bank, and the Employers and the Executive
        have previously entered into a change in control severance agreement dated
        January 24, 2006 (the “Prior Agreement”);

      

      WHEREAS,
        the Employers desire to amend
        and restate the Prior Agreement in order to make changes to comply with Section
        409A of the Internal Revenue Code of 1986, as amended (the “Code”), as well as
        certain other changes;

      

      WHEREAS,
        the Employers desire to be ensured of the Executive's continued active
        participation in the business of the Employers; and

      

      WHEREAS,
        in order to induce the Executive to remain in the employ of the Employers
        and in
        consideration of the Executive's agreeing to remain in the employ of the
        Employers, the parties desire to specify the severance benefits which shall
        be
        due the Executive in the event that his employment with the Employers is
        terminated under specified circumstances;

      

      NOW
        THEREFORE, in consideration of the mutual agreements herein contained, and
        upon
        the other terms and conditions hereinafter provided, the parties hereby agree
        as
        follows:

      

      1.           Definitions.  The
        following words and terms shall have the meanings set forth below for the
        purposes of this Agreement:

      

      (a)         Annual
        Compensation.  The Executive's "Annual Compensation" for
        purposes of this Agreement shall be deemed to mean the average level of
        compensation paid to the Executive by the Employers or any subsidiary thereof
        during the most recent five taxable years preceding the year in which the
        Date
        of Termination occurs (or such shorter period as the Executive was employed)
        and
        which was included in the Executive’s gross income for tax purposes, including
        but not limited to the Executive’s salary, bonuses and all other amounts taxable
        to the Executive pursuant to any employee benefit plans of
        Employers.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          2

        

      

      
 

      (b)           Cause.
        Termination of the Executive's employment for "Cause" shall mean termination
        because of personal dishonesty, incompetence, willful misconduct, breach
        of
        fiduciary duty involving personal profit, intentional failure to perform
        stated
        duties, willful violation of any law, rule or regulation (other than traffic
        violations or similar offenses), final cease-and-desist order or material
        breach
        of any provision of this Agreement.  For purposes of this paragraph,
        no act or failure to act on the Executive's part shall be considered "willful"
        unless done, or omitted to be done, by the Executive not in good faith and
        without reasonable belief that the Executive's action or omission was in
        the
        best interests of the Employers.

      

      (c)           Change
        in Control.  "Change in Control " shall mean a change in the
        ownership of the Corporation or the Bank, a change in the effective control
        of
        the Corporation or the Bank or a change in the ownership of a substantial
        portion of the assets of the Corporation or the Bank, in each case as provided
        under Section 409A of the Code and the regulations thereunder.

      

      (d)           Date
        of Termination.  "Date of Termination" shall mean (i) if the
        Executive's employment is terminated for Cause, the date on which the Notice
        of
        Termination is given, and (ii) if the Executive's employment is terminated
        for
        any other reason, the date specified in the Notice of Termination.

      

      (e)           Disability.  “Disability”
        shall mean the Executive (i) is unable to engage in any substantial gainful
        activity by reason of any medically determinable physical or mental impairment
        which can be expected to result in death or can be expected to last for a
        continuous period of not less than 12 months, or (ii) is, by reason of any
        medically determinable physical or mental impairment which can be expected
        to
        result in death or can be expected to last for a continuous period of not
        less
        than 12 months, receiving income replacement benefits for a period of not
        less
        than three months under an accident and health plan covering employees of
        the
        Employers.

      

      (f)           Effective
        Date.  The Effective Date of this Agreement shall mean the
        date first written above.

      

      (g)         Good
        Reason.  Termination by the Executive of the Executive's
        employment for "Good Reason" shall mean termination by the Executive following
        a
        Change in Control of the Corporation based on the occurrence of any of the
        following events:

      

      (i)
        (A) a
        material diminution in the Executive’s base compensation as in effect
        immediately prior to the date of the Change in Control or as the same may
        be
        increased from time to time thereafter, (B) a material diminution in the
        Executive’s authority, duties or responsibilities as in effect immediately prior
        to the Change in Control, or (C) a material diminution in the authority,
        duties
        or responsibilities of the officer (as in effect immediately prior to the
        date
        of the Change in Control) to whom the Executive is required to report
        immediately prior to the Change in Control,

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          3

        

      

      
 

      (ii)
        any
        material breach of this Agreement by the Employers, or

      

      (iii)
        any
        material change in the geographic location at which the Executive must perform
        his services under this Agreement immediately prior to the Change in
        Control;

      

      provided,
        however, that prior to any termination of employment for Good Reason, the
        Executive must first provide written notice to the Employers within ninety
        (90)
        days of the initial existence of the condition, describing the existence
        of such
        condition, and the Employers shall thereafter have the right to remedy the
        condition within thirty (30) days of the date the Employers received the
        written
        notice from the Executive.  If the Employers remedy the condition
        within such thirty (30) day cure period, then no Good Reason shall be deemed
        to
        exist with respect to such condition.  If the Employers do not remedy
        the condition within such thirty (30) day cure period, then the Executive
        may
        deliver a Notice of Termination for Good Reason at any time within sixty
        (60)
        days following the expiration of such cure period.

      

      (h)           IRS.  IRS
        shall mean the Internal Revenue Service.

      

      (i)           Notice
        of Termination.  Any purported termination of the Executive's
        employment by the Employers for any reason, including without limitation
        for
        Cause, Disability or Retirement, or by the Executive for any reason, including
        without limitation for Good Reason, shall be communicated by a written "Notice
        of Termination" to the other party hereto.  For purposes of this
        Agreement, a "Notice of Termination" shall mean a dated notice which (i)
        indicates the specific termination provision in this Agreement relied upon,
        (ii)
        sets forth in reasonable detail the facts and circumstances claimed to provide
        a
        basis for termination of the Executive's employment under the provision so
        indicated, (iii) specifies a Date of Termination, which shall be not less
        than
        thirty (30) nor more than ninety (90) days after such Notice of Termination
        is
        given, except in the case of the Employers' termination of the Executive's
        employment for Cause, which shall be effective immediately; and (iv) is given
        in
        the manner specified in Section 7 hereof.

      

      (j)           Retirement.  "Retirement"
        shall mean voluntary termination by the Executive in accordance with the
        Employers' retirement policies, including early retirement, generally applicable
        to the Employers=
        salaried
        employees.

      

      2.           Benefits
        Upon Termination.   If the Executive's employment by the
        Employers shall be terminated subsequent to a Change in Control of the
        Corporation by (i) the Employers for other than Cause, Disability,
        Retirement or the Executive's death or (ii) the Executive for Good Reason,
        then
        the Employers shall, subject to the provisions of Section 3 hereof, if
        applicable,

      

      (A)        pay
        to the Executive, in a lump sum within ten (10) business days following the
        Date
        of Termination, a cash severance amount equal to three (3) times the Executive’s
        Annual Compensation, and

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          4

        

      

      
 

      (B)           maintain
        and provide for a period ending at the earlier of (i) the expiration of the
        remaining term of this Agreement as of the Date of Termination or (ii) the
        date
        of the Executive’s full-time employment by another employer (provided that the
        Executive is entitled under the terms of such employment to benefits
        substantially similar to those described in this subparagraph (B)), at no
        cost
        to the Executive, the Executive’s continued participation in all group
        insurance, life insurance, health and accident insurance, and disability
        insurance in which the Executive was participating immediately prior to the
        Date
        of Termination; provided that any insurance premiums payable by the Employers
        or
        any successors pursuant to this Section 5(c)(B) shall be payable at such
        times
        and in such amounts as if the Executive was still an employee of the Employers,
        subject to any increases in such amounts imposed by the insurance company
        or
        COBRA, and the amount of insurance premiums required to be paid by the Employers
        in any taxable year shall not affect the amount of insurance premiums required
        to be paid by the Employers in any other taxable year; and provided further
        that
        if the Executive’s participation in any group insurance plan is barred, the
        Employers shall either arrange to provide the Executive with insurance benefits
        substantially similar to those which the Executive was entitled to receive
        under
        such group insurance plan or, if such coverage cannot be obtained, pay a
        lump
        sum cash equivalency amount within thirty (30) days following the Date of
        Termination based on the annualized rate of premiums being paid by the Employers
        as of the Date of Termination; and

      

      (C)           pay
        to the Executive, in a lump sum within thirty (30) days following the Date
        of
        Termination, a cash amount equal to the projected cost to the Employers of
        providing benefits to the Executive for the remaining term of employment
        under
        this Agreement (prior to giving effect to the Notice of Termination) pursuant
        to
        any other employee benefit plans, programs or arrangements offered by the
        Employers in which the Executive was entitled to participate immediately
        prior
        to the Date of Termination (excluding (y) stock option plans, restricted
        stock
        plans and employee stock ownership plans of the Employers and (z) bonuses
        and
        other items of cash compensation), with the projected cost to the Employers
        to
        be based on the costs incurred for the calendar year immediately preceding
        the
        year in which the Date of Termination occurs and with any automobile-related
        costs to exclude any depreciation on Bank-owned automobiles.

      

      3.           Limitation
        of Benefits under Certain Circumstances.  If the payments and
        benefits pursuant to Section 2 hereof, either alone or together with other
        payments and benefits which the Executive has the right to receive from the
        Employers, would constitute a "parachute payment" under Section 280G of the
        Code, then the payments and benefits payable by the Employers pursuant to
        Section 2 hereof shall be reduced by the minimum amount necessary to result
        in
        no portion of the payments and benefits under Section 2 being non-deductible
        to
        either of the Employers pursuant to Section 280G of the Code and subject
        to the
        excise tax imposed under Section 4999 of the Code.  If the payments
        and benefits under Section 2 are required to be reduced, the cash severance
        shall be reduced first, followed by a reduction in the fringe
        benefits.  The determination of any reduction in the payments and
        benefits to be made pursuant to Section 2 shall be based upon the opinion
        of
        independent tax counsel selected by the Employers and paid by the
        Employers.  Such counsel shall promptly prepare the foregoing opinion,
        but in no event later than thirty (30) days from the Date of Termination,
        and
        may use such actuaries as such counsel deems necessary or advisable for the
        purpose.  Nothing contained in this Section 3 shall result in a
        reduction of any payments or benefits to which the Executive may be entitled
        upon termination of employment under any circumstances other than as specified
        in this Section 3, or a reduction in the payments and benefits specified
        in
        Section 2 below zero.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          5

        

      

      
 

      4.           Mitigation;
        Exclusivity of Benefits.

      

      (a)         The
        Executive shall not be required to mitigate the amount of any benefits hereunder
        by seeking other employment or otherwise, nor shall the amount of any such
        benefits be reduced by any compensation earned by the Executive as a result
        of
        employment by another employer after the Date of Termination or
        otherwise.

      

      (b)         The
        specific arrangements referred to herein are not intended to exclude any
        other
        benefits which may be available to the Executive upon a termination of
        employment with the Employers pursuant to employee benefit plans of the
        Employers or otherwise, except as set forth in Section 2(c)(B)(ii)
        hereof.

      

      5.           Withholding.  All
        payments required to be made by the Employers hereunder to the Executive
        shall
        be subject to the withholding of such amounts, if any, relating to tax and
        other
        payroll deductions as the Employers may reasonably determine should be withheld
        pursuant to any applicable law or regulation.

      

      6.           Assignability.  The
        Employers may assign this Agreement and their rights and obligations hereunder
        in whole, but not in part, to any corporation, bank or other entity with
        or into
        which either of the Employers may hereafter merge or consolidate or to which
        either of the Employers may transfer all or substantially all of its respective
        assets, if in any such case said corporation, bank or other entity shall
        by
        operation of law or expressly in writing assume all obligations of the Employers
        hereunder as fully as if it had been originally made a party hereto, but
        may not
        otherwise assign this Agreement or their rights and obligations
        hereunder.  The Executive may not assign or transfer this Agreement or
        any rights or obligations hereunder.

      

      7.           Notice.  For
        the purposes of this Agreement, notices and all other communications provided
        for in this Agreement shall be in writing and shall be deemed to have been
        duly
        given when delivered or mailed by certified or registered mail, return receipt
        requested, postage prepaid, addressed to the respective addresses set forth
        below:

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          6

        

      

       

      
 

      
        	
                 

              	
                To
                  the Employers:

              	
                Board
                  of Directors

              
	 	
                First
                  Federal Bancshares of Arkansas, Inc.

              
	 	
                1401
                  Highway 62-65 North

              
	 	
                Harrison,
                  Arkansas  72601

              
	 	 
	
                 

              	
                To
                  the Executive:

              	
                At
                  his last address on file with the Employers

              
	 	 

      

      

      8.           Amendment;
        Waiver.  No provisions of this Agreement may be modified,
        waived or discharged unless such waiver, modification or discharge is agreed
        to
        in writing and signed by the Executive and such officer or officers as may
        be
        specifically designated by the Boards of Directors of the Employers to sign
        on
        their behalf.  No waiver by any party hereto at any time of any breach
        by any other party hereto of, or compliance with, any condition or provision
        of
        this Agreement to be performed by such other party shall be deemed a waiver
        of
        similar or dissimilar provisions or conditions at the same or at any prior
        or
        subsequent time.  In addition, notwithstanding anything in this
        Agreement to the contrary, the Employers may amend in good faith any terms
        of
        this Agreement, including retroactively, in order to comply with Section
        409A of
        the Code.

      

      9.           Governing
        Law.  The validity, interpretation, construction and
        performance of this Agreement shall be governed by the laws of the United
        States
        where applicable and otherwise by the substantive laws of the State of
        Arkansas.

      

      10.         Nature
        of Employment and Obligations.

      

      (a)          Nothing
        contained herein shall be deemed to create other than a terminable at will
        employment relationship between the Employers and the Executive, and the
        Employers may terminate the Executive's employment at any time, subject to
        providing any payments specified herein in accordance with the terms
        hereof.

      

      (b)         Nothing
        contained herein shall create or require the Employers to create a trust
        of any
        kind to fund any benefits which may be payable hereunder, and to the extent
        that
        the Executive acquires a right to receive benefits from the Employers hereunder,
        such right shall be no greater than the right of any unsecured general creditor
        of the Employers.

      

      11.        Term
        of Agreement. This Agreement shall terminate three (3) years after
        December 14, 2007; provided that on or prior to December 14, 2008 and each
        subsequent December 14, the Boards of Directors of the Employers shall consider
        (with appropriate corporate documentation thereof, and after taking into
        account
        all relevant factors, including the Executive’s performance as an employee)
        renewal of the term of this Agreement for an additional one (1) year, and
        the
        term of this Agreement shall be so extended as of such December 14 unless
        the
        Boards of Directors of the Employers do not approve such renewal and provide
        written notice to the Executive, or the Executive gives written notice to
        the
        Employers, at least thirty (30) days prior to such December 14, of such party’s
        or parties’ election not to extend the term beyond its then scheduled expiration
        date.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          7

        

      

      
 

      12.           Headings.  The
        section headings contained in this Agreement are for reference purposes only
        and
        shall not affect in any way the meaning or interpretation of this
        Agreement.

      

      13.           Validity.  The
        invalidity or unenforceability of any provision of this Agreement shall not
        affect the validity or enforceability of any other provisions of this Agreement,
        which shall remain in full force and effect.

      

      14.           Changes
        in Statutes or Regulations. If any statutory or regulation provision
        referenced herein is subsequently changed or re-numbered, or is replaced
        by a
        separate provision, then the references in this Agreement to such statutory
        or
        regulatory provision shall be deemed to be a reference to such section as
        amended, re-numbered or replaced.

      

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

      

      16.           Regulatory
        Prohibition.  Notwithstanding any other provision of this
        Agreement to the contrary, any payments made to the Executive pursuant to
        this
        Agreement, or otherwise, are subject to and conditioned upon their compliance
        with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. '1828(k))
        and
        the regulations promulgated thereunder, including 12 C.F.R.
        Part 359.

      

      17.           Regulatory
        Actions.  The following provisions shall be applicable to the
        parties to the extent that they are required to be included in agreements
        between a savings association and its employees pursuant to Section 563.39(b)
        of
        the Regulations Applicable to all Savings Banks, 12 C.F.R. §563.39(b), or any
        successor thereto, and shall be controlling in the event of a conflict with
        any
        other provision of this Agreement, including without limitation Section 5
        hereof.

      

      (a)           If
        Executive is suspended from office and/or temporarily prohibited from
        participating in the conduct of the Employers’ affairs by a notice served under
        Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act (“FDIA”)
        (12 U.S.C. §§1818(e)(3) and 1818(g)(1)), the Employers’ obligations under this
        Agreement shall be suspended as of the date of service, unless stayed by
        appropriate proceedings.  If the charges in the notice are dismissed,
        the Employers may, in their discretion:  (i) pay the Executive all or
        part of the compensation withheld while its obligations under this Agreement
        were suspended, and (ii) reinstate (in whole or in part) any of its obligations
        which were suspended.

      

      (b)           If
        the Executive is removed from office and/or permanently prohibited from
        participating in the conduct of the Employers’ affairs by an order issued under
        Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. §§1818(e)(4) and
        (g)(1)), all obligations of the Employers under this Agreement shall terminate
        as of the effective date of the order, but vested rights of the Executive
        and
        the Employers as of the date of termination shall not be affected.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          8

        

      

      
 

      (c)           If
        the Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C.
        §1813(x)(1)), all obligations under this Agreement shall terminate as of the
        date of default, but vested rights of the Executive and the Employers as
        of the
        date of termination shall not be affected.

      

      (d)           All
        obligations under this Agreement shall be terminated pursuant to 12 C.F.R.
        §563.39(b)(5), except to the extent that it is determined that continuation
        of
        the Agreement for the continued operation of the Employers is necessary:
        (i) by
        the Director of the Office of Thrift Supervision (“OTS”), or his or her
        designee, at the time the Federal Deposit Insurance Corporation (“FDIC”) enters
        into an agreement to provide assistance to or on behalf of the Bank under
        the
        authority contained in Section 13(c) of the FDIA (12 U.S.C. §1823(c)); or (ii)
        by the Director of the OTS, or his or her designee, at the time the Director
        or
        his or her designee approves a supervisory merger to resolve problems related
        to
        operation of the Bank or when the Bank is determined by the Director of the
        OTS
        to be in an unsafe or unsound condition, but vested rights of the Executive
        and
        the Employers as of the date of termination shall not be affected.

      

      18.           Entire
        Agreement.  This Agreement embodies the entire agreement
        between the Employers and the Executive with respect to the matters agreed
        to
        herein.  All prior agreements between the Employers and the Executive
        with respect to the matters agreed to herein, including without limitation
        the
        Prior Agreement, are hereby superseded and shall have no force or
        effect.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          9

        

      

      
 

      IN
        WITNESS WHEREOF, this Agreement has been executed as of the date first above
        written.

      

      
        	
                Attest:

              	
                FIRST
                  FEDERAL BANCSHARES OF ARKANSAS, INC.

              
	 	 
	 	 
	/s/ Tommy W.
                Richardson 	 	
                By:

              	/s/
                Larry J. Brandt 
	Tommy
                W. Richardson 	 	
                Larry
                  J. Brandt, President and Chief Executive Officer

              
	 	 
	
                Attest:

              	
                FIRST
                  FEDERAL BANK

              
	 	 
	 	 
	/s/
                Tommy W. Richardson 	 	
                By:

              	/s/
                Larry J. Brandt 
	Tommy
                W. Richardson 	 	
                Larry
                  J. Brandt, Chief Executive Officer

              
	 	 
	 	
                EXECUTIVE

              
	 	 
	 	 
	 	
                By:

              	/s/
                Jeffrey L. Brandt 
	 	 	
                Jeffrey
                  L. BrandtExhibit 10.1

 

PARTICIPATION AGREEMENT

 

RELATING TO

 

EAST TEXAS BOSSIER – BIG BILL SIMPSON

 

This PARTICIPATION AGREEMENT
(this “Agreement”) is made and
entered into as of October 23, 2007 (the “Effective
Date”), by and among the Parties (as defined below).

 

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

 

ARTICLE I

DEFINITIONS

 

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

 

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

 

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

 

“Agreed Rate” means 4.41% per annum.

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Party” means CWEI or any Participant.

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3

 

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

 

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

 

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

 

ARTICLE II

RELATIONSHIP OF THE PARTIES

 

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

 

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

 

4

 

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

 

ARTICLE III

MANAGEMENT OF LEASES AND WELLS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

ARTICLE IV

ACCESS TO INFORMATION; TRANSFER RESTRICTIONS

 

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

 

4.02         Transfer
Restrictions.  Except as
provided in Section 4.03, no Participant shall Transfer his or her
Interests without the prior written consent of CWEI.  Any attempted Transfer

 

6

 

in violation of this Section 4.02
shall be null and void, and CWEI shall refuse to recognize any such Transfer.

 

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

 

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

 

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

 

ARTICLE V

SHARING, ALLOCATIONS AND DISTRIBUTIONS

 

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

 

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

 

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

 

7

 

5.04         Funding
of Costs and Expenses.

 

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

 

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

 

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

 

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

 

8

 

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

 

ARTICLE VI

BOOKS AND RECORDS

 

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

 

ARTICLE VII

TERMINATION

 

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

 

(a)           the third anniversary of Payout;

 

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

 

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

 

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

 

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

 

9

 

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

 

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

 

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

 

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

 

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

 

ARTICLE VIII

GENERAL PROVISIONS

 

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

 

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

 

10

 

Participants.  A
Participant may change its address by giving written notice to CWEI.  Any notice, request or consent to CWEI shall
be sent to CWEI at its principal place of business, to the attention of Patti
Hollums.

 

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

 

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

 

8.05         Amendment
or Modification.

 

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

 

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

 

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

 

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

 

11

 

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

 

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

 

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

 

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

 

8.11         Indemnification.

 

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

 

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

 

12

 

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

 

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

 

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

 

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

 

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

 

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

 

13

 

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

 

[Signature Pages Follow]

 

14

 

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

 

	
   

  	
  CWEI:

  
	
   

  	
   

  
	
   

  	
  CLAYTON WILLIAMS ENERGY,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  //s// L. Paul Latham

  	
   

  
	
   

  	
   

  	
  L. Paul Latham

  
	
   

  	
   

  	
  Executive Vice President

  

 

 

Signature Page For Participant Agreement

 

 

SIGNATURE PAGE FOR PARTICIPANT

 

The undersigned does hereby
agree to all the terms and provisions of the Participation Agreement,
including, without limitation, the power of attorney set forth in Section 8.13
thereof.

 

	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Address:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Fax:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Taxpayer I.D. No.

  
								

 

 

Signature Page For Participant Agreement

 

 

Exhibit A

Participants

 

	
  Participants

  	
   

  	
  Interests
  (%)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Paul Latham

  	
   

  	
  7.75

  	
   

  
	
  Mel Riggs

  	
   

  	
  7.75

  	
   

  
	
  Sam Lyssy

  	
   

  	
  14.50

  	
   

  
	
  Jeff Shultz

  	
   

  	
  9.00

  	
   

  
	
  Greg Wellborn

  	
   

  	
  10.00

  	
   

  
	
  Ed Uzzell

  	
   

  	
  5.00

  	
   

  
	
  Mark Tisdale

  	
   

  	
  3.00

  	
   

  
	
  John Kennedy

  	
   

  	
  7.00

  	
   

  
	
  Jim Wolfshol

  	
   

  	
  4.00

  	
   

  
	
  Ron Gasser

  	
   

  	
  5.00

  	
   

  
	
  Clarence Wolfshohl

  	
   

  	
  4.00

  	
   

  
	
  David Grafe

  	
   

  	
  4.50

  	
   

  
	
  Joe Stembridge

  	
   

  	
  4.50

  	
   

  
	
  Mike Pollard

  	
   

  	
  2.75

  	
   

  
	
  Danny Alford

  	
   

  	
  2.00

  	
   

  
	
  Janet Hamilton

  	
   

  	
  0.75

  	
   

  
	
  Kim Jones

  	
   

  	
  1.00

  	
   

  
	
  Robert Thomas

  	
   

  	
  2.00

  	
   

  
	
  Wilson Beebe

  	
   

  	
  0.75

  	
   

  
	
  Kathy Schwope

  	
   

  	
  0.75

  	
   

  
	
  Dennis Polson

  	
   

  	
  1.00

  	
   

  
	
  Donnie Pruitt

  	
   

  	
  1.00

  	
   

  
	
  Joe Roome

  	
   

  	
  1.00

  	
   

  
	
  Denise Kelly

  	
   

  	
  1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total:

  	
   

  	
  100.00

  	
   

  

 

A-1

 

EXHIBIT B

 

AREA OF INTEREST

 

The Area of Interest shall
be the prospects located in Leon County, Texas covered by the leases described
below:

 

[The original Exhibit B
contains the legal description of 35 oil and gas leases covering approximately
1,920 gross acres surrounding the Big Bill Simpson #1 well, which descriptions
have been omitted in this filing.]

 

B-1

 

EAST TEXAS BOSSIER – BIG BILL SIMPSON

 

EXHIBIT C

 

Wells

 

	
  Well Name

  	
   

  	
  County,
  State

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [Such
  other wells as may be

  	
   

  	
   

  
	
  added
  from time to time]

  	
   

  	
   

  

 

C-1

 

EXHIBIT D

 

Allocations of Profits and Losses and Other Tax
Matters

 

ARTICLE I

 

TAX DEFINITIONS

 

Section 1.01           Definitions. 
All capitalized terms used herein shall have the meanings assigned to
them in the Participation Agreement relating to EAST TEXAS BOSSIER- BIG BILL
SIMPSON, dated October 23, 2007 (the “Agreement”), or as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE II.

 

REFLECTION
OF ACTIVITIES FOR FEDERAL AND STATE TAX PURPOSES

 

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

 

D-1

 

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

 

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

 

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

 

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

 

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

 

ARTICLE III

 

ALLOCATIONS OF PROFIT AND LOSS

 

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

 

D-2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

D-3

 

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

 

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

 

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

 

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

 

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

 

D-4

 

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

 

ARTICLE IV

 

OTHER TAX MATTERS

 

Section 4.01           Tax Elections.

 

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

 

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

 

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

 

D-5

 

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

 

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

 

ARTICLE V

 

CAPITAL ACCOUNT MAINTENANCE

 

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

 

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

 

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

 

D-6

 

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

 

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

 

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

 

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

 

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

 

[End of Exhibit D]

 

D-7

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00134-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00134-of-00352.parquet"}]]