Document:

exv10w8

 

Exhibit 10.8

TranS1 Inc.

SERIES C PREFERRED STOCK PURCHASE AGREEMENT

          THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”) is entered into on
September 20, 2005, by and among TranS1 Inc., a Delaware corporation (the
“Company”), and each of the persons listed on Exhibit A hereto (individually, an
“Investor” and collectively, the “Investors”), who hereby agree as follows:

	1.	 	PURCHASE AND SALE OF STOCK.

	 	1.1	 	Sale and Issuance of Series C Preferred Shares.

               (a)     The Company shall adopt and file with the Secretary of State of the State of Delaware on
or before the Closing (as defined below) the Fourth Amended and Restated Certificate of
Incorporation in the form attached hereto as Exhibit B (the “Restated Charter”).

               (b)     Subject to the terms and conditions of this Agreement, each Investor agrees to purchase at
the Closing, and the Company agrees to sell and issue to each Investor at the Closing, severally
and not jointly, a total of 3,887,879 shares (each a “Share” and collectively, the
“Shares”) of the Company’s Series C Preferred Stock, $0.0001 par value per share (the
“Series C Preferred Stock”), in the amounts set forth opposite the names of the respective
Investors on Exhibit A hereto at a purchase price of $6.60 per Share. The Shares will have
the rights, preferences, privileges and restrictions set forth in the Restated Charter.

	 	1.2	 	Closing.

               (a)     The separate purchases and sales of an aggregate of 3,887,879 Shares, for an aggregate
purchase price of $25,660,001.40, shall take place at the closing (the “Closing”) to be
held at the offices of Stradling Yocca Carlson & Rauth, counsel to the Company, in Newport Beach,
California, at 10:00 a.m. (PDT) on September 20, 2005 or at such other time and place as the
Company and the Investors listed on Exhibit A hereto shall mutually agree, either orally or
in writing (the “Closing Date”).

               (b)     At the Closing, the Company shall deliver to each Investor a certificate representing the
Shares of Series C Preferred that such Investor is purchasing, against payment of the purchase
price therefor by check, wire transfer or such other form of payment as shall be mutually agreed
upon by such Investor and the Company.

	2.	 	REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

        The Company hereby represents and warrants to and covenants with each Investor that, except as
set forth on a Schedule of Exceptions attached hereto as Exhibit C, specifically
identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be
representations and warranties as if made hereunder:

 

 

	 	2.1	 	Organization, Qualification and Good Standing.

         The Company is a corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware, has all requisite corporate power and authority to own and operate
its properties and assets and to carry on its business as now conducted and as presently proposed
to be conducted, to execute and deliver this Agreement, the Third Amended and Restated Investors’
Rights Agreement in the form attached hereto as Exhibit D (the “Investors’ Rights
Agreement”) and the Third Amended and Restated Right of First Refusal and Co-Sale Agreement in
the form attached hereto as Exhibit E (the “Co-Sale Agreement”) (this Agreement
together with the Investors’ Rights Agreement and the Co-Sale Agreement being collectively referred
to herein as the “Transaction Documents”) and any other ancillary agreements, to issue and
sell the Shares of Series C Preferred and the shares of Common Stock issuable upon conversion of
the Shares (the “Conversion Stock” and together with the Shares, the “Securities”),
and to carry out the provisions of the Transaction Documents, the Restated Charter and any other
ancillary agreements. The Company is duly qualified and is authorized to transact business in
North Carolina and is in good standing as a foreign corporation in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business, properties or financial
condition.

	 	2.2	 	Authorization.

         All corporate action on the part of the Company, its officers, directors and stockholders
necessary for the authorization, execution and delivery of this Agreement and the other Transaction
Documents, the performance of all obligations of the Company hereunder and thereunder and the
authorization, issuance (or reservation for issuance) sale and delivery of the Securities has been
taken or will have been taken prior to the Closing, and the Transaction Documents, when executed
and delivered by the Company, shall constitute valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other equitable remedies, and
(iii) to the extent that the indemnification provisions contained in the Investors’ Rights
Agreement may be limited by applicable laws or public policy considerations.

	 	2.3	 	Valid Issuance of Securities.

         The Shares that are being purchased by the Investors hereunder, when issued, sold, and
delivered in accordance with the terms of this Agreement for the consideration expressed herein,
will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer under the Transaction Documents and applicable state
and federal securities laws. The Conversion Stock has been duly and validly reserved for issuance,
and upon issuance in accordance with the terms of the Restated Charter, will be duly and validly
issued, fully paid and nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under the Transaction Documents and under applicable state and federal
securities laws. Except pursuant to the Investors’ Rights Agreement, the Securities are not
subject to any preemptive rights or rights of first refusal.

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	 	2.4	 	Governmental Consents.

         No consent, approval, qualification, order or authorization of, or filing with, any local,
state, or federal governmental authority is required on the part of the Company in connection with
the Company’s valid execution, delivery, or performance of this Agreement, the offer, sale or
issuance of the Securities by the Company, except (i) the filing of the Restated Charter with the
Secretary of State of the State of Delaware, and (ii) such filings as have been made prior to the
Closing, except any notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act of 1933, as amended (the “Securities
Act”), or such post-closing filings as may be required under applicable state securities laws,
which will be timely filed in the applicable periods therefor.

	 	2.5	 	Capitalization and Voting Rights.

         Following the filing of the Restated Charter with the Secretary of State of the State of
Delaware, the authorized capital of the Company consists, or will consist immediately prior to the
Closing, of:

               (a)     Preferred Stock. 11,992,424 shares of Preferred Stock, $0.0001 par value, of which (i)
1,250,000 shares have been designated Series A Preferred Stock, all of which are currently issued
and outstanding, (ii) 1,400,000 shares have been designated Series AA Preferred Stock, all of which
are currently issued and outstanding, (iii) 5,454,545 shares have been designated Series B
Preferred Stock, all of which are currently issued and outstanding, and (iv) 3,887,879 shares have
been designated Series C Preferred Stock, all of which will be issued and outstanding immediately
after the Closing (collectively, the Series A Preferred Stock, Series AA Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be referred to herein as the “Preferred
Stock”). The Preferred Stock shall have the rights, preferences, and privileges set forth in
the Restated Charter.

               (b)     Common Stock. 19,000,000 shares of common stock, $0.0001 par value (the “Common
Stock”), of which 2,386,706 shares are issued and outstanding.

               (c)     The outstanding shares of Common Stock and Preferred Stock are owned by the stockholders
specified in Exhibit F attached hereto in the amounts set forth opposite each stockholder’s
name.

               (d)     The outstanding shares of Common Stock and Preferred Stock have been duly authorized and
validly issued, are fully paid and nonassessable, and were issued in accordance with the
registration or qualification provisions of the Securities Act and any relevant state securities
laws or pursuant to valid exemptions therefrom.

               (e)     Except for (i) the conversion privileges of the Preferred Stock, (ii) the rights provided
in paragraph 3.1 of the Investors’ Rights Agreement, and (iii) 1,596,029 stock options granted to
consultants and employees pursuant to the Company’s 2000 Stock Incentive Plan (the “Plan”),
there are no outstanding options, warrants, rights (including conversion or preemptive rights and
rights of first refusal), proxy or stockholder agreements or agreements of any kind for the
purchase or acquisition from the Company of any of its securities. The Company has reserved a
total of 3,432,735 shares of its Common Stock for purchase upon exercise of options granted
pursuant to the Plan, of which 1,250,000 remain available for future grants. Except as set forth
in the Investors’

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Rights Agreement, the Company is not a party or subject to any agreement or understanding, and
there is no agreement or understanding between any of the stockholders, that affects or relates to
the voting or giving of written consents with respect to any security or the voting by a director
of the Company.

	 	2.6	 	Subsidiaries.

         The Company has no subsidiaries. The Company is not a participant in any joint venture,
partnership, or similar arrangement.

	 	2.7	 	Contracts and Other Commitments.

               (a)     Except as expressly contemplated by this Agreement, or as set forth in the Schedule of
Exceptions, as of the Closing the Company will not be a party to, or bound by, any then-effective
written or oral:

                         (i)     pension, profit sharing, stock option, employee stock purchase or other plan providing for
deferred, incentive or other compensation to employees or any other employee benefit plan, or any
contract with any labor union;

                         (ii)     contract for the employment of any officer, individual employee, or other person or
entity on a full-time, part-time, consulting or other basis which provides for acceleration of
vesting or severance payments upon termination or a change of control (or any combination thereof),
or in any way, restricts or limits the Company’s right to terminate such contract at will (but the
Company need not disclose the existence of any law, public policy, or any oral discussions, or oral
statements of policy which might, under current law, be interpreted as imposing upon the Company
any covenant of good faith and fair dealing, or otherwise generally restrict the Company’s ability
to terminate its employees other than on an “at-will” basis or within sixty (60) days following
delivery of a notice of termination);

                         (iii)     agreement or indenture relating to the borrowing or loaning of money by the Company or
to the mortgaging, pledging, transfer of a security interest, or otherwise placing a lien on any
material asset or material group of assets of the Company, or otherwise relating to the sale,
exchange, or disposition of a material asset or right of the Company;

                         (iv)     guarantee of any obligation;

                         (v)     lease or agreement under which it is the lessee of or holds or operates any property, real
or personal, owned by any other party; provided that there may be excluded from such schedule
leases or agreements under which the aggregate annual rental payments of the Company do not, in the
aggregate, exceed $25,000;

                         (vi)     agreement or group of related agreements with the same party or any group of parties who
are affiliated, which requires an aggregate payment by or to the Company in an amount in excess of
$25,000 or which involves an obligation (contingent or otherwise) in excess of $25,000;

                         (vii)     warranty agreement of the Company with respect to products or services provided by the
Company;

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                         (viii)     contract or agreement prohibiting it from freely engaging in any business or competing
anywhere in the world; or

                         (ix)     letter of intent, memorandum of understanding or other similar document with any
representative of any corporation or corporations regarding the merger of the Company with or into
any such corporation or corporations or with any representative of any partnership, association or
other business entity or any individual regarding the sale, conveyance or disposition of all or
substantially all of the assets of the Company or a transaction or series of related transactions
in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or
regarding any other form of liquidation, dissolution or winding up of the Company.

               (b)     The Company has performed in all material respects all obligations required to be
performed by it and is not in default under, or in material breach of, or after due inquiry, in
receipt of any claim of default under or breach of, any material agreement to which it is a party
or to which its assets are subject; the Company has no present expectation or intention of not
fully performing in all material respects all such obligations; the Company does not have any
knowledge of any material breach or anticipatory breach by the other parties to any material
contract or commitment. To the Company’s knowledge, there are no existing claims under completed
contracts which are reasonably likely to result in a material loss to the Company which are not
reserved against in the Financial Statements. The consummation of the transactions contemplated
under this Agreement does not require the consent of any third party under any material contract
which has not been properly obtained.

               (c)     A true and correct copy of each of the written contracts and a description of the oral
contracts which are referred to in the Schedule of Exceptions, together with all amendments,
waivers or other changes thereto, have been provided to the Investors’ counsel.

	 	2.8	 	Related-Party Transactions.

         No employee, officer, stockholder or director of the Company or member of his or her immediate
family is indebted to the Company, nor is the Company indebted (or committed to make loans or
extend or guarantee credit) to any of them, other than (i) for payment of salary for services
rendered, (ii) reimbursement for reasonable expenses incurred on behalf of the Company, and (iii)
for other standard employee benefits made generally available to all employees including stock
option agreements outstanding under any stock option plan approved by the Board of Directors of the
Company). None of such persons has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except that employees,
stockholders, officers, or directors of the Company and members of their immediate families may own
up to 5% of the common stock of any publicly traded company that may compete with the Company. No
officer, director or stockholder or any member of their immediate families is, directly or
indirectly, interested in any contract with the Company (other than such contracts as relate to any
such person’s ownership of capital stock or other securities of the Company, copies of which have
been provided to counsel for the Investors).

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	 	2.9	 	Registration Rights.

         Except as provided in the Investors’ Rights Agreement, the Company is presently not under any
obligation and has not granted any rights to register under the Securities Act any of its presently
outstanding securities or any of its securities that may subsequently be issued.

	 	2.10	 	Permits.

         The Company has all franchises, permits, licenses, and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which would materially and
adversely affect the business, properties or financial condition of the Company, and believes it
can obtain, without undue burden or expense, any similar authority for the conduct of its business
as presently planned to be conducted. The Company is not in default in any material respect under
any of such franchises, permits, licenses or other similar authority.

	 	2.11	 	Compliance With Other Instruments.

         The Company is not in violation or default of any provision of its Restated Charter or bylaws
or in any material respect of any provision of any material contract, or of any federal or state
judgment, order, writ, decree or, to the Company’s knowledge, any statute, rule, regulation or
restriction applicable to the Company. The execution, delivery, and performance by the Company of
the Transaction Documents, and any other ancillary agreements, and the consummation of the
transactions contemplated hereby and thereby, will not result in any such violation or be in
conflict with or constitute, with or without the passage of time or giving of notice, either a
material default under any such provision or an event that results in the creation of any material
lien, charge, or encumbrance upon any assets of the Company or the suspension, revocation,
impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations, or any of its assets or properties.

	 	2.12	 	Litigation.

         There is no action, suit, proceeding, or investigation pending or, to the Company’s knowledge,
currently threatened against the Company or any officer of the Company. The Company is not a party
to or named in or, to the Company’s knowledge, subject to any order, writ, injunction, judgment, or
decree of any court, government agency, or instrumentality. There is no action, suit, proceeding
or investigation by the Company currently pending or that the Company currently intends to
initiate.

	 	2.13	 	Offering.

         Subject in part to the truth and accuracy of the Investors’ representations set forth in this
Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act and the registration or
qualification requirements of applicable state securities laws, and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that would cause the loss of
such exemption.

	 	2.14	 	Title to Property and Assets; Leases.

         Except (i) as reflected in the Schedule of Exceptions, (ii) for liens for current taxes not
yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for

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obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv)
for liens in respect of pledges or deposits under workers’ compensation laws or similar legislation
or (v) for liens in respect of minor defects in title, none of which, individually or in the
aggregate, materially interfere with the value or use of such property, the Company has good and
marketable title to its assets and property, both real and personal, free and clear of all
mortgages, liens, claims, and encumbrances. With respect to the property and assets it leases, the
Company is in material compliance with such leases and holds a valid leasehold interest free of any
liens, claims, or encumbrances, subject to clauses (i)-(v) above. Set forth on the Schedule of
Exceptions is a correct and complete list of all material leases under which the Company is a
lessee. The Company enjoys peaceful and undisturbed possession under all such leases, all of such
leases are valid and subsisting, and the Company is not in default of such leases in any material
respect.

	 	2.15	 	No Outstanding Indebtedness; Dividends.

         The Company has no outstanding indebtedness. The Company has not declared or paid any
dividends or authorized or made any distribution upon or with respect to any class or series of its
stock or purchased or otherwise acquired any of its stock.

	 	2.16	 	Changes.

         Since June 30, 2005, there has not been any event or condition of any character that might
materially and adversely affect the business, properties, prospects or financial condition of the
Company.

	 	2.17	 	Patents and Trademarks.

               (a)     The attached Schedule of Exceptions contains a complete and accurate list of all (i)
patented or registered Intellectual Property (as defined below) owned, used or proposed to be used
by the Company in the conduct of its business (in each case distinguishing owned from licensed
Intellectual Property), (ii) pending patent applications and applications for other registrations
of Intellectual Property filed by or on behalf of the Company, and (iii) material unregistered
Intellectual Property owned, used or proposed to be used by the Company. The attached Schedule of
Exceptions also contains a complete and accurate list of all material licenses and other rights
granted by the Company to any third party with respect to any Intellectual Property, all material
licenses and other rights granted by any third party to the Company with respect to any
Intellectual Property and all other agreements affecting the Company’s ability to use or disclose
any Intellectual Property, in each case specifically identifying the subject Intellectual Property.
The Company owns and possesses all right, title and interest to, or has the right to use pursuant
to a valid, enforceable license set forth on the Schedule of Exceptions, all Intellectual Property
necessary for the operation of the business as presently conducted and as presently proposed to be
conducted, free and clear of all liens, security interests, governmental or other third-party
rights or other encumbrances and without restrictions as to use or disclosure other than pursuant
to a written license set forth on the Schedule of Exceptions (the “Company Intellectual
Property”). Except as set forth on the attached Schedule of Exceptions, the prior loss or
expiration of any Intellectual Property or related group of Intellectual Property owned or used by
the Company has not had and would not reasonably be expected to have a material adverse effect on
the business, properties, prospects or financial condition of the Company, and, to the Company’s
knowledge, no loss or expiration of any Intellectual Property is threatened, pending or reasonably
foreseeable. The Company has taken all commercially reasonably steps to maintain and protect the
Intellectual Property which it owns and uses. To the Company’s knowledge, the
owners of any Intellectual Property licensed to the Company have taken all commercially
reasonable action to maintain and protect the Intellectual Property which is subject to such
licenses.

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               “Intellectual Property” means all (i) patents, patent applications, patent disclosures
and inventions, (ii) internet domain names, trademarks, service marks, trade dress, trade names,
logos and corporate names and registrations and applications for registration thereof together with
all of the goodwill associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof, (iv) mask works
and registrations and applications for registration thereof, (v) computer software (including, but
not limited to, source code and executable code), data, data bases and documentation thereof, (vi)
trade secrets and other confidential information (including ideas, formulas, compositions,
inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how,
manufacturing and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial
and marketing plans and customer and supplier lists and information), and (vii) copies and tangible
embodiments thereof (in whatever form or medium).

               (b)     To the knowledge of the Company after reasonable inquiry, the Company believes it can
obtain, on commercially reasonable terms, any additional rights necessary for the operation of the
business as presently conducted and as presently proposed to be conducted, and the conduct of such
business by the Company does not, and will not, conflict with or constitute an infringement of the
rights of others.

               (c)     There are no outstanding options, licenses, or agreements of any kind relating to the
Company Intellectual Property, no claims of infringement or claims of misappropriation of the
Intellectual Property rights of others, and there is no known infringement of any valid third party
patent rights or misappropriation of the Intellectual Property rights of others. There are no
grants of rights to any other person to manufacture, license, produce, assemble, market or sell the
Company’s products, and the Company is not bound by or a party to any options, licenses, or
agreements of any kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights, and processes of any other
person or entity.

               (d)     To the Company’s knowledge, the attorneys, inventors, and others involved in prosecuting
the patents or patent applications owned by the Company have not made any misrepresentations to, or
concealed any material fact from, a U.S. or foreign patent office, or concealed any material prior
art reference from the U.S. Patent Office, during the filing, prosecution or revival of the patents
or patent applications owned by the Company in violation of applicable U.S. or foreign patent law.
The Company is not aware of any claim of a third party to a non-joined inventorship interest in any
of the patents or patent applications owned by the Company.

               (e)     (e) Except as specifically set forth on the attached Schedule of Exceptions or in the
course of patent prosecution, (a) there have been no communications made to the Company or its
employees asserting the invalidity, misuse or unenforceability of any of the Intellectual Property
owned or used by the Company, and to the Company’s knowledge, there is no basis for such
assertions, (b) neither the Company nor any of its employees has received any notices of, or has
knowledge of any facts which indicate a likelihood of, any infringement or misappropriation by, or
conflict with, any third party with respect to any Intellectual Property (including any demand or
request that the Company license any rights from a third party), (c) to the Company’s knowledge,
the conduct of the Company’s businesses as presently conducted and as

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proposed to be conducted has not infringed, and will not infringe, any valid third party
patent right, and has not misappropriated or conflicted with, and will not, misappropriate or
conflict with any patented or registered Intellectual Property of third parties, (d) the Company
has not agreed to indemnify any third party for or against any interference, infringement,
misappropriation or other conflict with respect to any Intellectual Property, and (e) to the
Company’s knowledge, the Company Intellectual Property has not been infringed, misappropriated or
conflicted by third parties. The transactions contemplated by this Agreement will not adversely
affect the Company’s right, title or interest in and to the Company Intellectual Property and all
of such Intellectual Property shall be owned or available for use by the Company on identical terms
and conditions immediately after the Closing.

               (f)     All persons or parties who have participated in the creation or development of any of the
Company Intellectual Property have executed and delivered or will execute and deliver to the
Company a valid and enforceable agreement prior to the Closing (i) providing for the non-disclosure
by such person or parties of any confidential information of the Company, and (ii) providing for
the assignment by such person or parties to the Company of all Company Intellectual Property and
any Intellectual Property arising out of such person’s or party’s employment by or contract with
the Company.

               (g)     To the knowledge of the Company after reasonable inquiry, no employee is obligated under
any applicable law or under any contract (including licenses, covenants, or commitments of any
nature) or other agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the performance of the employee’s work for the
Company, use of such employee’s best efforts to promote the interests of the Company, or ability of
the employee to enter into and perform such employee’s obligations under the agreements referenced
in Section 2.17(e), or that would conflict with the Company’s business as presently conducted and
as presently proposed to be conducted; and

               (h)     Neither the execution nor delivery of this Agreement, nor the carrying on of the Company’s
business by the employees of the Company, nor the conduct of the Company’s business as contemplated
at the Closing, will, to the Company’s knowledge after reasonable inquiry, conflict with or result
in a breach of the terms, conditions, or provisions of, or constitute a default under, any
contract, covenant, or instrument under which any of such employees is now obligated. The Company
does not believe it is, or will be, necessary to utilize any inventions of any of its employees (or
people it currently intends to hire) made prior to their employment by the Company.

	 	2.18	 	Employees; Employee Compensation.

         There has not been and currently is no strike, labor dispute or union organization activities
pending or, to the knowledge of the Company, threatened between it and its employees. None of the
Company’s employees belongs to any union or collective bargaining unit. The Company has complied
in all material respects with all applicable state and federal equal opportunity and other laws
related to employment. To the Company’s knowledge, no employee of the Company is or will be in
material violation of any judgment, decree, or order, or any term of any employment contract,
patent disclosure agreement, confidentiality agreement, non-compete agreement, or other contract or
agreement relating to the relationship of any such employee with the Company, or any other party
because of the nature of the business conducted or presently proposed to be conducted by the
Company or to the use by the employee his or her best efforts with respect to such business. The
Company is not aware that any officer or employee, or that any group of employees, intends to

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terminate their employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees and limitations imposed under any applicable federal, state or
local law, the employment of each officer and employee of the Company is terminable at the will of
the Company.

	 	2.19	 	ERISA.

         Except as set forth in the Schedule of Exceptions, the Company does not have any (i) labor
agreement to which it is a party, or by which it is bound, including “employee pension benefit
plans” as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”)(“ERISA Plans”); (ii) employment, profit sharing, deferred
compensation, bonus, pension, retainer, consulting, retirement, welfare or incentive plan or
contract to which it is a party, or by which it is bound; (iii) written or other formal personnel
policies; or (iv) plan or agreement under which “fringe benefits” (including, but not limited to,
vacation plans or programs, sick leave plans or programs, and related benefits) are afforded to its
employees over and above those usual and customary in the Company’s industry (the agreements and
plans referred to in clauses (i) through (iv) being referred to collectively as the “Benefit
Plans”). True and correct copies of all such Benefit Plans have been made available to
Investors. The Internal Revenue Service has issued a favorable determination or opinion letter, or
the Company has time remaining to apply for such favorable determination or opinion letter, with
respect to each ERISA Plan intended to be qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the “Code”), which has not been revoked or modified, and the Company has
no knowledge that anything has occurred or any change or amendment has been made which would
adversely effect the qualification of any ERISA Plan under Section 401 of the Code or any of the
trusts maintained pursuant thereto under Section 501 of the Code. All contributions required by
law to have been made under each ERISA Plan prior to the Closing Date have been made or accrued.
No event of the type set forth in Section 4043(b) of ERISA has occurred and is continuing with
respect to any ERISA Plan other than as may result from the transactions contemplated hereby.
There are no material claims, investigations or lawsuits which had been asserted or instituted
against the assets of any of the trusts under any Benefit Plan, and no reasonable basis for any
such claim or lawsuit exists. Each ERISA Plan has been maintained, operated and administered in
all material respects, in accordance with its terms and all provisions of ERISA (including rules
and regulations thereunder) and other applicable laws, and each Benefit Plan has been maintained,
operated and administered in all material respects, in accordance with its terms.

	 	2.20	 	Proprietary Information and Inventions Agreements.

         Each employee of the Company has executed a Proprietary Information and Inventions Agreement
in the form delivered to counsel for the Investors. No such employee has excluded works or
inventions made prior to his or her employment with the Company on the Proprietary Information and
Inventions Agreement. Each consultant and advisor of the Company has executed a consulting
agreement in the forms delivered to counsel for the Investors.

	 	2.21	 	Tax Returns, Payments, and Elections.

         The Company has timely filed all tax returns and reports (federal, state and local) as
required by applicable law. These returns and reports are true and correct in all material
respects. The Company has paid all taxes and other assessments due. The Company has not elected
pursuant to the Code, to be treated as an S corporation or a collapsible corporation pursuant to
Section 1362(a) or

10

 

Section 341(f) of the Code. The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. The Company has never had any tax deficiency
proposed or assessed against it and has not executed any waiver of any statute of limitations on
the assessment or collection of any tax or governmental charge. None of the Company’s federal
income tax returns and none of its state income or franchise tax or sales or use tax returns has
ever been audited by governmental authorities. Since the date of the Company’s incorporation, the
Company has made adequate provisions on its books of account for all taxes, assessments, and
governmental charges with respect to its business, properties, and operations for such period. The
Company has withheld or collected from each payment made to each of its employees, the amount of
all taxes, including, but not limited to, federal income taxes, Federal Insurance Contribution Act
taxes and Federal Unemployment Tax Act taxes required to be withheld or collected therefrom, and
has paid the same to the proper tax receiving officers or authorized depositaries.

	 	2.22	 	Insurance.

         The Company has insurance policies with coverage customary for companies that are similarly
situated to the Company.

	 	2.23	 	Environmental and Safety Laws.

         The Company has not, contrary to applicable statutes and regulations, stored or disposed of,
on, under or about any real property owned or leased by the Company, hazardous materials, and to
the knowledge of the Company, no other person has stored or disposed of hazardous materials on,
under or about any real property owned or leased by the Company. As used in this Agreement, the
term “hazardous materials” shall mean substances defined as “hazardous substances” or “hazardous
materials” or “toxic substances” in the Comprehensive Environmental Response and Compensation
Liability Act of 1980, as amended, 42 U.S.C., Section 9601, et seq.; The Hazardous Materials
Transportation Act, 49 U.S.C., Section 1801, et seq.; The Resource Conservation Recovery Act, 42
U.S.C., Section 6901, et seq.; and those substances defined as hazardous wastes or hazardous
substances in any applicable California statutes or codes and any regulations or publication
promulgated pursuant to any of said laws or regulations.

	 	2.24	 	Minute Books.

         The copy of the minute books of the Company provided to counsel for the Investors contains
complete minutes of all meetings of directors and stockholders and all actions by written consent
without a meeting by the directors and stockholders since the date of incorporation and accurately
reflects all actions by the directors (and any committee of directors) and stockholders with
respect to all transactions referred to in such minutes in all material respects.

	 	2.25	 	Margin Regulations; Use of Proceeds.

         The Company neither owns nor intends to acquire any “margin stock” as defined in Regulation G
of the Board of Governors of the Federal Reserve System (12 CFR 207).

11

 

	 	2.26	 	Disclosure.

         No representation or warranty made by the Company in this Agreement, in any written
certificate or statement required by this Agreement to be furnished to the Investors or their
counsel pursuant to this Agreement, including the Financial Statements, in the Business Plan dated
July 6, 2005 delivered to the Investors by the Company, or in the slide presentations made by the
Company to the Investors on July 20, 2005 (when read together) contains any untrue statement of
material fact or taken together with all information furnished to Investors or their
representatives, omits to state a material fact necessary to make the statements made herein or
therein, in light of the circumstances under which they were made, not misleading. The Company
believes it has provided the Investors with all information that it considers reasonably necessary
or reasonably appropriate for the Investors’ decision to purchase the Shares.

	 	2.27	 	Brokers and Finders.

         The Company has not retained and does not have any liability or obligation to pay any fees or
commissions to any investment banker, broker, or finder in connection with the transactions
contemplated by this Agreement.

	 	2.28	 	Regulatory Matters.

         All regulatory filings made with respect to the Company’s products have been complete and
correct and have complied in all material respects with all applicable laws and regulations. All
clinical trials of investigational products are being conducted by the Company according to the
applicable laws and regulations along with appropriate monitoring of clinical investigation trial
sites for their compliance. The Company has disclosed to the Investors all regulatory filings and
all material communications between representatives of the Company and any regulatory agency.

	 	2.29	 	Qualified Small Business Stock.

         As of and immediately following the Closing, the Shares will meet each of the requirements for
qualification as “qualified small business stock” set forth in Sections 1202(c)(1) and (3)(B) of
the Code, including without limitation the following: (i) the Company will be a domestic C
corporation, (ii) the Company will not have made any purchases of its own stock described in Code
Section 1202(c)(3)(B) during the one-year period preceding the Closing (and the Company does not
intend to make any such repurchases during the one-year period subsequent to the Closing), and
(iii) the Company’s (and any predecessor’s) aggregate gross assets, as defined by Code Section
1202(d)(2), at no time from the date of incorporation of the Company and through the Closing have
exceeded or will exceed $50 million, taking into account the assets of any corporations required to
be aggregated with the Company in accordance with Code Section 1202(d)(3). As of the Closing, at
least 80% (by value) of the assets of the Company are used by it in the active conduct of one or
more qualified trades or businesses, as defined by Code Section 1202(e)(3), and the Company is an
eligible corporation, as defined by Code Section 1202(e)(4).

	 	2.30	 	Financial Statements.

         The Company has made available to each Investor or an agent thereof its audited financial
statements for the fiscal years ended December 31, 2003 and 2004 and its unaudited financial
statements for the six month period ended June 30, 2005 (the “Financial Statements”). The
Financial

12

 

Statements are complete and correct in all material respects and have been prepared in
accordance with generally accepted accounting principles (“GAAP”) applied on a consistent
basis throughout the periods indicated, except that the unaudited Financial Statements do not
contain any footnotes required by GAAP. The Financial Statements fairly present the financial
condition and operating results of the Company as of the dates and during the periods indicated
therein in accordance with GAAP as in effect for such periods. Except as disclosed in the
Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other
person or entity. The Company maintains and will continue to maintain a standard system of
accounting established and administered in accordance with GAAP.

         Except as set forth in the Financial Statements, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business
subsequent to June 30, 2005, and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under GAAP to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not material to the
financial condition of the Company.

	 	2.31	 	83(b) Elections.

         To the Company’s knowledge, all individuals who have purchased shares of the Company’s Common
Stock under agreements providing for the vesting of such shares have timely filed elections under
Section 83(b) of the Code and analogous provisions of applicable state tax laws.

	3.	 	REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.

         Each Investor hereby represents and warrants to the Company that:

	 	3.1	 	Authorization.

         Such Investor has full power and authority to enter into the Transaction Documents, and any
other agreement to which such Investor is a party the execution and delivery of which is
contemplated hereby and that each such agreement, when executed and delivered, will constitute a
valid and legally binding obligation of such Investor enforceable against such Investor in
accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent that
the indemnification provisions contained in the Investors’ Rights Agreement may be limited by
applicable laws or public policy considerations.

	 	3.2	 	Purchase Entirely for Own Account.

         This Agreement is made with such Investor in reliance upon such Investor’s representation to
the Company, which by its execution of this Agreement it hereby confirms, that the Securities, will
be acquired for investment for its own account, not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof. Except for transfers to affiliated funds under
common control (a) such Investor has no present intention of selling, granting any participation
in, or otherwise distributing the same and (b) by executing this Agreement, such Investor further
represents that it does not have any contract, undertaking, agreement or arrangement with any
person to sell,
transfer or grant participations to such person or to any third person, with respect to any of
the Securities.

13

 

	 	3.3	 	Reliance Upon Investors’ Representations.

         Such Investor understands that the Shares are not, and any Conversion Stock at the time of
issuance may not be, registered under the Securities Act because of the fact that the sale provided
for in this Agreement and the issuance of the Securities hereunder are exempt from registration
under the Securities Act pursuant to an exemption from the registration provisions thereof, and
that the Company’s reliance on such exemption is predicated on the bona fide nature of the
investment intent and the accuracy of the representations of the Investors set forth herein.

	 	3.4	 	Receipt of Information.

         Such Investor believes it has received all the information that it considers necessary or
appropriate for deciding whether to purchase the Shares. Such Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company regarding the terms
and conditions of the offering of the Shares and the business, properties, prospects and financial
condition of the Company and to obtain additional information (to the extent the Company possessed
such information or could acquire it without unreasonable effort or expense) necessary to verify
the accuracy of any information furnished to such Investor or to which it had access. The
foregoing, however, does not limit or modify the representations and warranties of the Company in
Section 2 of this Agreement or the right of the Investors to rely thereon.

	 	3.5	 	Investment Experience; Economic Risk.

         Such Investor represents that it is experienced in evaluating and investing in private
placement transactions of securities of companies in a similar stage of development as the Company
and acknowledges that such Investor is able to fend for itself, can bear the economic risk of its
investment, and has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the investment in the Shares. Such Investor
understands that the purchase of the Shares hereunder is a speculative investment that involves a
high degree of risk of such Investor’s entire investment therein. Such Investor is able to bear
the economic risks of its investment in the Shares for an indefinite period of time, including the
risks of a complete loss of such Investor’s investment in such securities. Such Investor also
represents it has not been organized for the purpose of acquiring the Shares.

	 	3.6	 	Accredited Investor.

         Such Investor further represents to the Company that it is an Accredited Investor as defined
in Rule 501(a) promulgated under the Securities Act.

	 	3.7	 	Restricted Securities.

         Such Investor understands that the Securities may not be sold, transferred, or otherwise
disposed of without registration under the Securities Act or an exemption therefrom, and that in
the absence of an effective registration statement covering the Securities, or an available
exemption from registration under the Securities Act, the Securities must be held indefinitely. In
particular, such Investor is aware that the Securities may not be sold pursuant to Rule 144
promulgated under the

14

 

Securities Act unless all of the conditions of that Rule are met. Among the conditions for
use of Rule 144 may be the availability of current information to the public about the Company.
Such information is not now available and the Company has no present plans to make such information
available.

	 	3.8	 	Legends.

         Such Investor understands that, to the extent applicable, each certificate or other document
evidencing any of the Securities shall be endorsed with the legends substantially in the form set
forth below:

               (a) The following legend under the Securities Act:

“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY
AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”

               (b) Any legend imposed or required by the Company’s bylaws or applicable state securities
laws.

	4.	 	CONDITIONS TO INVESTORS’ OBLIGATIONS AT CLOSING.

         The obligations of each Investor under subparagraph 1.1(b) of this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions:

	 	4.1	 	Representations and Warranties.

         The representations and warranties of the Company contained in Section 2 shall be true on and
as of the Closing with the same effect as though such representations and warranties had been made
on and as of the date of the Closing.

	 	4.2	 	Performance.

         The Company shall have performed and complied with all agreements, obligations, and conditions
contained in this Agreement that are required to be performed or complied with by it on or before
the Closing.

	 	4.3	 	Deliverables.

               (a)     Compliance Certificate. The President of the Company shall deliver to the Investors at
the Closing a certificate dated as of the Closing, satisfactory in form and substance to counsel
for the Investors certifying that the conditions specified in paragraphs 4.1 and 4.2 have been
fulfilled.

15

 

               (b)     Good Standing Certificates. The Company shall deliver to the Investors at the Closing a
certificate of the Secretary of State of the States of Delaware and North Carolina, dated as of a
date within five days of the date of the Closing, with respect to the good standing of the Company.

               (c)     Secretary’s Certificate. The Secretary of the Company shall deliver to the Investors at
the Closing a certificate dated as of the Closing, satisfactory in form and substance to counsel
for the Investors, attaching and certifying to the truth, correctness, and effectiveness of (1) the
Restated Charter, (2) the Bylaws and (3) the board and stockholder resolutions adopted in
connection with the transactions contemplated by this Agreement.

               (d)     Legal Opinion. The Investors shall have received from Stradling Yocca Carlson & Rauth,
counsel for the Company, an opinion, dated as of the Closing, in the form attached hereto as
Exhibit G.

	 	4.4	 	Qualifications.

         All authorizations, approvals, or permits, if any, of any governmental authority or regulatory
body of the United States or of any state that are required in connection with the lawful issuance
and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the
Closing.

	 	4.5	 	Proceedings and Documents.

         All corporate and other proceedings in connection with the transactions contemplated at the
Closing and all documents incident thereto shall be reasonably satisfactory in form and substance
to counsel for the Investors, who shall have received all such counterpart original and certified
or other copies of such documents as such counsel may reasonably request.

	 	4.6	 	Investors’ Rights Agreement.

         The Company and the Investors (as defined in the Investors’ Rights Agreement) shall have
executed and delivered the Investors’ Rights Agreement.

	 	4.7	 	Right of First Refusal and Co-Sale Agreement.

         The Company, Founders, Investors, and Major Holders (each as defined in the Co-Sale Agreement)
shall have executed and delivered the Co-Sale Agreement.

	 	4.8	 	Management Rights Letter.

         The Company shall have executed and delivered the Management Rights Letter in the form
attached hereto as Exhibit H.

	 	4.9	 	Indemnification Agreement.

         The Company shall have entered into its standard form of directors’ indemnification agreement
with James Shapiro.

16

 

	 	4.10	 	Board Observation Rights Letter.

         The Company shall have entered into a board observation rights letter with Cutlass Capital,
L.P.

	5.	 	CONDITIONS TO THE COMPANY’S OBLIGATIONS AT CLOSING.

     The obligations of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by the Investors
purchasing Shares at such Closing.

	 	5.1	 	Representations and Warranties.

         The representations and warranties of each Investor contained in Section 3 shall be true on
and as of the Closing, with the same effect as though such representations and warranties had been
made on and as of the date of such Closing.

	 	5.2	 	Qualifications.

         All authorizations, approvals, or permits, if any, of any governmental authority or regulatory
body of the United States or of any state that are required in connection with the lawful issuance
and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the
Closing.

	 	5.3	 	Purchase of Shares.

         The Company shall have received payment for all of the Shares being sold to such Investor
pursuant to this Agreement.

	6.	 	MISCELLANEOUS.

	 	6.1	 	Entire Agreement.

         This Agreement and the documents referred to herein constitute the entire agreement among the
parties and no party shall be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or therein.

	 	6.2	 	Survival of Warranties.

         The warranties and representations of the Company and the Investors contained in or made
pursuant to this Agreement shall survive the execution and delivery of this Agreement and the
Closing.

	 	6.3	 	Successors and Assigns.

         Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective successors and assigns of the parties (including
permitted transferees of any of the Securities). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.

17

 

	 	6.4	 	Governing Law.

         This Agreement shall be governed by and construed under the laws of the State of Delaware as
applied to agreements among Delaware residents entered into and to be performed entirely within
Delaware.

	 	6.5	 	Counterparts.

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

	 	6.6	 	Titles and Subtitles.

         The titles and subtitles used in this Agreement are used for convenience only and are not to
be considered in construing or interpreting this Agreement.

	 	6.7	 	Notices.

         Unless otherwise provided, all notices and other communications required or permitted under
this Agreement shall be in writing and shall be mailed by United States first-class mail, postage
prepaid, sent by facsimile or delivered personally by hand or by a nationally recognized courier
addressed to the party to be notified at the address or facsimile number indicated for such person
on the signature page hereof, or at such other address or facsimile number as such party may
designate advance written notice to the other parties hereto. All such notices and other written
communications shall be effective on the fifth business day after the date of mailing, or on the
date of confirmed facsimile transfer or delivery.

	 	6.8	 	Finder’s Fees.

         Each party represents that it neither is nor will be obligated for any finder’s fee or
commission in connection with this transaction. Each Investor agrees to indemnify and to hold
harmless the Company from any liability for any commission or compensation in the nature of a
finder’s fee (and the cost and expenses of defending against such liability or asserted liability)
for which such Investor or any of its officers, partners, employees, or representatives is
responsible. The Company agrees to indemnify and hold harmless each Investor from any liability
for any commission or compensation in the nature of a finder’s fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or any of its
officers, employees, or representatives is responsible.

	 	6.9	 	Expenses.

         The Company and each Investor shall pay all costs and expenses that they incur with respect to
the negotiation, execution, delivery, and performance of this Agreement and the transactions
contemplated hereby; provided, however, that the Company shall pay the reasonable
fees and expenses of counsel for the Investors, in an aggregate amount not to exceed $50,000.

	 	6.10	 	Attorneys’ Fees.

         If any action at law or in equity is necessary to enforce or interpret the terms of any of the
Transaction Documents, any ancillary agreement or the Restated Charter, the prevailing party shall
be entitled to reasonable attorneys’ fees, costs, and disbursements in addition to any other
relief to which such party may be entitled.

18

 

	 	6.11	 	Amendments and Waivers.

         Any term of this Agreement may be amended and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively or prospectively),
only with the written consent of the Company and the holders of more than fifty percent (50%) of
the Shares (including shares of the Conversion Stock); provided that if any amendment or
waiver which affects any Investor or group of similarly situated Investors disproportionately
relative to the other Investors, then such amendment or waiver shall also require the written
consent of the holders of a majority of the Shares (including shares of the Conversion Stock) held
by such Investors so affected; and provided further that if any such amendment or
waiver is to a provision in this Agreement that requires a specific vote or approval to take an
action thereunder or to take an action with respect to the matters described therein, such
amendment or waiver shall not be effective unless such vote or approval is obtained with respect to
such amendment or waiver. Any amendment or waiver effected in accordance with this paragraph shall
be binding upon each holder of any Securities purchased under this Agreement at the time
outstanding, each future holder of all such Securities, and the Company.

	 	6.12	 	Severability.

         If one or more provisions of this Agreement are held to be unenforceable under applicable law,
such provision shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in accordance with its
terms.

[signature page follows]

19

 

     IN WITNESS WHEREOF, the parties have executed this Series C Preferred Stock Purchase Agreement
as of the date first written above.

	 	 	 	 	 
	COMPANY: 	TranS1 Inc. 

 	 
	Address:	By:  	                                 /s/ Richard Randall
 	 
	411 Landmark Drive	 	                              Richard Randall, President and            	 
	Wilmington, NC 28412	 	                            Chief Executive Officer 	 
	 

INVESTORS:

(see attached signature pages)

[Company Signature Page to Series C Preferred Stock Purchase Agreement]

20

 

     IN WITNESS WHEREOF, the undersigned Investor has executed this Series C Preferred Stock
Purchase Agreement as of the date first written above.

	 	 	 
	INVESTOR:
	 	 
	 

	 	 
	 

	 	(print name of Investor, exactly as it should appear on the share
certificate)

	 	 	 	 	 
	 	 	 
	 	By:  	
 	 
	 	 	(signature of authorized signatory and title, if any)	 
	 

[Investor Signature Page to Series C Preferred Stock Purchase Agreement]

21

 

EXHIBIT A

SCHEDULE OF INVESTORS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Name
	 	 	Series C Shares
	 	 	Amount Invested
	 
	 	Thomas Weisel

Healthcare Venture

Partners, L.P.

	 	 	 	1,060,606	 	 	 	$	6,999,999.60	 	 
	 	Advanced Technology

Ventures VII, L.P.

	 	 	 	995,521	 	 	 	$	6,570,438.60	 	 
	 	Advanced Technology

Ventures VII (B),

L.P.

	 	 	 	39,950	 	 	 	$	263,670.00	 	 
	 	Advanced Technology

Ventures VII (C),

L.P.

	 	 	 	19,203	 	 	 	$	126,739.80	 	 
	 	ATV Entrepreneurs

VII, L.P.

	 	 	 	5,932	 	 	 	$	39,151.20	 	 
	 	Delphi Ventures VI,

L.P.

	 	 	 	750,075	 	 	 	$	4,950,495.00	 	 
	 	Delphi BioInvestments VI,

L.P.

	 	 	 	7,501	 	 	 	$	49,506.60	 	 
	 	Cutlass Capital, L.P.

	 	 	 	399,762	 	 	 	$	2,638,429.20	 	 
	 	Cutlass Capital

Principals Fund,

L.L.C.

	 	 	 	28,719	 	 	 	$	189,545.40	 	 
	 	Cutlass Capital

Affiliates Fund,

L.P.

	 	 	 	26,065	 	 	 	$	172,029.00	 	 
	 	Sapient Capital, L.P.

	 	 	 	272,500	 	 	 	$	1,798,500.00	 	 
	 	Paul E. Colombo

	 	 	 	15,000	 	 	 	$	99,000.00	 	 
	 	C-Two, L.L.C.

	 	 	 	31,000	 	 	 	$	204,600.00	 	 
	 

A-1

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Name

	 	 	Series C Shares
	 	 	Amount Invested
	 
	 	Bobby I. Griffin

	 	 	 	31,000	 	 	 	$	204,600.00	 	 
	 	Imagine Capital

Partners VI

	 	 	 	2,500	 	 	 	$	16,500.00	 	 
	 	Prime Petroleum

Profit Sharing Trust

	 	 	 	11,000	 	 	 	$	72,600.00	 	 
	 	Noel P. Rahn

	 	 	 	4,500	 	 	 	$	29,700.00	 	 
	 	Steve Ramee, M.D.

	 	 	 	4,500	 	 	 	$	29,700.00	 	 
	 	Rancho Partners III

	 	 	 	48,000	 	 	 	$	316,800.00	 	 
	 	GDN Holdings, LLC

	 	 	 	24,000	 	 	 	$	158,400.00	 	 
	 	Sands Partnership

No. 1 Money Purchase

Pension Plan and

Trust

	 	 	 	9,000	 	 	 	$	59,400.00	 	 
	 	Schloss Bros., L.P.

	 	 	 	4,500	 	 	 	$	29,700.00	 	 
	 	William A. Schreyer

	 	 	 	7,500	 	 	 	$	49,500.00	 	 
	 	James Barrile

	 	 	 	30,300	 	 	 	$	199,980.00	 	 
	 	Ricardo J. Simmons

	 	 	 	30,300	 	 	 	$	199,980.00	 	 
	 	Luiz Pimenta, M.D.

	 	 	 	7,575	 	 	 	$	49,995.00	 	 
	 

A-2

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Name

	 	 	Series C Shares
	 	 	Amount Invested
	 
	 	Sasso Brothers

Enterprises, LLC

	 	 	 	7,575	 	 	 	$	49,995.00	 	 
	 	MLPFS Custodian for

Scott Kitchel IRA

	 	 	 	7,575	 	 	 	$	49,995.00	 	 
	 	Madison Venture

Partners, LLC

	 	 	 	 6,220	 	 	 	$	41,052.00	 	 
	 	Total

	 	 	 	3,887,879	 	 	 	$	25,660,001.40	 	 
	 

A-3

 

EXHIBIT B

FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

B-1

 

EXHIBIT C

SCHEDULE OF EXCEPTIONS

C-1

 

EXHIBIT D

THIRD AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT

D-1

 

EXHIBIT E

THIRD AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT

E-1

 

EXHIBIT F

COMMON STOCKHOLDERS

	 	 	 	 	 	 	 	 
	 	Common Stockholders

	 	 	Number of Shares of Common Stock Held
	 
	 	Andrew Cragg, M.D.

	 	 	 	973,650	 	 
	 	Wallace Partners, L.P.

	 	 	 	720,000	 	 
	 	Bruce W. Feuchter and Karen O.
Feuchter, as Co-Trustees of the Feuchter Family Trust, U/D/T March 20, 2003

	 	 	 	180,000	 	 
	 	Jonathan Kagan & Gail Brottman-Kagan

	 	 	 	20,000	 	 
	 	Michael O’Tousa

	 	 	 	18,056	 	 
	 	J. Costello Associates, Inc.

	 	 	 	12,000	 	 
	 	J.J. Donohue

	 	 	 	17,500	 	 
	 	Richard Randall

	 	 	 	381,500	 	 
	 	L. Nelson Hopkins, M.D.

	 	 	 	40,000	 	 
	 	W. Allen Putnam

	 	 	 	24,000	 	 
	 	TOTAL

	 	 	 	2,386,706	 	 
	 

SERIES A PREFERRED STOCKHOLDERS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Name

	 	 	Series A Preferred Shares
	 	 	Amount
	 
	 	Andrew Cragg, M.D.

	 	 	 	125,000	 	 	 	$	100,000	 	 
	 	George B. Wallace and
Jane F. Wallace, as Co-Trustees of the Wallace Family
Trust, U/D/T March 26, 2002

	 	 	 	62,500	 	 	 	$	50,000	 	 
	 	Bruce W. Feuchter and
Karen O. Feuchter, as Co-Trustees of the Feuchter Family Trust,
U/D/T March 20, 2003

	 	 	 	37,500	 	 	 	$	30,000	 	 
	 	Gilbert F. Jemmott and
Deborah E. Love Jemmott, as Trustees of the Twinhancements Inc.
Defined Contribution Plan

	 	 	 	6,250	 	 	 	$	5,000	 	 
	 	Jonathan Kagan and Gail
Brottman-Kagan

	 	 	 	12,500	 	 	 	$	10,000	 	 
	 	Michael O’Tousa

	 	 	 	12,500	 	 	 	$	10,000	 	 
	 	Flavio Castaneda, Trustee,
Flavio Castaneda Living Trust, Dated 11/4/98

	 	 	 	125,000	 	 	 	$	100,000	 	 
	 	Niagara Gorge Partners, LLC

	 	 	 	31,250	 	 	 	$	25,000	 	 
	 	Sapient Capital, L.P.

	 	 	 	437,500	 	 	 	$	350,000	 	 
	 	William N. Starling, Jr.
and Dana Gregory Starling

	 	 	 	93,750	 	 	 	$	75,000	 	 
	 	Michael J. Strauss and
Marguerite Strauss

	 	 	 	62,500	 	 	 	$	50,000	 	 
	 	Navarro Holdings, LLC

	 	 	 	50,000	 	 	 	$	40,000	 	 
	 	Michael K. Brawer, Michael
K. Brawer, M.D., MPP Keough

	 	 	 	31,250	 	 	 	$	25,000	 	 
	 	Karen L. Davis 2003 Trust
Dated December 9, 2003

	 	 	 	31,250	 	 	 	$	25,000	 	 
	 	Cass Pinkerton Estate

	 	 	 	31,250	 	 	 	$	25,000	 	 
	 	Tony Smith

	 	 	 	12,500	 	 	 	$	10,000	 	 
	 	Paul Buckman

	 	 	 	31,250	 	 	 	$	25,000	 	 
	 	Scott Wong

	 	 	 	12,500	 	 	 	$	10,000	 	 
	 	Steven Almany, M.D., as
Trustee for the Steven L. Almany Trust, Dated 12/30/96

	 	 	 	18,750	 	 	 	$	15,000	 	 
	 	John Rush

	 	 	 	12,500	 	 	 	$	10,000	 	 
	 	Kevin T. Campion

	 	 	 	12,500	 	 	 	$	10,000	 	 
	 	TOTAL

	 	 	 	1,250,000	 	 	 	$	1,000,000	 	 
	 

F-1

 

SERIES AA PREFERRED STOCKHOLDERS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Name

	 	 	Series AA Shares
	 	 	Amount Invested
	 
	 	Sapient Capital, L.P.

	 	 	 	600,000	 	 	 	$	750,000	 	 
	 	Cutlass Capital, L.P.

	 	 	 	372,962	 	 	 	 	466,202.50	 	 
	 	Cutlass Capital Principals
Fund, L.L.C.

	 	 	 	27,038	 	 	 	 	33,797.50	 	 
	 	Andrew Cragg, M.D.

	 	 	 	100,000	 	 	 	 	125,000	 	 
	 	George B. Wallace and Jane
F. Wallace, as Co-Trustees of the Wallace Family
Trust, U/D/T March 26, 2002

	 	 	 	100,000	 	 	 	 	125,000	 	 
	 	Flavio Castaneda Living
Trust, Flavio Castaneda MD, Trustee

	 	 	 	80,000	 	 	 	 	100,000	 	 
	 	Niagara Gorge Partners, LLC

	 	 	 	60,000	 	 	 	 	75,000	 	 
	 	Bruce W. Feuchter and
Karen O. Feuchter, as Co-Trustees of the
Feuchter Family Trust, U/D/T March 20, 2003

	 	 	 	40,000	 	 	 	 	50,000	 	 
	 	Gerard von Hoffman

	 	 	 	20,000	 	 	 	 	25,000	 	 
	 	TOTAL

	 	 	 	1,400,000	 	 	 	$	1,750,000	 	 
	 

F-2

 

SERIES B PREFERRED STOCKHOLDERS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Name

	 	 	Series B Shares
	 	 	Amount Invested
	 
	 	Advanced Technology Ventures
VII, L.P.

	 	 	 	1,701,488	 	 	 	$	3,743,273.60	 	 
	 	Advanced Technology Ventures
VII (B), L.P.

	 	 	 	68,280	 	 	 	$	150,216.00	 	 
	 	Advanced Technology Ventures
VII (C), L.P.

	 	 	 	32,820	 	 	 	$	72,204.00	 	 
	 	ATV Entrepreneurs VII, L.P.

	 	 	 	10,139	 	 	 	$	22,305.80	 	 
	 	ATV Alliance 2002, L.P.

	 	 	 	5,455	 	 	 	$	12,001.00	 	 
	 	Delphi Ventures VI, L.P.

	 	 	 	1,624,662	 	 	 	$	3,574,256.40	 	 
	 	Delphi BioInvestments VI, L.P.

	 	 	 	16,247	 	 	 	$	35,743.40	 	 
	 	Cutlass Capital, L.P.

	 	 	 	1,199,285	 	 	 	$	2,638,427.00	 	 
	 	Cutlass Capital Principals
Fund, LLC

	 	 	 	86,157	 	 	 	$	189,545.40	 	 
	 	Cutlass Capital Affiliates
Fund, L.P.

	 	 	 	78,194	 	 	 	$	172,026.80	 	 
	 	Sapient Capital, L.P.

	 	 	 	454,545	 	 	 	$	999,999.00	 	 
	 	Bruce W. Feuchter and Karen
O. Feuchter, as Co-Trustees of the Feuchter Family Trust, U/D/T March 20, 2003

	 	 	 	18,182	 	 	 	$	40,000.40	 	 
	 	Gerard von Hoffmann

	 	 	 	11,364	 	 	 	$	25,000.80	 	 
	 	Andrew Cragg, M.D.

	 	 	 	22,727	 	 	 	$	49,999.40	 	 
	 	NG Cap Partners E, LLC

	 	 	 	56,818	 	 	 	$	124,999.60	 	 
	 	Emily Breese, Trustee of the
Brawer Irrevocable Family
Trust

	 	 	 	4,545	 	 	 	$	9,999	 	 
	 	Michael K. Brawer, M.D.
MPP Keogh

	 	 	 	18,182	 	 	 	$	40,000.40	 	 
	 	Flavio Castaneda, Trustee of
the Flavio Castaneda Living Trust dated 11/04/98

	 	 	 	22,727	 	 	 	$	49,999.40	 	 
	 	William N. Starling, Jr.
Dana Gregory Starling

	 	 	 	11,364	 	 	 	$	25,000.80	 	 
	 	Paul Buckman

	 	 	 	11,364	 	 	 	$	25,000.80	 	 
	 	Total

	 	 	 	5,454,545	 	 	 	$	11,999,999	 	 
	 

F-3

 

EXHIBIT G

OPINION OF COMPANY COUNSEL

G-1exv10w2

 

Exhibit 10.2

PATTERSON-UTI ENERGY, INC.

CHANGE IN CONTROL AGREEMENT

          This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the “Company”),
and Douglas J. Wall (the “Employee”) is effective as of
August 31, 2007 (the “Effective Date”).
Certain capitalized terms used herein are defined in Section 22.

W I T N E S S E T H:

          Whereas, the Company considers it to be in the best interests of its stockholders to
encourage the continued employment of certain key employees of the Company and its Wholly Owned
Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the
Company (as that phrase is defined in Section 2);

          Whereas, the Employee is a key employee of the Company and/or one or more of its Wholly
Owned Entities;

          Whereas, the Company believes that the possibility of the occurrence of a Change in
Control of the Company may result in the termination of the Employee’s employment by the Company or
in the distraction of the Employee from the performance of his duties to the Company, in either
case to the detriment of the Company and its stockholders;

          Whereas, the Company recognizes that the Employee could suffer adverse financial and
professional consequences if a Change in Control of the Company were to occur; and

          Whereas, the Company wishes to enter into this Agreement to protect the Employee if a
Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ
of the Company and not to be distracted from the performance of his duties to the Company by the
possibility of a Change in Control of the Company;

          Now, Therefore, the parties agree as follows:

     Section 1. Other Employment Arrangements.

     (a) This Agreement does not affect the Employee’s existing or future employment
arrangements with the Company unless a Change in Control of the Company shall have occurred
before the expiration of the term of this Agreement. The Employee’s employment with the
Company shall continue to be governed by the Employee’s existing or future employment
agreements with the Company, if any, or, in the absence of any employment agreement, shall
continue to be at the will of the Board of Directors or, if the Employee is not an officer
of the Company at the time of the termination of the Employee’s employment with the Company,
the will of the Chief Executive Officer of the Company, except that if (i) a Change in
Control of the Company shall have occurred before the expiration of the term of this
Agreement, and (ii) the Employee’s employment with the Company is terminated (whether by the
Employee or

-1-

 

the Company or automatically as provided in Section 3) after the occurrence of that
Change in Control of the Company, then the Employee shall be entitled to receive certain
benefits as provided in this Agreement.

     (b) Notwithstanding anything contained in this Agreement to the contrary, if following
the commencement of any discussion with a third person that ultimately results in a written
agreement or agreements to which the Company is a party and which, if the transactions
contemplated by such agreement or agreements were consummated, would result in a Change in
Control of the Company, the Employee’s employment with the Company is terminated by the
Company for any reason other than as a result of the occurrence of an event described in any
of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change
in Control of the Company shall be deemed to have occurred on the date immediately prior to
the date of such termination, removal, or reduction regardless of whether any Change in
Control of the Company actually occurs.

     (c) Nothing in this Agreement shall prevent or limit the Employee’s continuing or
future participation in any plan, program, policy or practice of or provided by the Company
or any of its Affiliates and for which the Employee may qualify, nor shall anything herein
limit or otherwise affect such rights as the Employee may have under any contract or
agreement with the Company or any of its Affiliates. Amounts which are vested benefits or
which the Employee is otherwise entitled to receive under any plan, program, policy or
practice of or provided by, or any contract or agreement with, the Company or any of its
Affiliates at or subsequent to the date of termination of the Employee’s employment with the
Company shall be payable or otherwise provided in accordance with such plan, program, policy
or practice or contract or agreement except as explicitly modified by this Agreement.

     Section 2. Change in Control of the Company. For purposes of this Agreement, a “Change in
Control of the Company” shall mean the occurrence of any of the following after the Effective Date:

     (a) The acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) (a “Covered Person”) of beneficial ownership
(within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of
either (i) the then outstanding shares of the common stock of the Company (the “Outstanding
Company Common Stock”), or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of directors (the
“Outstanding Company Voting Securities”); provided, however, that for purposes of this
subsection (a) of this Section 2, the following acquisitions shall not constitute a Change
in Control of the Company: (i) any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any entity controlled by the Company, or
(iv) any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or

-2-

 

     (b) Individuals who, as of the Effective Date, constitute the Board of Directors (the
“Incumbent Board”) cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by the Company’s stockholders, was
approved by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Covered Person other than the Board; or

     (c) Consummation of (xx) a reorganization, merger or consolidation or sale of the
Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all
of the assets of the Company (a “Business Combination”), in each case, unless, following
such Business Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such Business Combination
beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or substantially
all of the Company’s assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership immediately prior to such Business
Combination of the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan
(or related trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting securities of such
corporation, except to the extent that such ownership existed prior to the Business
Combination, and (iii) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action of the Board of
Directors, providing for such Business Combination.

     Section 3. Term of this Agreement. The term of this Agreement shall begin on the Effective
Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall
expire on the first to occur of:

     (i) the Employee’s death, the Employee’s Disability or the Employee’s
Retirement, which events shall also be deemed automatically to terminate the
Employee’s employment by the Company;

-3-

 

     (ii) the termination by the Employee or the Company of the Employee’s
employment by the Company; or

     (iii) the end of the last day (the “Expiration Date”) of:

     (x) the period beginning on the Effective Date and ending on January
29, 2008 (or any period for which the term of this Agreement shall have
been automatically extended pursuant to the second sentence of this Section
3) if no Change in Control of the Company shall have occurred during that
period (or any period for which the term of this Agreement shall have been
automatically extended pursuant to the second sentence of this Section 3);
or

     (y) if one or more Changes in Control of the Company shall have
occurred during the period beginning on the Effective Date and ending on
January 29, 2008 (or any period for which the term of this Agreement shall
have been automatically extended pursuant to the second sentence of this
Section 3), the two-year period beginning on the date on which the last
Change in Control of the Company occurred.

If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of
the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the
Company shall not have given notice to the Employee at least ninety (90) days before the Expiration
Date that the term of this Agreement will expire on the Expiration Date, then the term of this
Agreement shall be automatically extended for successive one-year periods (the first such period to
begin on the day immediately following the Expiration Date) unless the Company shall have given
notice to the Employee at least ninety (90) days before the end of any one-year period for which
the term of this Agreement shall have been automatically extended that such term will expire at the
end of that one-year period. The expiration of the term of this Agreement shall not terminate this
Agreement itself or affect the right of the Employee or the Employee’s legal representatives to
enforce the payment of any amount or other benefit to which the Employee was entitled before the
expiration of the term of this Agreement or to which the Employee became entitled as a result of
the event (including the termination, whether by the Employee or the Company or automatically as
provided in this Section 3, of the Employee’s employment by the Company) that caused the term of
this Agreement to expire.

     Section 4. Event of Termination for Cause. An “Event of Termination for Cause” shall have
occurred if, after a Change in Control of the Company, the Employee shall have committed:

     (i) gross negligence or willful misconduct in connection with his duties or in
the course of his employment with the Company;

     (ii) an act of fraud, embezzlement or theft in connection with his duties or in
the course of his employment with the Company;

     (iii) intentional wrongful damage to property of the Company;

-4-

 

     (iv) intentional wrongful disclosure of secret processes or confidential
information of the Company; or

     (v) an act leading to a conviction of a felony or a misdemeanor involving moral
turpitude.

For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be
deemed “intentional” if it was due primarily to an error in judgment or negligence, but shall be
deemed “intentional” only if done, or omitted to be done, by the Employee not in good faith and
without reasonable belief that his action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a result
of an “Event of Termination for Cause” hereunder unless and until there shall have been delivered
to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the Board of Directors then in office at a meeting of the Board of Directors
called and held for such purpose (after reasonable notice to the Employee and an opportunity for
the Employee, together with his counsel, to be heard before the Board of Directors), finding that,
in the good faith opinion of the Board of Directors, the Employee had committed an act set forth
above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall
limit the right of the Employee or his legal representatives to contest the validity or propriety
of any such determination.

     Section 5. An Event of Termination for Good Reason. An “Event of Termination for Good Reason”
shall have occurred if, after a Change in Control of the Company, the Company shall:

     (i) assign to the Employee any duties inconsistent with the Employee’s position
(including offices, titles and reporting requirements), authority, duties, status or
responsibilities with the Company in effect immediately before the occurrence of the
first Change in Control of the Company or otherwise make any change in any such
position, authority, duties or responsibilities;

     (ii) remove the Employee from, or fail to re-elect or appoint the Employee to,
any duties or position with the Company or any of its Affiliates that were assigned
or held by the Employee immediately before the occurrence of the first Change in
Control of the Company, except that a nominal change in the Employee’s title that is
merely descriptive and does not affect rank or status shall not constitute such an
event;

     (iii) take any other action that results in a material diminution in such
position, authority, duties or responsibilities or otherwise take any action that
materially interferes therewith;

     (iv) reduce the Employee’s annual base salary as in effect immediately before
the occurrence of the first Change in Control of the Company or as the Employee’s
annual base salary may be increased from time to time after that occurrence (the
“Base Salary”);

-5-

 

     (v) reduce the Employee’s annual bonus to an amount less than (x) $800,000, if
the first Change in Control of the Company occurred prior to the Employee earning an
annual bonus with respect to the fiscal year ended December 31, 2007, (y) the amount
of the annual bonus earned by the Employee with respect to the fiscal year ended
December 31, 2007, if the first Change in Control of the Company occurred after the
Employee earned an annual bonus with respect to the fiscal year ended December 31,
2007, but prior to the Employee earning an annual bonus with respect to the fiscal
year ended December 31, 2008 or (z) the average of the two annual bonuses earned by
the Employee with respect to the two fiscal years of the Company immediately
preceding the fiscal year of the Company in which the first Change in Control of the
Company occurred (the applicable amount is referred to herein as the “Benchmark
Bonus”);

     (vi) relocate the Employee’s principal place of employment to a location
outside of a 50-mile radius from the Employee’s principal place of employment
immediately prior to the first Change in Control of the Company;

     (vii) fail to (x) continue in effect any bonus, incentive, profit sharing,
performance, savings, retirement or pension policy, plan, program or arrangement
(such policies, plans, programs and arrangements collectively being referred to
herein as “Basic Benefit Plans”), including, but not limited to, any deferred
compensation, supplemental executive retirement or other retirement income, stock
option, stock purchase, stock appreciation, or similar policy, plan, program or
arrangement of the Company, in which the Employee was a participant immediately
before the occurrence of the first Change in Control of the Company, or any
substitute plan adopted by the Board of Directors and in which the Employee was a
participant immediately before the occurrence of the last Change in Control of the
Company, unless an equitable and reasonably comparable arrangement (embodied in a
substitute or alternative benefit or plan) shall have been made with respect to such
Basic Benefit Plan promptly following the occurrence of the last Change in Control
of the Company, or (y) continue the Employee’s participation in any Basic Benefit
Plan (or any substitute or alternative plan) on substantially the same basis, both
in terms of the amount of benefits provided to the Employee (which are in any event
always subject to the terms of any applicable Basic Benefit Plan) and the level of
the Employee’s participation relative to other participants, as existed immediately
before the occurrence of the first Change in Control of the Company;

     (viii) fail to continue to provide the Employee with benefits substantially
similar to those enjoyed by the Employee under any of the Company’s other employee
benefit plans, policies, programs and arrangements (the “Other Benefit Plans”),
including, but not limited to, life insurance, medical, dental, health, hospital,
accident or disability plans, in which the Employee was a participant immediately
before the occurrence of the first Change in Control of the Company;

-6-

 

     (ix) fail to provide the Employee with the number of paid vacation days to
which the Employee was entitled in accordance with the Company’s vacation policy in
effect immediately before the occurrence of the first Change in Control of the
Company;

     (x) fail to continue to provide the Employee with office space, related
facilities and support personnel (including, but not limited to, administrative and
secretarial assistance) (y) that are both commensurate with the Employee’s
responsibilities to and position with the Company immediately before the occurrence
of the first Change in Control of the Company and not materially dissimilar to the
office space, related facilities and support personnel provided to other employees
of the Company having comparable responsibility to the Employee, or (z) that are
physically located at the Company’s principal executive offices; or

     (xi) purport to terminate the Employee’s employment by the Company unless
notice of that termination shall have been given to the Employee pursuant to, and
that notice shall meet the requirements of, Section 6.

     Section 6. Notice of Termination. If a Change in Control of the Company shall have occurred
before the expiration of the term of this Agreement, any subsequent termination by the Employee or
the Company of the Employee’s employment by the Company, or any determination of the Employee’s
Disability, shall be communicated by notice to the other party that shall indicate the specific
paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the
termination. If the notice states that the Employee’s employment by the Company has been
automatically terminated as a result of the Employee’s Disability, the notice shall (i)
specifically describe the basis for the determination of the Employee’s Disability, and (ii) state
the date of the determination of the Employee’s Disability, which date shall be not more than ten
(10) days before the date such notice is given. If the notice is from the Company and states that
the Employee’s employment by the Company is terminated by the Company as a result of the occurrence
of an Event of Termination for Cause, the notice shall specifically describe the action or inaction
of the Employee that the Company believes constitutes an Event of Termination for Cause and shall
be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the
Employee and states that the Employee’s employment by the Company is terminated by the Employee as
a result of the occurrence of an Event of Termination for Good Reason, the notice shall
specifically describe the action or inaction of the Company that the Employee believes constitutes
an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than
a notice stating that the Employee’s employment by the Company has been automatically terminated as
a result of the Employee’s Disability) shall state a date, which shall be not fewer than thirty
(30) days nor more than sixty (60) days after the date such notice is given, on which the
termination of the Employee’s employment by the Company is effective. The date so stated in
accordance with this Section 6 shall be the “Termination Date”. If a Change in Control of the
Company shall have occurred before the expiration of the term of this Agreement, any subsequent
purported termination by the Company of the Employee’s employment by the Company, or any subsequent
purported determination by the Company of the Employee’s Disability, shall be ineffective unless
that termination or determination shall have been communicated by the

-7-

 

Company to the Employee by notice that meets the requirements of the foregoing provisions of
this Section 6 and the provisions of Section 9.

     Section 7. Benefits Payable on Change in Control of the Company and Termination.

     (a) If (x) a Change in Control of the Company shall have occurred before the expiration
of the term of this Agreement, and (y) the Employee’s employment by the Company is
terminated (whether by the Employee or the Company or automatically as provided in Section
3) after the occurrence of that Change in Control of the Company, the Employee shall be
entitled to the following benefits:

     (i) If the Employee’s employment by the Company is terminated (x) by the
Company as a result of the occurrence of an Event of Termination for Cause, or (y)
by the Employee before the occurrence of an Event of Termination for Good Reason,
then the Company shall pay to the Employee the Base Salary accrued through the
Termination Date but not previously paid to the Employee, and the Employee shall be
entitled to any other amounts or benefits provided under any plan, policy, practice,
program, contract or arrangement of or with the Company, including, but not limited
to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by
the terms thereof (except as explicitly modified by this Agreement).

     (ii) If the Employee’s employment by the Company is automatically terminated as
a result of the Employee’s death, the Employee’s Disability or the Employee’s
Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued
through the date of the occurrence of that event but not previously paid to the
Employee, and (y) the Employee shall be entitled to any other amounts or benefits
provided under any plan, policy, practice, program, contract or arrangement of or
with the Company, including, but not limited to, the Basic Benefit Plans and the
Other Benefit Plans, which shall be governed by the terms thereof (except as
explicitly modified by this Agreement).

     (iii) If the Employee’s employment by the Company is terminated (x) by the
Company otherwise than as a result of the occurrence of an Event of Termination for
Cause, or (y) by the Employee after the occurrence of an Event of Termination for
Good Reason, then the Employee shall be entitled to the following:

     (1) the Company shall pay to the Employee the Base Salary and
compensation for earned but unused vacation time accrued through the
Termination Date but not previously paid to the Employee;

     (2) the Company shall pay to the Employee an amount equal to the
product of (A) the greater of (I) the highest aggregate annual bonus,
incentive or other payment of cash compensation in addition to annual base
salary pursuant to any bonus, incentive, profit-sharing, performance,

-8-

 

discretionary pay or similar policy, plan, program or arrangement of
the Company paid or payable to the Employee (including any deferred portion
thereof) for any fiscal year (or portion thereof) of the Company paid after
the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a
fraction, the numerator of which is the number of days in the current fiscal
year of the Company through the Termination Date and the denominator of
which is 365;

     (3) the Company shall pay to the Employee, as a lump sum, an amount
(the “Severance Payment”) equal to two and one-half (2.5) times the sum of:

     A. the amount (including any deferred portion thereof) of the
Base Salary that would have been paid to the Employee during the
fiscal year of the Company in which the Termination Date occurs based
on the assumption that the Employee’s employment by the Company had
continued throughout that fiscal year at the Base Salary at the
highest rate in effect at any time during the term of this Agreement;
plus

     B. the amount equal to (I) $800,000, if the Termination Date
occurs prior to the Employee earning an annual bonus with respect to
the fiscal year ended December 31, 2007, (II) the amount of the
annual bonus earned by the Employee with respect to the fiscal year
ended December 31, 2007, if the Termination Date occurs after the
Employee earned an annual bonus with respect to the fiscal year ended
December 31, 2007, but prior to the Employee earning an annual bonus
with respect to the fiscal year ended December 31, 2008, (III) the
average of the two annual bonuses earned by the Employee with respect
to the fiscal years ended December 31, 2007 and 2008 if the
Termination Date occurs after the Employee earned an annual bonus
with respect to the fiscal year ended December 31, 2008, but prior to
the Employee earning an annual bonus with respect to the fiscal year
ended December 31, 2009, or (IV) the average of the three annual
bonuses earned by the Employee with respect to the three fiscal years
preceding the year in which the Termination Date occurs;

     (4) the Company (at its sole expense) shall take the following actions:

     A. throughout the Relevant Period, the Company shall maintain in
effect, and not materially reduce the benefits provided by, each of
the Other Benefit Plans in which the Employee was a participant
immediately before the Termination Date; and

-9-

 

     B. the Company shall arrange for the Employee’s uninterrupted
participation throughout the Relevant Period in each of such Other
Benefit Plans,

provided that if the Employee’s participation after the Termination Date in
any such Other Benefit Plan is not permitted by the terms of that Other
Benefit Plan, then throughout the Relevant Period, the Company (at its sole
expense) shall provide the Employee with substantially the same benefits
that were provided to the Employee by that Other Benefit Plan immediately
before the Termination Date; and

     (5) the Employee shall be entitled to any other amounts or benefits
provided under any plan, policy, practice, program, contract or arrangement
of or with the Company, including, but not limited to, the Basic Benefit
Plans and the Other Benefit Plans, which shall be governed by the terms
thereof (except as explicitly modified by this Agreement).

     (b) Each payment required to be made to the Employee pursuant to the foregoing
provisions of Section 7(a) above (i) shall be made by check drawn on an account of the
Company at a bank located in the United States of America, and (ii) shall be paid (x) if the
Employee’s employment by the Company was terminated as a result of the Employee’s death, the
Employee’s Disability or the Employee’s Retirement, not more than thirty (30) days
immediately following the date of the occurrence of that event, and (y) if the Employee’s
employment by the Company was terminated for any other reason, not more than ten (10) days
immediately following the Termination Date.

     Section 8. Successors. If a Change in Control of the Company shall have occurred before the
expiration of the term of this Agreement,

     (i) the Company shall not, directly or indirectly, consolidate with, merge into
or sell or otherwise transfer its assets as an entirety or substantially as an
entirety to, any person, or permit any person to consolidate with or merge into the
Company, unless immediately after such consolidation, merger, sale or transfer, the
Successor shall have assumed in writing the Company’s obligations under this
Agreement; and

     (ii) not fewer than ten (10) days before the consummation of any consolidation
of the Company with, merger by the Company into, or sale or other transfer by the
Company of its assets as an entirety or substantially as an entirety to, any person,
the Company shall give the Employee notice of that proposed transaction.

     Section 9. Notice. Notices required or permitted to be given by either party pursuant to this
Agreement shall be in writing and shall be deemed to have been given when delivered personally to
the other party or when deposited with the United States Postal Service as certified or registered
mail with postage prepaid and addressed:

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     (a) if to the Employee, at the Employee’s address last shown on the Company’s records,
and

     (b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the
attention of the Chief Executive Officer.

or, in either case, to such other address as the party to whom or which such notice is to be given
shall have specified by notice given to the other party.

     Section 10. Withholding Taxes. The Company may withhold from all payments to be paid to the
Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company
is required to so withhold.

     Section 11. Certain Additional Payments by the Company.

     (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall
be determined that any payment or distribution by, or benefit from, the Company or any of
its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise (any such payments,
distributions or benefits being individually referred to herein as a “Payment,” and any two
or more of such payments, distributions or benefits being referred to herein as “Payments”),
would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax,
together with any interest thereon, any penalties, additions to tax, or additional amounts
with respect to such excise tax, and any interest in respect of such penalties, additions to
tax or additional amounts, being collectively referred to herein as the “Excise Tax”), then
the Employee shall be entitled to receive an additional payment or payments (individually
referred to herein as a “Gross-Up Payment” and any two or more of such additional payments
being referred to herein as “Gross-Up Payments”) in an amount such that after payment by the
Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the
Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.

     (b) Subject to the provisions of Section 11(c) through (i), any determination
(individually, a “Determination”) required to be made under this Section 11(b), including
whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall
initially be made, at the Company’s expense, by nationally recognized tax counsel mutually
acceptable to the Company and the Employee (“Tax Counsel”). Tax Counsel shall provide
detailed supporting legal authorities, calculations, and documentation both to the Company
and the Employee within 15 business days of the termination of the Employee’s employment, if
applicable, or such other time or times as is reasonably requested by the Company or the
Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by
the Employee with respect to a Payment or Payments, it shall furnish the Employee with an
opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with
respect to any such Payment or Payments. The Employee shall have the right to dispute any
Determination (a “Dispute”) within 15 business days after delivery of Tax Counsel’s opinion
with respect to such

-11-

 

Determination. The Gross-Up Payment, if any, as determined pursuant to such
Determination shall, at the Company’s expense, be paid by the Company to the Employee within
five business days of the Employee’s receipt of such Determination. The existence of a
Dispute shall not in any way affect the Employee’s right to receive the Gross-Up Payment in
accordance with such Determination. If there is no Dispute, such Determination shall be
binding, final and conclusive upon the Company and the Employee, subject in all respects,
however, to the provisions of Section 11(c) through (i) below. As a result of the
uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that
Gross-Up Payments (or portions thereof) which will not have been made by the Company should
have been made (“Underpayment”), and if upon any reasonable written request from the
Employee or the Company to Tax Counsel, or upon Tax Counsel’s own initiative, Tax Counsel,
at the Company’s expense, thereafter determines that the Employee is required to make a
payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel
shall, at the Company’s expense, determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to the Employee.

     (c) The Company shall defend, hold harmless, and indemnify the Employee on a fully
grossed-up after tax basis from and against any and all claims, losses, liabilities,
obligations, damages, impositions, assessments, demands, judgements, settlements, costs and
expenses (including reasonable attorneys’, accountants’, and experts’ fees and expenses)
with respect to any tax liability of the Employee resulting from any Final Determination (as
defined in Section 11(j)) that any Payment is subject to the Excise Tax.

     (d) If a party hereto receives any written or oral communication with respect to any
question, adjustment, assessment or pending or threatened audit, examination, investigation
or administrative court or other proceeding which, if pursued successfully, could result in
or give rise to a claim by the Employee against the Company under this Section 11 (“Claim”),
including, but not limited to, a claim for indemnification of the Employee by the Company
under Section 11(c), then such party shall promptly notify the other party hereto in writing
of such Claim (“Tax Claim Notice”).

     (e) If a Claim is asserted against the Employee (“Employee Claim”), the Employee shall
take or cause to be taken such action in connection with contesting such Employee Claim as
the Company shall reasonably request in writing from time to time, including the retention
of counsel and experts as are reasonably designated by the Company (it being understood and
agreed by the parties hereto that the terms of any such retention shall expressly provide
that the Company shall be solely responsible for the payment of any and all fees and
disbursements of such counsel and any experts) and the execution of powers of attorney
provided that:

     (i) within 30 calendar days after the Company receives or delivers, as the case
may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date
that any payment of the taxes claimed is due from the Employee, but in no event
sooner than five calendar days after the Company receives or delivers such Tax Claim
Notice), the Company shall have notified the Employee

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in writing (“Election Notice”) that the Company does not dispute its
obligations (including, but not limited to, its indemnity obligations) under this
Agreement and that the Company elects to contest, and to control the defense or
prosecution of, such Employee Claim at the Company’s sole risk and sole cost and
expense; and

     (ii) the Company shall have advanced to the Employee on an interest-free basis,
the total amount of the tax claimed in order for the Employee, at the Company’s
request, to pay or cause to be paid the tax claimed, file a claim for refund of such
tax and, subject to the provisions of the last sentence of Section 11(g), sue for a
refund of such tax if such claim for refund is disallowed by the appropriate taxing
authority (it being understood and agreed by the parties hereto that the Company
shall only be entitled to sue for a refund and the Company shall not be entitled to
initiate any proceeding in, for example, United States Tax Court) and shall
indemnify and hold the Employee harmless, on a fully grossed-up after tax basis,
from any tax imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and

     (iii) the Company shall reimburse the Employee for any and all costs and
expenses resulting from any such request by the Company and shall indemnify and hold
the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as
a result of such reimbursement.

     (f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right
to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee
Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted
diligently by the Company to a Final Determination; provided, however, that (i) the Company
shall not, without the Employee’s prior written consent, enter into any compromise or
settlement of such Employee Claim that would adversely affect the Employee, (ii) any request
from the Company to the Employee regarding any extension of the statute of limitations
relating to assessment, payment, or collection of taxes for the taxable year of the Employee
with respect to which the contested issues involved in, and amount of, the Employee Claim
relate is limited solely to such contested issues and amount, and (iii) the Company’s
control of any contest or proceeding shall be limited to issues with respect to the Employee
Claim and the Employee shall be entitled to settle or contest, in his sole and absolute
discretion, any other issue raised by the Internal Revenue Service or any other taxing
authority. So long as the Company is diligently defending or prosecuting such Employee
Claim, the Employee shall provide or cause to be provided to the Company any information
reasonably requested by the Company that relates to such Employee Claim, and shall otherwise
cooperate with the Company and its representatives in good faith in order to contest
effectively such Employee Claim. The Company shall keep the Employee informed of all
developments and events relating to any such Employee Claim (including, without limitation,
providing to the Employee copies of all written materials pertaining to any such Employee
Claim), and the Employee or his authorized representatives shall be entitled, at the
Employee’s expense, to participate in all conferences, meetings and proceedings relating to
any such Employee Claim.

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     (g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to
an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii)
hereof, the extent of the liability of the Company hereunder with respect to such tax
claimed has been established by a Final Determination, the Employee shall promptly pay or
cause to be paid to the Company any refund actually received by, or actually credited to,
the Employee with respect to such tax (together with any interest paid or credited thereon
by the taxing authority and any recovery of legal fees from such taxing authority related
thereto), except to the extent that any amounts are then due and payable by the Company to
the Employee, whether under the provisions of this Agreement or otherwise. If, after the
receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii),
a determination is made by the Internal Revenue Service or other appropriate taxing
authority that the Employee shall not be entitled to any refund with respect to such tax
claimed and the Company does not notify the Employee in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other
payments required to be paid hereunder.

     (h) With respect to any Employee Claim, if the Company fails to deliver an Election
Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after
delivery of such Election Notice, the Company fails to comply with the provisions of Section
11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the
right (but not the obligation), at his election and in his sole and absolute discretion, to
defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim.
The Employee shall have full control of such defense or prosecution and such proceedings,
including any settlement or compromise thereof. If requested by the Employee, the Company
shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the
Employee and his authorized representatives in order to contest effectively such Employee
Claim. The Company may attend, but not participate in or control, any defense, prosecution,
settlement or compromise of any Employee Claim controlled by the Employee pursuant to this
Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case
of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall,
from time to time, be entitled to current payment, on a fully grossed-up after tax basis,
from the Company with respect to costs and expenses incurred by the Employee in connection
with such defense or prosecution.

     (i) In the case of any Employee Claim that is defended or prosecuted to a Final
Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully
grossed-up after tax basis, to the Employee in immediately available funds the full amount
of any taxes arising or resulting from or incurred in connection with such Employee Claim
that have not theretofore been paid by the Company to the Employee, together with the costs
and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that
have not theretofore been paid by the Company to the Employee, within ten calendar days
after such Final Determination. In the case of any Employee Claim not covered by the
preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the
Employee in immediately available funds the full

-14-

 

amount of any taxes arising or resulting from or incurred in connection with such
Employee Claim at least ten calendar days before the date payment of such taxes is due from
the Employee, except where payment of such taxes is sooner required under the provisions of
this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up
after tax basis, of any costs and expenses required to be paid under this Section 11(i))
shall be made within the time and in the manner otherwise provided in this Section 11(i).

     (j) For purposes of this Agreement, the term “Final Determination” shall mean (A) a
decision, judgment, decree or other order by a court or other tribunal with appropriate
jurisdiction, which has become final and non-appealable; (B) a final and binding settlement
or compromise with an administrative agency with appropriate jurisdiction, including, but
not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of
a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a
timely basis; or (D) any final disposition by reason of the expiration of all applicable
statutes of limitations.

     (k) For purposes of this Agreement, the terms “tax” and “taxes” mean any and all taxes
of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income
taxes, and employment taxes), together with any interest thereon, any penalties, additions
to tax, or additional amounts with respect to such taxes and any interest in respect of such
penalties, additions to tax, or additional amounts.

     Section 12. Section 409A Deferred Compensation. This Agreement is intended to meet the
requirements of Section 409A of the Code and may be administered in a manner that is intended to
meet those requirements and shall be construed and interpreted in accordance with such intent. To
the extent that a payment, or the settlement or deferral thereof, is subject to Section 409A of the
Code, except as the Board of Directors and Employee otherwise determine in writing, the payment
shall be granted, paid, settled or deferred in a manner that will meet the requirements of Section
409A of the Code, including regulations or other guidance issued with respect thereto, such that
the payment, settlement or deferral shall not be subject to the additional tax or interest
applicable under Section 409A of the Code. Any provision of this Agreement that would cause the
payment, settlement or deferral thereof to fail to satisfy Section 409A of the Code shall be
amended (in a manner that as closely as practicable achieves the original intent of this Agreement)
to comply with Section 409A of the Code on a timely basis, which may be made on a retroactive
basis, in accordance with regulations and other guidance issued under Section 409A of the Code. In
the event additional regulations or other guidance is issued under Section 409A of the Code or a
court of competent jurisdiction provides additional authority concerning the application of Section
409A with respect to the payments described hereunder, then the provisions regarding such payments
shall be amended to permit such payments to be made at the earliest time allowed under such
additional regulations, guidance or authority that is practicable and achieves the original intent
of this Agreement.

     Section 13. Expenses of Enforcement. If a Change in Control of the Company shall have
occurred before the expiration of the term of this Agreement, then, upon demand by the Employee
made to the Company, the Company shall reimburse the Employee for the reasonable expenses
(including attorneys’ fees and expenses) incurred by the Employee in enforcing or

-15-

 

seeking to enforce the payment of any amount or other benefit to which the Employee shall have
become entitled pursuant to this Agreement, including those incurred in connection with any
arbitration initiated pursuant to Section 21. To the extent that any such reimbursement would be
subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an
amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the
Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other
provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof
otherwise indicates.

     Section 14. Employment by Wholly Owned Entities. If, at or after the Effective Date, the
Employee is or becomes an employee of one or more corporations, partnerships, limited liability
companies or other entities that are, directly or indirectly, wholly owned by the Company (“Wholly
Owned Entities”), references in this Agreement to the Employee’s employment by the Company shall
include the Employee’s employment by any such Wholly Owned Entity.

     Section 15. No Obligation to Mitigate; No Rights of Offset.

     (a) The Employee shall not be required to mitigate the amount of any payment or other
benefit required to be paid or provided to the Employee pursuant to this Agreement, whether
by seeking other employment or otherwise, nor shall the amount of any such payment or other
benefit be reduced on account of any compensation earned by the Employee as a result of
employment by another person.

     (b) The Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the Company may have
against the Employee or others.

     Section 16. Amendment and Waiver. No provision of this Agreement may be amended or waived
(whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is
by written instrument signed by the parties hereto. No waiver by either party of any breach of
this Agreement shall be deemed a waiver of any other or subsequent breach.

     Section 17. Governing Law. The validity, interpretation, construction and enforceability of
this Agreement shall be governed by the laws of the State of Texas.

     Section 18. Validity. The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this Agreement, which
shall remain in full force and effect.

     Section 19. Counterparts. This Agreement may be executed in counterparts, each of which shall
be deemed an original but all of which together will constitute the same instrument.

     Section 20. Assignment. This Agreement shall inure to the benefit of and be enforceable by
the Employee’s legal representative. The Company may not assign any of its

-16-

 

obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the
requirements of Section 8 are fulfilled.

     Section 21. Arbitration. Except as otherwise explicitly provided in Section 11, any dispute
between the parties arising out of this Agreement, whether as to this Agreement’s construction,
interpretation or enforceability or as to any party’s breach or alleged breach of any provision of
this Agreement, shall be submitted to arbitration in accordance with the following procedures:

     (i) Either party may demand such arbitration by giving notice of that demand to
the other party. The notice shall state (x) the matter in controversy, and (y) the
name of the arbitrator selected by the party giving the notice.

     (ii) Not more than 15 days after such notice is given, the other party shall
give notice to the party who demanded arbitration of the name of the arbitrator
selected by the other party. If the other party shall fail to timely give such
notice, the arbitrator that the other party was entitled to select shall be named by
the Arbitration Committee of the American Arbitration Association. Not more than 15
days after the second arbitrator is so named, the two arbitrators shall select a
third arbitrator. If the two arbitrators shall fail to timely select a third
arbitrator, the third arbitrator shall be named by the Arbitration Committee of the
American Arbitration Association.

     (iii) The dispute shall be arbitrated at a hearing that shall be concluded
within ten days immediately following the date the dispute is submitted to
arbitration unless a majority of the arbitrators shall elect to extend the period of
arbitration. Any award made by a majority of the arbitrators (x) shall be made
within ten days following the conclusion of the arbitration hearing, (y) shall be
conclusive and binding on the parties, and (z) may be made the subject of a judgment
of any court having jurisdiction.

     (iv) All expenses of the arbitration shall be borne by the Company.

The agreement of the parties contained in the foregoing provisions of this Section 21 shall be a
complete defense to any action, suit or other proceeding instituted in any court or before any
administrative tribunal with respect to any dispute between the parties arising out of this
Agreement.

     Section 22. Interpretation.

     (a) As used in this Agreement, the following terms and phrases have the indicated
meanings:

     (i) “Affiliate” and “Affiliates” mean, when used with respect to any entity,
individual, or other person, any other entity, individual, or other person which,
directly or indirectly, through one or more intermediaries controls, or is
controlled by, or is under common control with such entity, individual or person.

-17-

 

     (ii) “Base Salary” has the meaning assigned to that term in Section 5.

     (iii) “Basic Benefit Plans” has the meaning assigned to that term in Section 5.

     (iv) “Benchmark Bonus” has the meaning assigned to that term in Section 5.

     (v) “Board of Directors” means the Board of Directors of the Company.

     (vi) “Business Combination” has the meaning assigned to that term in Section
2.

     (vii) “Change in Control of the Company” has the meaning assigned to that
phrase in Section 2.

     (viii) “Claim” has the meaning assigned to such term in Section 11.

     (ix) “Code” means the Internal Revenue Code of 1986, as amended from time to
time.

     (x) “Company” has the meaning assigned to that term in the preamble to this
Agreement. The term “Company” shall also include any Successor, whether the
liability of such Successor under this Agreement is established by contract or
occurs by operation of law.

     (xi) “Covered Person” has the meaning assigned to that term in Section 2.

     (xii) “Determination” has the meaning assigned to that term in Section 11.

     (xiii) “Dispute” has the meaning assigned to that term in Section 11.

     (xiv) “Effective Date” has the meaning assigned to that term in the preamble to
this Agreement.

     (xv) “Election Notice” has the meaning assigned to such term in Section 11.

     (xvi) “Employee” has the meaning assigned to such term in the preamble to this
Agreement.

     (xvii) “Employee Claim” has the meaning assigned to such term in Section 11.

     (xviii) “Employee’s Disability” means:

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     (1) if no Change in Control of the Company shall have occurred before
the date of determination, the physical or mental disability of the
Employee determined in accordance with the disability policy of the Company
at the time in effect and generally applicable to its salaried employees;
and

     (2) if a Change in Control of the Company shall have occurred at that
date, the physical or mental disability of the Employee determined in
accordance with the disability policy of the Company in effect immediately
before the occurrence of the first Change in Control of the Company and
generally applicable to its salaried employees.

The Employee’s Disability, and the automatic termination of the Employee’s
employment by the Company by reason of the Employee’s Disability, shall be
deemed to have occurred on the date of determination, provided that if (1) a
Change in Control of the Company shall have occurred before the expiration
of the term of this Agreement, (2) the Company shall have subsequently given
notice pursuant to Section 6 of the Company’s determination of the
Employee’s Disability, and (3) the Employee shall have given notice to the
Company that the Employee disagrees with that determination, then (A)
whether the Employee’s Disability shall have occurred shall be submitted to
arbitration pursuant to Section 21, and (B) if a majority of the arbitrators
decide that the Employee’s Disability had not occurred, at the date of
determination by the Company, then (I) the Employee’s Disability, and the
automatic termination of the Employee’s employment by the Company by reason
of the Employee’s Disability, shall be deemed not to have occurred, and (II)
on demand by the Employee made to the Company, the Company shall reimburse
the Employee for the reasonable expenses (including attorneys’ fees and
expenses) incurred by the Employee in obtaining that decision.

     (xix) “Employee’s Retirement” means (x) if no Change in Control of the Company
shall have occurred before the date of the Employee’s proposed retirement, the
retirement of the Employee in accordance with the retirement policy of the Company
at the time in effect and generally applicable to its salaried employees, and (y) if
a Change in Control of the Company shall have occurred at that date, the retirement
of the Employee from the employ of the Company in accordance with the retirement
policy of the Company in effect immediately before the occurrence of the first
Change in Control of the Company and generally applicable to its salaried employees.

     (xx) “Event of Termination for Cause” has the meaning assigned to that phrase
in Section 4.

     (xxi) “Event of Termination for Good Reason” has the meaning assigned to that
phrase in Section 5.

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     (xxii) “Exchange Act” means the Securities Exchange Act of 1934, as amended
from time to time.

     (xxiii) “Excise Tax” has the meaning assigned to that term in Section 11.

     (xxiv) “Expiration Date” has the meaning assigned to that term in Section 3.

     (xxv) “Final Determination” has the meaning assigned to such term in Section
11.

     (xxvi) “Gross-Up Payment” has the meaning assigned to that term in Section 11.

     (xxvii) “Other Benefit Plans” has the meaning assigned to that term in Section
5.

     (xxviii) “Outstanding Company Common Stock” has the meaning assigned to that
term in Section 2.

     (xxix) “Outstanding Company Voting Securities” has the meaning assigned to that
term in Section 2.

     (xxx) “Payment” has the meaning assigned to that term in Section 11.

     (xxxi) “person” means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited partnership, limited liability company,
trust, unincorporated organization, government, or agency or political subdivision
of any government.

     (xxxii) “Relevant Period” means a period beginning on the Termination Date and
ending on the first to occur of (x) the third anniversary of the Termination Date,
(y) the date on which the Employee becomes a full time employee of another person,
and (z) the Employee’s normal retirement date, determined in accordance with the
retirement policy of the Company in effect on the Termination Date.

     (xxxiii) “Severance Payment” has the meaning assigned to that term in Section
7.

     (xxxiv) “Successor” means a person with or into which the Company shall have
been merged or consolidated or to which the Company shall have transferred its
assets as an entirety or substantially as an entirety.

     (xxxv) “tax” and “taxes” have the meaning assigned to those terms in Section
11.

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     (xxxvi) “Tax Claim Notice” has the meaning assigned to that term in Section 11.

     (xxxvii) “Tax Counsel” has the meaning assigned to that term in Section 11.

     (xxxviii) “Termination Date” has the meaning assigned to that term in Section
6.

     (xxxix) “this Agreement” means this Change in Control Agreement as it may be
amended from time to time in accordance with Section 16.

     (xl) “Underpayment” has the meaning assigned to that term in Section 11.

     (xli) “Wholly Owned Entities” has the meaning assigned to that term in Section
14.

     (b) In the event of the enactment of any successor provision to any statute or rule
cited in this Agreement, references in this Agreement to such statute or rule shall be to
such successor provision.

     (c) The headings of Sections of this Agreement shall not control the meaning or
interpretation of this Agreement.

     (d) References in this Agreement to any Section are to the corresponding Section of
this Agreement unless the context otherwise indicates.

          In Witness Whereof, the Company and the Employee have executed this Agreement as of
the Effective Date.

	 	 	 	 	 
	 

	 	PATTERSON-UTI ENERGY, INC.
	 	 
	 
	 	 	 	 
	 

	 	/s/ John E. Vollmer III	 	 
	 	 	 	 	 
	 

	 	John E. Vollmer III	 	 
	 

	 	Senior Vice President – Corporate Development and 	 	 
	 

	 	Chief Financial Officer	 	 
	 
	 	 	 	 
	 

	 	/s/ Douglas J. Wall	 	 
	 	 	 	 	 
	 

	 	Douglas J. Wall	 	 

-21-

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