Document:

exv10w1

Exhibit 10.1

Execution
Version

Hercules Offshore, Inc.

$250,000,000 of 3.375% Convertible Senior Notes due 2038

Purchase Agreement

May 28, 2008

	 	 	 
	Goldman, Sachs & Co.,
	Banc of America Securities LLC
	UBS Securities LLC
	 

	 	As representative of the several Purchasers
	 

	 	named in Schedule I hereto,
	c/o Goldman, Sachs & Co.,
	1000 Louisiana, Suite 1100
	Houston, Texas 77002

Ladies and Gentlemen:

     Hercules Offshore, Inc., a Delaware corporation (the “Company”), proposes, subject to the
terms and conditions stated herein, to issue and sell to the Purchasers named in Schedule I hereto
(the “Purchasers”), for whom Goldman, Sachs & Co., Bank of America Securities LLC and UBS
Securities LLC are acting as representatives (the “Representatives”), an aggregate of $250,000,000
original principal amount of the 3.375% Convertible Senior Notes due 2038 (the “Firm Securities”),
convertible into shares of common stock, par value $0.01 per share (“Stock”), of the Company, and,
at the election of the Purchasers, up to an aggregate of $37,500,000 additional original principal
amount of the 3.375% Convertible Senior Notes due 2038 (the “Optional Securities”). The Firm
Securities and the Optional Securities are collectively referred to herein as the “Securities”.

     1. The Company represents and warrants to, and agrees with, each of the Purchasers that:

	 	(a)	 	A preliminary offering circular, dated May 27, 2008 (the “Preliminary Offering
Circular”) has been prepared, and an offering circular, dated May 28, 2008 (the
“Offering Circular”), will be prepared, in connection with the offering of the
Securities and shares of the Stock issuable upon conversion thereof. The Preliminary
Offering Circular, as amended and supplemented immediately prior to the Applicable Time
(as defined in Section 1(b)), is hereinafter referred to as the “Pricing Circular”. Any
reference to the Preliminary Offering Circular, the Pricing Circular or the Offering
Circular shall be deemed to refer to and include

 

 

	 	 	 	the Company’s most recent Annual
Report on Form 10-K and all subsequent documents filed with the United States
Securities and Exchange Commission (the “Commission”) pursuant to Section 13(a), 13(c)
or 15(d) of the United States Securities Exchange Act of 1934, as amended (the
“Exchange Act”) on
or prior to the date of such Circular (to the extent incorporated by reference
therein) and any reference to the Preliminary Offering Circular or the Offering
Circular, as the case may be, as amended or supplemented, as of any specified date,
shall be deemed to include (i) any documents filed with the Commission pursuant to
Section 13(a), 13(c) or 15(d) of the Exchange Act after the date of the Preliminary
Offering Circular or the Offering Circular, as the case may be, and prior to such
specified date (to the extent incorporated by reference therein) and (ii) any
Additional Issuer Information (as defined in Section 5(f)) furnished by the Company
prior to the completion of the distribution of the Securities; and all documents
filed under the Exchange Act and so deemed to be included in the Preliminary
Offering Circular, the Pricing Circular or the Offering Circular, as the case may
be, or any amendment or supplement thereto are hereinafter called the “Exchange Act
Reports”. The Exchange Act Reports, when they were or are filed with the
Commission, conformed or will conform in all material respects to the applicable
requirements of the Exchange Act and the applicable rules and regulations of the
Commission thereunder; and no such documents were filed with the Commission since
the Commission’s close of business on the business day immediately prior to the date
of this Agreement and prior to the execution of this Agreement, except as set forth
on Schedule II(a) hereof. The Preliminary Offering Circular or the Offering Circular
and any amendments or supplements thereto and the Exchange Act Reports did not and
will not, as of their respective dates, contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty shall not apply
to any statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by a Purchaser through the
Representatives expressly for use therein;
	 
	 	(b)	 	For the purposes of this Agreement, the “Applicable Time” is 4:45 pm (Eastern
time) on the date of this Agreement; the Pricing Circular as supplemented by the
information set forth in Schedule III hereto, taken together (collectively, the
“Pricing Disclosure Package”) as of the Applicable Time, did not include any untrue
statement of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they were
made, not misleading; and each Company Supplemental Disclosure Document (as defined in
Section 6(a)(i)) listed on Schedule II(b) hereto, does not conflict with the
information contained in the Pricing Circular or the Offering Circular and each such
Company Supplemental Disclosure Document, as supplemented by and taken together with
the Pricing Disclosure Package as of the Applicable Time, did not include any untrue
statement of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty shall
not

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	 	 	 	apply to statements or omissions made in a Company Supplemental Disclosure Document
in reliance upon and in conformity with information furnished in writing to the Company
by a Purchaser through the Representatives expressly for use therein;

	 	(c)	 	Neither the Company nor any of its subsidiaries has sustained since the date of
the latest audited financial statements included in the Pricing Circular any material
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or contemplated in
the Pricing Circular; and, since the respective dates as of which information is
given in the Pricing Circular, there has not been (i) any change in the capital
stock (excluding grants of shares of restricted stock and options to employees or
directors of the Company under plans existing on the date of the Preliminary
Offering Circular and the issuance of shares upon exercise of outstanding stock
options) or any increase in the long term debt of the Company or any of its
subsidiaries or (ii) any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders’ equity or results of operations of the
Company and its subsidiaries, taken as a whole (a “Material
Adverse Effect”), in
each case of clauses (i) and (ii) otherwise than as set forth or contemplated in the
Pricing Circular;
	 
	 	(d)	 	The Company and its subsidiaries have good and marketable title in fee simple
to all real property and good and marketable title to all personal property owned by
them, in each case free and clear of all liens, encumbrances and defects except such as
are described in the Pricing Circular or such as do not materially affect the value of
such property and do not materially interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not material and
do not materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries;
	 
	 	(e)	 	The Company has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the State of Delaware, with power and authority
(corporate and other) to own its properties and conduct its business as described in
the Pricing Circular, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction; and each subsidiary
of the Company has been duly incorporated or organized and is validly existing as a
corporation or other organization in good standing under the laws of its jurisdiction
of incorporation or organization;

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	 	(f)	 	The Company has an authorized capitalization as set forth in the Pricing
Circular, and all of the issued shares of capital stock of the Company have been duly
and validly authorized and issued and are fully paid and non assessable; and all of the
issued shares of capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non assessable and (except as
otherwise set forth in the Pricing Circular) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims;
	 
	 	(g)	 	This Agreement has been duly authorized, executed and delivered by the Company;
	 
	 	(h)	 	The Securities have been duly authorized and, when issued and delivered
pursuant to this Agreement and authenticated by the Trustee (as defined below), will
have been duly executed, authenticated, issued and delivered and will constitute valid
and legally binding obligations of the Company entitled to the benefits provided by the
indenture to be dated as of June 3, 2008 (the “Indenture”) between the Company and The
Bank of New York Trust Company, National Association, as Trustee (the “Trustee”), under
which they are to be issued, which will be substantially in the form previously
delivered to you; the Indenture has been duly authorized and, when executed and
delivered by the Company and the Trustee, the Indenture will constitute a valid and
legally binding instrument of the Company, enforceable against the Company in
accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors’ rights and to general equity principles; and the Securities and the
Indenture will conform in all material respects to the descriptions thereof in the
Pricing Disclosure Package and the Offering Circular and will be in substantially the
form previously delivered to you;
	 
	 	(i)	 	Upon issuance and delivery of the Securities in accordance with this Agreement
and the Indenture, the Securities will be convertible at the option of the holder
thereof into shares of Stock in accordance with the terms of the Securities; the Stock
reserved for issuance upon conversion of the Securities has been duly authorized and
reserved and, when issued upon conversion of the Securities in accordance with the
terms of the Securities and the Indenture, will be duly and validly issued, fully paid
and non-assessable, and the issuance of such Stock will not be subject to any
preemptive or similar rights; and Stock issuable upon conversion of the Securities will
conform in all material respects to the description of the Stock contained in the
Pricing Circular and the Offering Circular;
	 
	 	(j)	 	None of the transactions contemplated by this Agreement (including, without
limitation, the use of the proceeds from the sale of the Securities) will violate or
result in a violation of Section 7 of the Exchange Act, or any regulation promulgated
thereunder, including, without limitation, Regulations T, U, and X of the Board of
Governors of the Federal Reserve System;

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	 	(k)	 	Except as described in the Pricing Circular, prior to the date hereof, neither
the Company nor any of its affiliates has taken any action which is designed to or
which has constituted or which might have been expected to cause or result in
stabilization or manipulation of the price of any security of the Company in connection
with the offering of the Securities;
	 
	 	(l)	 	The issue and sale of the Securities and the compliance by the Company with all
of the provisions of the Securities, the Indenture and this Agreement and the
consummation of the transactions herein and therein contemplated will not (a) require
any consent or approval, or conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its subsidiaries
is bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, other than any consent, approval, conflict, breach, violation
or default that would not, individually or in the aggregate, have a Material Adverse
Effect, (b) result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or (c)
assuming the accuracy of the representations and warranties of the Purchasers
contained in Section 3 and their compliance with their agreements set forth therein,
result in any violation of any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties other than any violation that would not,
individually or in the aggregate, have a Material Adverse Effect; and, assuming the
accuracy of the representations and warranties of the Purchasers contained in
Section 3 and their compliance with their agreements set forth therein, no consent,
approval, authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale of the
Securities or the consummation by the Company of the transactions contemplated by
this Agreement or the Indenture, except for such consents, approvals,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of the
Securities by the Purchasers;
	 
	 	(m)	 	Neither the Company nor any of its subsidiaries is (i) in violation of its
Certificate of Incorporation or By-laws or similar governing documents, (ii) in default
in the performance or observance of any obligation, covenant or condition contained in
any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties may be bound
or (iii) in violation of laws applicable to its business and operations, other than, in
the case of clauses (ii) and (iii), any such default or violation that would not
individually or in the aggregate have a Material Adverse Effect;
	 
	 	(n)	 	The statements set forth in the Pricing Circular and the Offering Circular
under the caption “Description of the Notes” and “Description of Capital Stock”,
insofar as they purport to constitute a summary of the terms of the Securities and the
Stock, under the caption “Material United States Federal Income Tax

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	 	 	 	Considerations” and
under the caption “Plan of Distribution”, insofar as they purport to describe the
provisions of the laws and documents referred to therein, are accurate and fair in all
material respects;
	 
	 	(o)	 	Other than as set forth in the Pricing Circular, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect; and, to the best of
the Company’s knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
	 
	 	(p)	 	When the Securities are issued and delivered pursuant to this Agreement, the
Securities will not be of the same class (within the meaning of Rule 144A under the
United States Securities Act of 1933, as amended (the “Act”), as securities which are
listed on a national securities exchange registered under Section 6 of the United
States Securities Exchange Act of 1934, as amended (the “Exchange Act”), or quoted in a
U.S. automated inter-dealer quotation system;
	 
	 	(q)	 	The Company is subject to Section 13 or 15(d) of the Exchange Act;
	 
	 	(r)	 	The Company is not, and after giving effect to the offering and sale of the
Securities and the application of the proceeds thereof, will not be an “investment
company”, as such term is defined in the United States Investment Company Act of 1940,
as amended (the “Investment Company Act”);
	 
	 	(s)	 	Neither the Company nor any person acting on its or their behalf (other than
the Purchasers, as to which no representation or warranty is made) has offered or sold
the Securities by means of any general solicitation or general advertising within the
meaning of Rule 502(c) under the Act;
	 
	 	(t)	 	Within the preceding six months, neither the Company nor any other person
acting on behalf of the Company has offered or sold to any person any Securities, or
any securities of the same or a similar class as the Securities, other than Securities
offered or sold to the Purchasers hereunder. The Company will take reasonable
precautions designed to insure that any offer or sale, direct or indirect, in the
United States or to any U.S. person (as defined in Rule 902 under the Act) of any
Securities or any substantially similar security issued by the Company, within six
months subsequent to the date on which the distribution of the Securities has been
completed (as notified to the Company by the Representatives), is made under
restrictions and other circumstances reasonably designed not to affect the status of
the offer and sale of the Securities in the United States and to U.S. persons
contemplated by this Agreement as transactions exempt from the registration provisions
of the Act;
	 
	 	(u)	 	The Company and its subsidiaries maintain systems of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are

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	 	 	 	executed
in accordance with management’s general or specific authorizations; (ii) transactions
are recorded as necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles in the United States (“GAAP”) and to
maintain asset accountability; (iii) access to assets is permitted only in accordance
with management’s general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences;
	 
	 	(v)	 	Based on the assessment by management of the Company of the effectiveness of
the Company’s internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act) as of December 31, 2007, as described in Item 9A
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, the
Company is not aware of (i) any significant deficiencies or material weaknesses in the
design or operation of its internal controls over financial reporting that are likely
to adversely affect the Company’s ability to record, process, summarize and report
financial data; or (ii) any fraud, whether or not material, that involves management or
other employees who have a role in the Company’s internal controls over financial
reporting;
	 
	 	(w)	 	The Company has established and maintains disclosure controls and procedures
(as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) which
(i) are designed to ensure that material information relating to the Company, including
its consolidated subsidiaries, is made known to its principal executive officer and its
principal financial officer by others within those entities, particularly during the
periods in which the periodic reports required under the
Exchange Act are being prepared; (ii) have been evaluated for effectiveness as of
the end of the period covered by the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008 (the “Form 10-Q”) filed with the Commission; and (iii)
were effective at the time of such evaluation, in all material respects, with
respect to the recording, processing, summarizing and reporting, within the time
periods specified in the Commission’s rules and forms, of information required to be
disclosed by the Company in the reports that it files or submits under the Exchange
Act, as described in Item 4 of the Form 10-Q;
	 
	 	(x)	 	Ernst & Young LLP and Grant Thornton LLP, which have audited certain financial
statements of the Company and its subsidiaries, are independent registered public
accounting firms as required by the Act and the rules and regulations of the Commission
thereunder;
	 
	 	(y)	 	Except as disclosed in the Pricing Circular, neither the Company nor any of its
subsidiaries is in violation of any statute, rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the use,
disposal or release of hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic substances
(collectively, “environmental laws”), owns or operates any real property contaminated
with any substance that is subject to any environmental

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	 	 	 	laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws, or is subject to
any claim relating to any environmental laws, which violation, contamination, liability
or claim would individually or in the aggregate have a Material Adverse Effect; and the
Company is not aware of any pending investigation which might lead to such a claim;
	 
	 	(z)	 	The Company and its subsidiaries own, possess, license or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to inventions,
know-how, patents, copyrights, confidential information and other intellectual property
(collectively, “intellectual property rights”) necessary to conduct the business now
operated by them, or presently employed by them, except where the lack thereof would
not, individually or in the aggregate, have a Material Adverse Effect, and have not
received any notice of infringement of or conflict with asserted rights of others with
respect to any intellectual property rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate have a
Material Adverse Effect;
	 
	 	(aa)	 	None of the Company nor any of its subsidiaries nor, to the Company’s
knowledge, their respective officers, directors, supervisors, managers, agents, or
employees has violated in any material respect (i) any anti-bribery laws applicable to
the Company and its subsidiaries, including but not limited to the U.S. Foreign Corrupt
Practices Act of 1977, (ii) the sanctions program implemented and administered by the
U.S. Department of the Treasury’s Office of Foreign Assets Control, including, without
limitation, 31 CFR Parts 500-600, with respect to the Company or (iii) financial record
keeping and reporting requirements relating to money laundering applicable to the
Company and its subsidiaries, and no action, suit or proceeding by or before any court
or governmental agency, authority or body or any arbitrator involving the Company or
any of its subsidiaries with respect to the foregoing is pending or, to the knowledge
of the Company, threatened;
	 
	 	(bb)	 	The Company and its subsidiaries possess adequate certificates, authorities or
permits issued by appropriate governmental agencies or bodies necessary to conduct the
business now operated by them, except where the lack thereof would not, individually or
in the aggregate, have a Material Adverse Effect, and have not received any notice of
proceedings relating to the revocation or modification of any such certificate,
authority or permit that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse Effect;
	 
	 	(cc)	 	The financial statements included or incorporated by reference into the Pricing
Circular present fairly the financial position of the Company and its consolidated
subsidiaries as of the dates shown and their results of operations and cash flows for
the periods shown, and such financial statements have been prepared in conformity with
GAAP applied on a consistent basis; and the schedules included in the financial
statements present fairly the information required to be stated therein;

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	 	(dd)	 	Except as otherwise disclosed in each of the Pricing Disclosure Package and the
Offering Memorandum, the Company and its subsidiaries have paid all material federal,
state and foreign taxes and filed all material federal, state and foreign tax returns
required to be filed through the date hereof except where the failure to so pay or file
would not have a Material Adverse Effect, and except as disclosed in the Pricing
Disclosure Package and the Offering Circular, there is no material tax deficiency that
has been asserted against the Company or any of its subsidiaries;
	 
	 	(ee)	 	No labor dispute with the employees of the Company or any subsidiary exists or,
to the knowledge of the Company, is imminent that would have a Material Adverse Effect;
	 
	 	(ff)	 	Except as would not, individually or in the aggregate, have a Material Adverse
Effect, (i) with respect to each “pension plan” (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) maintained by
the Company or any of its subsidiaries, the Company and its subsidiaries are in
compliance with ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), and
the terms of each plan, if and to the extent applicable; and (ii) none of the Company
or its subsidiaries has incurred, or expects to incur, any liability (other than
contributions made in accordance with the terms of applicable plans) under Title IV of
ERISA with respect to any ongoing, frozen or terminated “pension plan” that is subject
to Title IV of ERISA and is, or was, maintained by the Company, its subsidiaries or any
other person or entity that, together with the Company and its subsidiaries, is treated
as a single employer under Section 414 of the Code;
	 
	 	(gg)	 	No subsidiary of the Company is currently prohibited, directly or indirectly,
under any agreement or other instrument to which it is a party or is subject, from
paying any dividends to the Company, from making any other distribution on such
subsidiary’s capital stock, from repaying to the Company any loans or advances to such
subsidiary from the Company or from transferring any of such subsidiary’s properties or
assets to the Company;
	 
	 	(hh)	 	Neither the Company nor any of its subsidiaries is a party to any contract,
agreement or understanding with any person (other than this Agreement) that
would give rise to a valid claim against any of them or any Purchaser for a
brokerage commission, finder’s fee or like payment in connection with the offering
and sale of the Securities;
	 
	 	(ii)	 	Assuming the accuracy of the representations and warranties of the Purchasers
contained in Section 3 and their compliance with their agreements set forth therein, it
is not necessary, in connection with the issuance and sale of the Securities to the
Purchasers and the offer, resale and delivery of the Securities by the Purchasers in
the manner contemplated by this Agreement, the Pricing Disclosure Package and the
Offering Circular, to register the Securities under the Act or to qualify the Indenture
under the Trust Indenture Act; and

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	 	(jj)	 	The Company is a “citizen of the United States” as such term is defined in
Section 2 of the Shipping Act of 1916, as amended (46 U.S.C. Section 802), and has been
for as long as it has owned or operated any vessels in the United States coastwise
trade.

     2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and
sell to each of the Purchasers, and each of the Purchasers agrees, severally and not jointly, to
purchase from the Company, at a purchase price of 97.625% of the principal amount thereof, plus
accrued interest, if any, from June 3, 2008 to the Time of Delivery (as defined below) hereunder,
the principal amount of Firm Securities set forth opposite the name of such Purchaser in Schedule I
hereto, and (b) in the event and to the extent that the Purchasers shall exercise the election to
purchase the Optional Securities as provided below, the Company agrees to issue and sell to each of
the Purchasers, and each of the Purchasers agrees, severally and not jointly, to purchase from the
Company, at the same purchase price set forth in clause (a) of this Section 2, that portion of the
aggregate principal amount of the Optional Securities as to which such election shall have been
exercised (to be adjusted by you so as to eliminate fractions of $1,000), determined by multiplying
such aggregate principal amount of Optional Securities by a fraction, the numerator of which is the
maximum aggregate principal amount of Optional Securities which such Purchaser is entitled to
purchase as set forth opposite the name of such Purchaser in Schedule I hereto and the denominator
of which is the maximum aggregate principal amount of Optional Securities which all of the
Purchasers are entitled to purchase hereunder.

          The Company hereby grants to the Purchasers the right to purchase at their election up to
$37,500,000 aggregate principal amount of Optional Securities, at the purchase price set forth in
clause (a) of the first paragraph of this Section 2, for the sole purpose of covering sales of
securities in excess of the aggregate principal amount of Firm Securities. Any such election to
purchase Optional Securities may be exercised (but not more than once) by written notice from the
Representatives to the Company, given within a period of 13 calendar days after the date of this
Agreement, setting forth the aggregate principal amount of Optional Securities to be purchased and
the date on which such Optional Securities are to be delivered, as determined by the
Representatives but in no event earlier than the First Time of Delivery (as defined in Section (4)
hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than
10 business days after the date of such notice.

     3. Upon the authorization by you of the release of the Securities, the several Purchasers
propose to offer the Securities for sale upon the terms and conditions set forth in this Agreement
and the Offering Circular and each Purchaser hereby represents and warrants to, and agrees with the
Company that:

	 	(a)	 	It will offer and sell the Securities only to persons who it reasonably
believes are “qualified institutional buyers” (“QIBs”) within the meaning of Rule 144A
under the Act in transactions meeting the requirements of Rule 144A;
	 
	 	(b)	 	It is an institutional “accredited investor” within the meaning of Rule 501(a)
under the Act; and

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	 	(c)	 	It will not offer or sell the Securities by any form of general solicitation or
general advertising, including but not limited to the methods described in Rule 502(c)
under the Act.

	4.	(a)		The Securities to be purchased by each Purchaser hereunder will be represented by one or
more definitive global Securities in book-entry form which will be deposited by or on behalf
of the Company with The Depository Trust Company (“DTC”) or its designated custodian. The
Company will deliver the Securities to Goldman, Sachs & Co., for the account of each
Purchaser, against payment by or on behalf of such Purchaser of the purchase price therefor by
wire transfer to the Company in Federal (same day) funds, by causing DTC to credit the
Securities to the account of Goldman, Sachs & Co. at DTC. The Company will cause the
certificates representing the Securities to be made available to the Representatives for
checking at least twenty-four hours prior to the Time of Delivery (as defined below) at the
office of Baker Botts L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas 77002 (the
“Closing Location”). The time and date of such delivery and payment shall be, with respect to
the Firm Securities, 9:30 a.m., New York City time, on June 3, 2008 or such other time and
date as the Representatives and the Company may agree upon in writing, and, with respect to
the Optional Securities, 9:30 a.m., New York City time, on the date specified by the
Representatives in the written notice given by the Purchasers of the Purchasers’ election to
purchase such Optional Securities, or at such other time and date as the Representatives and
the Company may agree upon in writing. Such time and date for delivery of the Firm Securities
is herein called the “First Time of Delivery”, any time and date for delivery of the Optional
Securities, if not the First Time of Delivery, is herein called the “Second Time of Delivery”,
and each such time and date for delivery of Securities is herein
called a “Time of Delivery”.

	 	(b)	 	The documents to be delivered at each Time of Delivery by or on behalf of the
parties hereto pursuant to Section 8 hereof, including the cross-receipt for the
Securities and any additional documents requested by the Purchasers pursuant to Section
8(j) hereof, will be delivered at such time and date at the Closing Location, and the
Securities will be delivered at DTC (or its designated custodian), all at each Time of
Delivery. A meeting will be held at the Closing Location at 5:00 p.m., New York City
time, on the New York Business Day next preceding such Time of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to the preceding
sentence will be available for review by the parties hereto. For the purposes of this
Section 4, “New York Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
	 
	 	5.	 	The Company agrees with each of the Purchasers:
	 
	 	(a)	 	To prepare the Offering Circular in a form approved by you; to make no
amendment or any supplement to the Offering Circular prior to the last Time of

11

 

	 	 	 	Delivery
which shall be disapproved by you promptly after reasonable notice thereof; and to
furnish you with copies thereof;
	 
	 	(b)	 	Promptly from time to time to take such action as you may reasonably request to
qualify the Securities and the shares of Stock issuable upon conversion of the
Securities for offering and sale under the securities laws of such jurisdictions as you
may request and to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary to complete the
distribution of the Securities, provided that in connection therewith the Company shall
not be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
	 
	 	(c)	 	To furnish the Purchasers with written and electronic copies of the Offering
Circular in such quantities as you may from time to time reasonably request, and if, at
any time prior to the earlier of the completion of the resale of the Securities by the
Purchasers or the expiration of nine months after the date of the Offering Circular,
any event shall have occurred as a result of which the Offering Circular as then
amended or supplemented would include an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such Offering Circular is
delivered, not misleading, or, if for any other reason it shall be necessary or
appropriate during such same period to amend or supplement the Offering Circular, to
notify you and upon your request to prepare and furnish without charge to each
Purchaser as many written and electronic copies as you may from time to time reasonably
request of an amended Offering Circular or a supplement to the Offering Circular which
will correct such statement or omission or effect such compliance;
	 
	 	(d)	 	During the period beginning from the date hereof and continuing until the date
60 days after the date hereof, not to offer, sell, contract to sell or otherwise
dispose of, except as provided hereunder, any securities of the Company that are
substantially similar to the Securities or the Stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the right
to receive, Stock or any such substantially similar securities (other than pursuant to
equity plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without the
Representatives’ prior written consent; provided, however, that the Company may make
issuances, offers, sales, contracts to sell or other disposals of Stock in connection
with an acquisition of a business or entity or a consolidation or merger with another
entity, provided that either (i) the party acquiring such Stock agrees in writing to be
bound by the provisions of this paragraph or (ii) the offering or issuance of such
Stock is registered pursuant to a registration statement on Form S-4 and such issuance
is not consummated within such 60-day period.
	 
	 	(e)	 	Not to be or become, at any time prior to the expiration of two years after the
last Time of Delivery, an open-end investment company, unit investment trust,

12

 

	 	 	 	closed-end investment company or face-amount certificate company that is or is
required to be registered under Section 8 of the Investment Company Act;
	 
	 	(f)	 	At any time when the Company is not subject to Section 13 or 15(d) of the
Exchange Act, for the benefit of holders from time to time of Securities, to furnish at
its expense, upon request, to holders of Securities and prospective purchasers of
securities information (the “Additional Issuer Information”) satisfying the
requirements of subsection (d)(4)(i) of Rule 144A under the Act to the extent required
by the Indenture;
	 
	 	(g)	 	If requested by you, to use its commercially reasonable efforts to cause the
Securities to be eligible for the PORTAL trading system of the National Association of
Securities Dealers, Inc.;
	 
	 	(h)	 	Except for such documents that are publicly available on EDGAR, to furnish to
the holders of the Securities as soon as practicable after the end of each fiscal year
an annual report (including a consolidated balance sheet and consolidated statements of
income, stockholders’ equity and cash flows of the Company and its consolidated
subsidiaries certified by independent public accountants) and, as soon as practicable
after the end of each of the first three quarters of each fiscal year (beginning with
the fiscal quarter ending after the date of the Offering Circular), to make available
to its stockholders consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
	 
	 	(i)	 	During the period of one year after the last Time of Delivery, not to, and not
permit any of its “affiliates” (as defined in Rule 144 under the Securities Act) to,
resell any of the Securities which constitute “restricted securities” under Rule 144
that have been reacquired by any of them;
	 
	 	(j)	 	To use the net proceeds received by it from the sale of the Securities pursuant
to this Agreement in the manner specified in the Pricing Circular under the caption
“Use of Proceeds”;
	 
	 	(k)	 	To reserve and keep available at all times, free of preemptive rights, shares
of Stock for the purpose of enabling the Company to satisfy any obligations to issue
shares of its Stock upon conversion of the Securities;
	 
	 	(l)	 	To use its commercially reasonable efforts to list, subject to notice of
issuance, the shares of Stock issuable upon conversion of the Securities on the NASDAQ
Global Select Market (“NASDAQ”);
	 
	 	(m)	 	Not to, and to cause its affiliates (as defined in Rule 501(b) of Regulation D)
not to, directly or through any agent, sell, offer for sale, solicit offers to buy or
otherwise negotiate in respect of, any Securities (as defined in the Securities Act),
that is or will be integrated with the sale of the Securities in a manner that would
require registration of the Securities under the Securities Act; and

13

 

	 	(n)	 	Not to, and to cause its affiliates or any other person acting on their behalf
(other than the Purchasers, as to which no covenant is given) not to solicit offers
for, or offer or sell, the Securities by means of any form of general solicitation or
general advertising within the meaning of Rule 502(c) of Regulation D or in any manner
involving a public offering within the meaning of Section 4(2) of the Securities
Act.

     6.

	 	(a)	 	(i) The Company represents and agrees that, without the prior consent of each
of the Representatives, it has not made and will not make any offer relating to the
Securities that, if the offering of the Securities contemplated by this Agreement were
conducted as a public offering pursuant to a registration statement filed under the Act
with the Commission, would constitute an “issuer free writing prospectus,” as defined
in Rule 433 under the Act (any such offer is hereinafter referred to as a “Company
Supplemental Disclosure Document”);

(ii) each Purchaser represents and agrees that, without the prior consent of the
Company and each of the Representatives, other than one or more term sheets relating to the
Securities containing customary information and conveyed to purchasers of securities, it has
not made and will not make any offer relating to the Securities that, if the offering of the
Securities contemplated by this Agreement were conducted as a public offering pursuant to a
registration statement filed under the Act with the Commission, would constitute a “free
writing prospectus,” as defined in Rule 405 under the Act (any such offer (other than any
such term sheets), is hereinafter referred to as a “Purchaser Supplemental Disclosure
Document”); and

(iii) any Company Supplemental Disclosure Document or Purchaser Supplemental Disclosure
Document the use of which has been consented to by the Company and each of the
Representatives is listed on Schedule II(b) hereto.

     7. The Company covenants and agrees with the several Purchasers that the Company will pay or
cause to be paid the following: (i) the fees, disbursements and expenses of the Company’s counsel
and accountants in connection with the issue of the Securities and the shares of Stock issuable
upon conversion of the Securities and all other expenses in connection with the preparation,
printing, reproduction and filing of the Preliminary Offering Circular and the Offering Circular
and any amendments and supplements thereto and the mailing and delivering of copies thereof to the
Purchasers and dealers; (ii) the cost of printing or producing this Agreement, the Indenture, any
Blue Sky Circular, closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Securities; (iii) all expenses
in connection with the qualification of the Securities and the shares of Stock issuable upon
conversion of the Securities for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the reasonable fees and disbursements of counsel for the Purchasers
in connection with such qualification and in connection with the Blue Sky and legal investment
surveys; (iv) any fees charged by securities rating services for rating the Securities; (v) the
cost of preparing the Securities; (vi) the fees and

14

 

expenses of the Trustee and any agent of the
Trustee and the fees and disbursements of counsel for the Trustee in connection with the Indenture
and the Securities; (vii) any cost incurred in connection with the designation of the Securities
for trading in PORTAL and the listing of the shares of Stock issuable upon conversion of the
Securities; and (viii) all other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It is understood,
however, that, except as provided in this Section, and Sections 9 and 12 hereof, the Purchasers
will pay all of their own costs and expenses, including the fees of their counsel, transfer taxes
on resale of any of the Securities by them, and any advertising expenses connected with any offers
they may make.

     8. The obligations of the Purchasers hereunder shall be subject, in their discretion, to the
condition that all representations and warranties and other statements of the Company herein are,
at and as of each Time of Delivery, true and correct, the condition that the Company shall have
performed all of its obligations hereunder theretofore to be performed, and the following
additional conditions:

	 	(a)	 	Andrews Kurth LLP, counsel for the Purchasers, shall have furnished to you such
opinion or opinions, dated such Time of Delivery, with respect to such matters as you
may reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such matters;
	 
	 	(b)	 	Each of Baker Botts L.L.P., counsel for the Company, and James W. Noe, Senior
Vice President, General Counsel, Chief Compliance Officer and Secretary of the Company,
shall have furnished to you their written opinions, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect set forth in Annex I and Annex
II, respectively.;
	 
	 	(c)	 	On the date of the Offering Circular prior to the execution of this Agreement
and also at each Time of Delivery, each of Ernst & Young LLP and Grant Thornton LLP
shall have furnished to you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you;
	 
	 	(d)	 	(i) Neither the Company nor any of its subsidiaries shall have sustained since
the date of the latest audited financial statements included in the Pricing Circular
any loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or contemplated in
the Pricing Circular, and (ii) since the respective dates as of which information is
given in the Pricing Circular there shall not have been any change in the capital stock
(excluding grants of shares of restricted stock and options to employees or directors
of the Company under plans existing on the date of the Preliminary Offering Circular
and the issuance of shares upon exercise of outstanding stock options) or long-term
debt of the Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs, management,
financial position, stockholders’ equity or results of operations of the Company and
its subsidiaries, taken as a whole, otherwise than

15

 

	 	 	 	as set forth or contemplated in the
Pricing Circular, the effect of which, in any such case described in clause (i) or
(ii), is in your judgment so material and adverse as to make it impracticable or
inadvisable to proceed with the offering or the delivery of the Securities being issued
at such Time of Delivery on the terms and in the manner contemplated in this Agreement
and in the Offering Circular;
	 
	 	(e)	 	On or after the Applicable Time (i) no downgrading shall have occurred in the
rating accorded the Company’s debt securities by any “nationally recognized statistical
rating organization”, as that term is defined by the Commission for purposes of Rule
436(g)(2) under the Act, and (ii) no such organization shall have publicly announced
that it has under surveillance or review, with possible negative implications, its
rating of any of the Company’s debt securities;
	 
	 	(f)	 	On or after the Applicable Time there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities generally
on the NASDAQ; (ii) a suspension or material limitation in trading in the Company’s
securities on NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York or Texas State authorities or a material
disruption in commercial banking or securities settlement or clearance services in the
United States; (iv) the outbreak or escalation of hostilities involving the United
States or the declaration by the United States of a national emergency or war or (v)
the occurrence of any other calamity or crisis or any change in financial, political or
economic conditions in the United States or elsewhere, if the effect of any such event
specified in clause (iv) or (v) in your judgment makes it impracticable or inadvisable
to proceed with the offering or the delivery of the Securities being issued at such
Time of Delivery on the terms and in the manner contemplated in the Offering Circular;
	 
	 	(g)	 	The Securities shall have been designated for trading on PORTAL;
	 
	 	(h)	 	The shares of Stock issuable upon conversion of the Securities shall have been
duly listed, subject to notice of issuance, for quotation on NASDAQ;
	 
	 	(i)	 	The Company shall have obtained and delivered to the Purchasers executed copies
of a lock-up agreement in substantially the form attached hereto as Annex III from
each of the executive officers and directors of the Company and from each of LR
Holdings, LP, LR2 GP, L.P., LR2 GP, LLC and Kestrel Capital, L.P.; and
	 
	 	(j)	 	The Company shall have furnished or caused to be furnished to you at such Time
of Delivery certificates of officers of the Company satisfactory to you as to the
accuracy of the representations and warranties of the Company herein at and as of such
Time of Delivery, as to the performance by the Company of all of its obligations
hereunder to be performed at or prior to such Time of Delivery, as to the matters set
forth in subsection (d) of this Section and as to such other matters as you may
reasonably request.

16

 

	9.	(a)		 The Company will indemnify and hold harmless each Purchaser against any losses, claims,
damages or liabilities, joint or several, to which such Purchaser may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Offering Circular, the Pricing
Circular, the Offering Circular, or any amendment or supplement thereto, any Company
Supplemental Disclosure Document, or arise out of or are based upon the omission or alleged
omission to state therein a material fact necessary to make the statements therein not
misleading, and will reimburse each Purchaser for any legal or other expenses reasonably
incurred by such Purchaser in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Offering Circular, the Pricing Circular, the Offering Circular or any
such amendment or supplement, or any Company Supplemental Disclosure
Document, in reliance upon and in conformity with written information furnished to
the Company by any Purchaser through the Representatives expressly
for use therein.
	 
	 	(b)	 	Each Purchaser will indemnify and hold harmless the Company against any losses,
claims, damages or liabilities to which the Company may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Offering Circular, the
Pricing Circular, the Offering Circular, or any amendment or supplement thereto, or any
Company Supplemental Disclosure Document, or arise out of or are based upon the
omission or alleged omission to state therein a material fact or necessary to make the
statements therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Offering Circular, the Pricing Circular, the Offering
Circular or any such amendment or supplement, or any Company Supplemental Disclosure
Document in reliance upon and in conformity with written information furnished to the
Company by such Purchaser through the Representatives expressly for use therein; and
will reimburse the Company for any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such action or claim as such
expenses are incurred.
	 
	 	(c)	 	Promptly after receipt by an indemnified party under subsection (a) or (b)
above of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party under such
subsection, notify the indemnifying party in writing of the commencement thereof; but
the omission so to notify the indemnifying party shall not relieve the indemnifying
party from any liability which it may have under subsection (a) or (b) above except to
the extent that it has been materially prejudiced (through the

17

 

	 	 	 	forfeiture of substantive rights or defenses, as determined by a court of competent
jurisdiction) by such omission; and provided further that the omission to notify the
indemnifying party shall not relieve the indemnifying party from any liability that
it may have to an indemnified party otherwise than under such subsection. In case
any such action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying party),
and, after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent of
the indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder (whether or
not the indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional release
of the indemnified party from all liability arising out of such action or claim and
(ii) does not include a statement as to, or an admission of, fault, culpability or a
failure to act, by or on behalf of any indemnified party.

	 	(d)	 	If the indemnification provided for in this Section 9 is unavailable to or
insufficient to hold harmless an indemnified party under subsection (a) or (b) above in
respect of any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Purchasers on the other from the offering of the Securities. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the Company on the one
hand and the Purchasers on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Purchasers on the other shall
be deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Purchasers, in each case as set forth in the
Offering

18

 

	 	 	 	Circular. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Purchasers on the other and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Purchasers agree
that it would not be just and equitable if contribution pursuant to this subsection
(d) were determined by pro rata allocation (even if the Purchasers were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above in
this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Purchaser shall be required to contribute any amount in excess of
the amount by which the total price at which the Securities purchased by it and
distributed to investors were offered to investors exceeds the amount of any damages
which such Purchaser has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. The Purchasers’
obligations in this subsection (d) to contribute are several in proportion to their
respective underwriting obligations and not joint.

	 	(e)	 	The obligations of the Company under this Section 9 shall be in addition to any
liability which the Company may otherwise have and shall extend, upon the same terms
and conditions, to any affiliate of each Purchaser and each person, if any, who
controls any Purchaser within the meaning of the Act; and the obligations of the
Purchasers under this Section 9 shall be in addition to any liability which the
respective Purchasers may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if any, who
controls the Company within the meaning of the Act.

	10.	(a)	 	If any Purchaser shall default in its obligation to purchase the Securities which it has
agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you
or another party or other parties to purchase such Securities on the terms contained herein .
If within thirty six hours after such default by any Purchaser you do not arrange for the
purchase of such Securities, then the Company shall be entitled to a further period of thirty
six hours within which to procure another party or other parties satisfactory to you to
purchase such Securities on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of such Securities,
or the Company notifies you that it has so arranged for the purchase of such Securities, you
or the Company shall have the right to postpone such Time of Delivery for a period of not more
than seven days, in order to effect whatever changes may thereby be made necessary in the
Offering Circular, or in any other documents or arrangements, and the Company agrees to
prepare promptly any amendments to the Offering Circular which in your opinion may

19

 

	 	 	 	thereby be made necessary. The term “Purchaser” as used in this Agreement shall
include any person substituted under this Section with like effect as if such person
had originally been a party to this Agreement with respect to such Securities.

	 	(b)	 	If, after giving effect to any arrangements for the purchase of the Securities
to be purchased at such Time of Delivery of a defaulting Purchaser or Purchasers by you
and the Company as provided in subsection (a) above, the aggregate principal amount of
such Securities which remains unpurchased does not exceed one eleventh of the aggregate
principal amount of all the Securities, then the Company shall have the right to
require each non defaulting Purchaser to purchase the principal amount of Securities
which such Purchaser agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non defaulting Purchaser to purchase its pro rata share
(based on the principal amount of Securities which such Purchaser agreed to purchase
hereunder) of the Securities of such defaulting Purchaser or Purchasers for which such
arrangements have not been made; but nothing herein shall relieve a defaulting
Purchaser from liability for its default.
	 
	 	(c)	 	If, after giving effect to any arrangements for the purchase of the Securities
of a defaulting Purchaser or Purchasers by you and the Company as provided in
subsection (a) above, the aggregate principal amount of Securities which remains
unpurchased exceeds one eleventh of the aggregate principal amount of all the
Securities to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non defaulting
Purchasers to purchase Securities of a defaulting Purchaser or Purchasers, then this
Agreement (or, with respect to an Optional Time of Delivery, the obligations of the
Purchasers to purchase and of the Company to sell Optional Securities) shall thereupon
terminate, without liability on the part of any non defaulting Purchaser or the
Company, except for the expenses to be borne by the Company and the Purchasers as
provided in Section 6 hereof and the indemnity and contribution agreements in Section 9
hereof; but nothing herein shall relieve a defaulting Purchaser from liability for its
default.

     11. The respective indemnities, agreements, representations, warranties and other statements
of the Company and the several Purchasers, as set forth in this Agreement or made by or on behalf
of them, respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof) made by or on behalf
of any Purchaser or any controlling person of any Purchaser, or the Company, or any officer or
director or controlling person of the Company, and shall survive delivery of and payment for the
Securities.

     12. If this Agreement shall be terminated pursuant to Section 10 hereof, the Company shall not
then be under any liability to any Purchaser except as provided in Sections 7 and 9 hereof; but, if
for any other reason, the Securities are not delivered by or on behalf of the Company as provided
herein, the Company will reimburse the Purchasers through you for all expenses approved in writing
by you, including fees and disbursements of counsel, reasonably

20

 

incurred by the Purchasers in making preparations for the purchase, sale and delivery of the
Securities, but the Company shall then be under no further liability to any Purchaser except as
provided in Sections 7 and 9 hereof.

     13. In all dealings hereunder, you shall act on behalf of each of the Purchasers, and the
parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement
on behalf of any Purchaser made or given by the Representatives on behalf of any Purchaser.

All statements, requests, notices and agreements hereunder shall be in writing, and if to the
Purchasers shall be delivered or sent by mail, telex or facsimile transmission to you as the
representatives in care of Goldman, Sachs & Co., 85 Broad Street, 20th Floor, New York, New York
10004, Attention: Registration Department; in care of Banc of America Securities LLC, 1 Bryant
Park, New York, New York 10036, Attention: Equity Capital Markets Legal and in care of UBS
Securities LLC, 299 Park Avenue, New York, New York 10171; and if to the Company shall be delivered
or sent by mail, telex or facsimile transmission to the address of the Company set forth in the
Offering Circular, Attention: Secretary; provided, however, that any notice to a Purchaser pursuant
to Section 9(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such
Purchaser at its address set forth in its Purchasers’ Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt thereof.

In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed
into law October 26, 2001)), the Purchasers are required to obtain, verify and record information
that identifies their respective clients, including the Company, which information may include the
name and address of their respective clients, as well as other information that will allow the
Purchasers to properly identify their respective clients.

     14. This Agreement shall be binding upon, and inure solely to the benefit of, the Purchasers,
the Company and, to the extent provided in Sections 9 and 11 hereof, the officers and directors of
the Company and each person who controls the Company or any Purchaser, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. No purchaser of any of the Securities from any
Purchaser shall be deemed a successor or assign by reason merely of such purchase.

     15. Time shall be of the essence of this Agreement.

     16. The Company acknowledges and agrees that (i) the purchase and sale of the Securities
pursuant to this Agreement is an arm’s-length commercial transaction between the Company, on the
one hand, and the several Purchasers, on the other, (ii) in connection therewith and with the
process leading to such transaction each Purchaser is acting solely as a principal and not the
agent or fiduciary of the Company, (iii) no Purchaser has assumed an advisory or fiduciary
responsibility in favor of the Company with respect to the offering contemplated hereby or the
process leading thereto (irrespective of whether such Purchaser has advised or is currently
advising the Company on other matters) or any other obligation to the Company except

21

 

the obligations expressly set forth in this Agreement and (iv) the Company has consulted its
own legal and financial advisors to the extent it deemed appropriate. The Company agrees that it
will not claim that the Purchaser, or any of them, has rendered advisory services of any nature or
respect, or owes a fiduciary or similar duty to the Company, in connection with such transaction or
the process leading thereto.

     17. This Agreement supersedes all prior agreements and understandings (whether written or
oral) between the Company and the Purchasers, or any of them, with respect to the subject matter
hereof.

     18. This Agreement shall be governed by and construed in accordance with the laws of the State
of New York.

     19. The Company and each of the Purchasers hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out
of or relating to this Agreement or the transactions contemplated hereby.

     20. This Agreement may be executed by any one or more of the parties hereto in any number of
counterparts, each of which shall be deemed to be an original, but all such respective counterparts
shall together constitute one and the same instrument.

     21. Notwithstanding anything herein to the contrary, the Company (and the Company’s employees,
representatives, and other agents) are authorized to disclose to any and all persons, the tax
treatment and tax structure of the potential transaction and all materials of any kind (including
tax opinions and other tax analyses) provided to the Company relating to that treatment and
structure, without the Purchasers’ imposing any limitation of any kind. However, any information
relating to the tax treatment and tax structure shall remain confidential (and the foregoing
sentence shall not apply) to the extent necessary to enable any person to comply with securities
laws. For this purpose, “tax treatment” means US federal and state income tax treatment, and “tax
structure” is limited to any facts that may be relevant to that treatment.

If the foregoing is in accordance with your understanding, please sign and return to us a
counterpart hereof, and upon the acceptance hereof by you, on behalf of each of the Purchasers,
this letter and such acceptance hereof shall constitute a binding agreement between each of the
Purchasers and the Company. It is understood that your acceptance of this letter on behalf of each
of the Purchasers is pursuant to the authority set forth in a form of Agreement among Purchasers,
the form of which shall be submitted to the Company for examination upon request, but without
warranty on your part as to the authority of the signers thereof.

[Signature Page Follows]

22

 

	 	 	 	 	 	 	 
	 	 	Very truly yours,
	 
	 	 	 	 	 	 
	 	 	Hercules Offshore, Inc.
	 
	 	 	 	 	 	 
	 

	 	By: 	/s/ Stephen Butz	 	 
	 

	 	 	 	 	 
	 

	 	 	 
Name: 	
Stephen Butz
 
	 	 
	 

	 	 	Title: 	Vice President -
Finance and
Treasurer	 
	 

	 	 	 	 	 	 

Signature Page to Purchase Agreement

 

 

	 	 	 	 	 
	Accepted as of the date hereof:	 	 
	 
	 	 	 	 
	Goldman, Sachs & Co.	 	 
	 
	 	 	 	 
	By:
	 	/s/ Goldman, Sachs & Co.	 	 
	 

	 	 

(Goldman, Sachs & Co.)
	 	 

	 	 	 	 	 
	Banc of America Securities LLC	 	 
	 
	By:
	 	/s/ Thomas M. Morrison	 	 
	 

	 	 

Name: Thomas M. Morrison
	 	 
	 

	 	Title: Managing Director	 	 

	 	 	 	 	 
	UBS Securities LLC	 	 
	 
	By:
	 	/s/ Chris Bradshaw	 	 
	 

	 	 

Name: Chris Bradshaw
	 	 
	 

	 	Title: Director	 	 

	 	 	 	 	 
	By:
	 	/s/ Stephen Perich	 	 
	 

	 	 

Name: Stephen Perich
	 	 
	 

	 	Title: Associate Director	 	 

On behalf of each of the Purchasers

Signature Page to Purchase Agreement

 

 

SCHEDULE I

	 	 	 	 	 
	 	 	Principal	 
	 	 	Amount of	 
	 	 	Securities	 
	 	 	to be	 
	Purchaser	 	Purchased	 
	Goldman, Sachs & Co.
	 	$	86,840,000	 
	Banc of America Securities LLC
	 	$	57,895,000	 
	 
	 	 	 
	UBS Securities LLC
	 	$	57,895,000	 
	 
	 	 	 
	Capital One Southcoast, Inc.
	 	$	14,474,000	 
	 
	 	 	 
	Deutsche Bank Securities Inc.
	 	$	14,474,000	 
	 
	 	 	 
	Comerica Securities, Inc.
	 	$	6,579,000	 
	 
	 	 	 
	Fortis Securities LLC
	 	$	3,947,000	 
	 
	 	 	 
	Natixis Bleichroeder Inc.
	 	$	2,632,000	 
	 
	 	 	 
	Nordea Bank Denmark A/S
	 	$	2,632,000	 
	 
	 	 	 
	Mizuho Securities USA Inc.
	 	$	2,632,000	 
	 
	 	 	 
	Total
	 	$	250,000,000	 
	 
	 	 	 

Schedule I — Page 1

 

 

SCHEDULE II

	(a)	 	Additional Documents Incorporated by Reference:
	 
	 	 	None

	(b)	 	Approved Supplemental Disclosure Documents:
	 
	 	 	Investor road show slide presentation, available at www.netroadshow.com on May 28, 2008.

Schedule II — Page 1

 

 

SCHEDULE III

Final Pricing Term Sheet

	 	 	 
	Issuer:

	 	Hercules Offshore, Inc. (NASDAQ: HERO) (the “Company”)
	 
	 	 
	Issue:

	 	3.375% Convertible Senior Notes due 2038 (the “Notes”)
	 
	 	 
	Aggregate Original 

Principal Amount:

	 	$250,000,000 
	 
	 	 
	Over-allotment Option:

	 	$37,500,000 
	 
	 	 
	Offering Price:

	 	100.0% of the original principal amount of the Notes,
plus accrued interest, if any, from the Settlement
Date
	 
	 	 
	Interest; Accretion:

	 	3.375% per annum, accruing from the Settlement Date
through June 1, 2013; principal accretion at an
annual yield to maturity of 3.375% per annum
thereafter
	 
	 	 
	Contingent Interest:

	 	Beginning with the six-month interest period
commencing on June 1, 2013, if the trading price of
the Notes for each of the five trading days ending on
the second trading day immediately preceding the
first day of the applicable interest period equals or
exceeds 120% of the accreted principal amount of the
Notes, the Company will pay contingent interest of
0.40% of the average trading price over such five
trading day period
	 
	 	 
	Interest Payment Dates:

	 	June 1 and December 1 of each year, beginning on
December 1, 2008 and ending on June 1, 2013
	 
	 	 
	Maturity:

	 	June 1, 2038
	 
	 	 
	NASDAQ Closing

Price for Company’s

Common Stock on

May 28, 2008:

	 	$33.95 
	 
	 	 
	Conversion Premium:

	 	Approximately 47.5% over last reported NASDAQ closing
price on May 28, 2008
	 
	 	 
	Conversion Price:

	 	Approximately $50.08 per share of common stock,
subject to adjustment
	 
	 	 
	Conversion Rate:

	 	19.9695 shares of common stock per $1,000 in original
principal amount of Notes, subject to adjustment
	 
	 	 
	Optional Redemption:

	 	Beginning June 6, 2013, the Company may redeem any or
all of the outstanding Notes in cash at a redemption
price equal to 100% of the accreted principal amount
of the Notes being redeemed, plus accrued and unpaid
interest, if any

Schedule III — Page 1

 

 

	 	 	 
	Optional Put by the 

Holders:

	 	Each holder of Notes will have the right to require
the Company to repurchase in cash all or part of such
holder’s Notes on June 1, 2013, June 1, 2018, June 1,
2023, June 1, 2028 and June 1, 2033 at a repurchase
price equal to 100% of the accreted principal amount
of the Notes being repurchased, plus accrued and
unpaid interest, if any
	 
	 	 
	Fundamental Change

Permits Holders to
Require

the Company to
Repurchase

the Notes:

	 	Subject to certain exceptions, if a “fundamental
change” occurs, each holder of the Notes will have
the option to require the Company to repurchase, for
cash, all or any portion of such holder’s Notes that
is equal to $1,000 in original principal amount of
the Notes or an integral multiple of $1,000 in
original principal amount of the Notes, at a
repurchase price of 100% of the accreted principal
amount of the Notes to be repurchased, plus accrued
and unpaid interest, if any
	 
	 	 
	Ranking:

	 	The Notes will be the Company’s general senior
unsecured obligations, ranking equal in right of
payment with all of its existing and future senior
indebtedness, senior in right of payment to all of
its future subordinated indebtedness, effectively
subordinate in right of payment to all of the
existing and future indebtedness and other
liabilities of its subsidiaries and effectively
subordinate to any of its existing and future secured
indebtedness to the extent of the value of the
collateral that secures it. The Company’s
obligations under its senior secured credit agreement
are secured by liens on a majority of the vessels
owned by its domestic subsidiaries and one foreign
subsidiary and substantially all of the other
personal property owned by the Company, its domestic
subsidiaries and one foreign subsidiary.
Substantially all of the Company’s domestic
subsidiaries and one foreign subsidiary guarantee the
Company’s obligations under the senior secured credit
agreement. As of March 31, 2008, as adjusted to give
effect to the issuance of the Notes, the Company
would have had an aggregate of $1,159.4 million of
consolidated long-term debt (including current
portion), all of which, other than the Notes, would
have been secured or owed by the Company’s
subsidiaries and therefore effectively senior to the
Notes, with respect to the collateral securing the
debt or the assets of the subsidiary obligor.
	 
	 	 
	Use of Proceeds:

	 	The Company estimates the net proceeds from the
offering of the Notes will be approximately $243.1
million (approximately $279.7 million if the initial
purchasers exercise their over-allotment option in
full), after deducting the initial purchasers’
discount and estimated offering expenses. The
Company intends to use the net proceeds from this
offering to repurchase, concurrently with this
offering, approximately 1.45 million shares

Schedule III — Page 2

 

 

	 	 	 
	 

	 	of its
common stock, for a total cost of approximately $49.2
million, in privately negotiated transactions, to
repay outstanding borrowings under its senior secured
revolving credit facility and for other general
corporate purposes.
	 
	 	 
	Joint Bookrunners:

	 	Goldman, Sachs & Co.
Banc of America Securities LLC
UBS Securities LLC
	 
	 	 
	Trade Date:

	 	May 28, 2008
	 
	 	 
	Settlement Date:

	 	June 3, 2008
	 
	 	 
	Listing:

	 	None
	 
	 	 
	CUSIP:

	 	427093 AA7 
	 
	 	 
	ISIN:

	 	US427093AA76 
	 
	 	 
	Comparable Yield:

	 	The Company has determined that the comparable yield
for the Notes is 7.75%, compounded semi-annually.
	 
	 	 
	Adjustment to Shares
Delivered upon
Conversion
Upon a Make-Whole
Fundamental Change:

	 	The following table sets forth the adjustments to the
conversion rate, expressed as a number of additional
shares to be received per $1,000 in original
principal amount of the Notes, in connection with a
make-whole fundamental change (as defined in the
Preliminary Offering Circular (as defined below)):

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	June 3,	 	June 1,	 	June 1,	 	June 1,	 	June 1,	 	June 1,
	Stock Price	 	2008	 	2009	 	2010	 	2011	 	2012	 	2013
	$  33.95
	 	 	9.4855	 	 	 	9.4855	 	 	 	9.4855	 	 	 	9.4855	 	 	 	9.4855	 	 	 	9.4855	 
	$  35.00
	 	 	8.9667	 	 	 	8.6019	 	 	 	8.6019	 	 	 	8.6019	 	 	 	8.6019	 	 	 	8.6019	 
	$  37.50
	 	 	7.9060	 	 	 	7.4625	 	 	 	7.0903	 	 	 	6.7553	 	 	 	6.6971	 	 	 	6.6971	 
	$  40.00
	 	 	7.0203	 	 	 	6.5525	 	 	 	6.1301	 	 	 	5.7040	 	 	 	5.2124	 	 	 	5.0305	 
	$  42.50
	 	 	6.2746	 	 	 	5.7921	 	 	 	5.3348	 	 	 	4.8427	 	 	 	4.2177	 	 	 	3.5599	 
	$  45.00
	 	 	5.6420	 	 	 	5.1522	 	 	 	4.6724	 	 	 	4.1349	 	 	 	3.4168	 	 	 	2.2527	 
	$  50.00
	 	 	4.6366	 	 	 	4.1484	 	 	 	3.6506	 	 	 	3.0696	 	 	 	2.2632	 	 	 	0.0305	 
	$  55.00
	 	 	3.8845	 	 	 	3.4116	 	 	 	2.9197	 	 	 	2.3375	 	 	 	1.5340	 	 	 	0.0000	 
	$  60.00
	 	 	3.3093	 	 	 	2.8590	 	 	 	2.3866	 	 	 	1.8277	 	 	 	1.0776	 	 	 	0.0000	 
	$  70.00
	 	 	2.5044	 	 	 	2.1076	 	 	 	1.6913	 	 	 	1.2088	 	 	 	0.6119	 	 	 	0.0000	 
	$  85.00
	 	 	1.7839	 	 	 	1.4674	 	 	 	1.1373	 	 	 	0.7711	 	 	 	0.3665	 	 	 	0.0000	 
	$115.00
	 	 	1.0379	 	 	 	0.8832	 	 	 	0.6736	 	 	 	0.4540	 	 	 	0.2287	 	 	 	0.0000	 
	$150.00
	 	 	0.6905	 	 	 	0.5882	 	 	 	0.4523	 	 	 	0.3113	 	 	 	0.1624	 	 	 	0.0000	 
	$200.00
	 	 	0.4505	 	 	 	0.3798	 	 	 	0.2957	 	 	 	0.2070	 	 	 	0.1095	 	 	 	0.0000	 
	$250.00
	 	 	0.3145	 	 	 	0.2634	 	 	 	0.2066	 	 	 	0.1458	 	 	 	0.0777	 	 	 	0.0000	 

The exact stock prices and make-whole reference dates may not be set forth in the table above, in
which case:

Schedule III
— Page 3

 

 

	 	•	 	If the stock price is between two stock price amounts in the table or the make-whole
reference date is between two dates in the table, the number of additional shares by
which the conversion rate for the Notes will be increased will be determined by a
straight-line interpolation between the number of additional shares set forth for the
higher and lower stock price amounts and the two dates, as applicable, based on a
365-day year.
	 
	 	•	 	If the stock price is greater than $250.00 per share, subject to adjustment, no
adjustments will be made to the conversion rate.
	 
	 	•	 	If the stock price is less than $33.95 per share, subject to adjustment, no
adjustments will be made to the conversion rate.

Notwithstanding the foregoing, in no event will the conversion rate exceed 29.4550 shares of common
stock per $1,000 in original principal amount of Notes, subject to adjustments as set forth under
“Description of the Notes—Conversion Rights—Conversion Rate Adjustments” in the Company’s
Preliminary Offering Circular for the offering of the Notes.

	 	 	 
	Accreted Principal for 

the Notes:

	 	The following table sets forth the accreted
principal amounts for the Notes per $1,000 original
principal amount as of the specified dates during
the period from June 1, 2013 through the maturity
date of the Notes:

	 	 	 	 	 
	 	 	Accreted Principal
	Date	 	Amount
	June 1, 2013
	 	$	1,000.00	 
	December 1, 2013
	 	$	1,016.88	 
	June 1, 2014
	 	$	1,034.03	 
	December 1, 2014
	 	$	1,051.48	 
	June 1, 2015
	 	$	1,069.23	 
	December 1, 2015
	 	$	1,087.27	 
	June 1, 2016
	 	$	1,105.62	 
	December 1, 2016
	 	$	1,124.28	 
	June 1, 2017
	 	$	1,143.25	 
	December 1, 2017
	 	$	1,162.54	 
	June 1, 2018
	 	$	1,182.16	 
	December 1, 2018
	 	$	1,202.11	 
	June 1, 2019
	 	$	1,222.39	 
	December 1, 2019
	 	$	1,243.02	 
	June 1, 2020
	 	$	1,264.00	 
	December 1, 2020
	 	$	1,285.33	 
	June 1, 2021
	 	$	1,307.02	 
	December 1, 2021
	 	$	1,329.07	 
	June 1, 2022
	 	$	1,351.50	 
	December 1, 2022
	 	$	1,374.31	 

Schedule III — Page 4

 

 

	 	 	 	 	 
	 	 	Accreted Principal
	Date	 	Amount
	June 1, 2023
	 	$	1,397.50	 
	December 1, 2023
	 	$	1,421.08	 
	June 1, 2024
	 	$	1,445.06	 
	December 1, 2024
	 	$	1,469.45	 
	June 1, 2025
	 	$	1,494.24	 
	December 1, 2025
	 	$	1,519.46	 
	June 1, 2026
	 	$	1,545.10	 
	December 1, 2026
	 	$	1,571.17	 
	June 1, 2027
	 	$	1,597.69	 
	December 1, 2027
	 	$	1,624.65	 
	June 1, 2028
	 	$	1,652.06	 
	December 1, 2028
	 	$	1,679.94	 
	June 1, 2029
	 	$	1,708.29	 
	December 1, 2029
	 	$	1,737.12	 
	June 1, 2030
	 	$	1,766.43	 
	December 1, 2030
	 	$	1,796.24	 
	June 1, 2031
	 	$	1,826.55	 
	December 1, 2031
	 	$	1,857.38	 
	June 1, 2032
	 	$	1,888.72	 
	December 1, 2032
	 	$	1,920.59	 
	June 1, 2033
	 	$	1,953.00	 
	December 1, 2033
	 	$	1,985.96	 
	June 1, 2034
	 	$	2,019.47	 
	December 1, 2034
	 	$	2,053.55	 
	June 1, 2035
	 	$	2,088.20	 
	December 1, 2035
	 	$	2,123.44	 
	June 1, 2036
	 	$	2,159.28	 
	December 1, 2036
	 	$	2,195.71	 
	June 1, 2037
	 	$	2,232.77	 
	December 1, 2037
	 	$	2,270.44	 
	June 1, 2038
	 	$	2,308.76	 

The accreted principal amount of a Note between the dates listed above will include an amount
reflecting the additional principal accretion that has accrued as of such date since the
immediately preceding date in the table.

 

			
	This communication is intended for the sole use of the person to whom it is provided by the sender.

Schedule III — Page 5

 

 

These securities have not been registered under the Securities Act of 1933, as amended (the
“Securities Act”), and may only be sold to qualified institutional buyers pursuant to Rule 144A of
the Securities Act or pursuant to another applicable exemption from registration.

This term sheet relates only to the Notes described herein and should be read together with the
Company’s Preliminary Offering Circular dated May 27, 2008 (including the documents incorporated by
reference therein) relating to the Notes (the “Preliminary Offering Circular”) before making a
decision in connection with an investment in the Notes. The information in this term sheet
supersedes the information in the Company’s Preliminary Offering Circular to the extent that it is
inconsistent therewith. Terms used herein but not defined herein shall have the respective meanings
as set forth in the Preliminary Offering Circular.

ANY DISCLAIMERS OR OTHER NOTICES THAT MAY APPEAR BELOW ARE NOT APPLICABLE TO THIS COMMUNICATION AND
SHOULD BE DISREGARDED. SUCH DISCLAIMERS OR OTHER NOTICES WERE AUTOMATICALLY GENERATED AS A RESULT
OF THIS COMMUNICATION BEING SENT VIA BLOOMBERG OR ANOTHER EMAIL SYSTEM.

Schedule III — Page 6EX-10.19

Exhibit 10.19

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”), is made and entered into as of July 30, 2007, by
and between Graham Corporation, a Delaware corporation with its principal place of business at 20
Florence Avenue, Batavia, New York 14020 (the “Company”), and Alan E. Smith, currently residing at
52 Willow Street, Dover, New Hampshire (the “Executive”).

     WHEREAS, the Company and the Executive desire enter into this Agreement to describe the
employment relationship and obligations of the parties.

     NOW, THEREFORE, the parties hereto, intending to be legally bound and in consideration of the
mutual covenants herein contained, agree as follows:

     1. Employment. The Company hereby employs the Executive and the Executive hereby
accepts employment as the Vice President of Operations of the Company, upon the terms and
conditions hereinafter set forth.

     2. Duties.

          (a) The Executive shall have authority and responsibility for development, control and
oversight of the Company’s manufacturing processes and shall report directly to the Company’s
President and/or Chief Operating Officer. The Executive shall perform such duties generally
consistent with Executive’s title and as may from time to time be required of the Executive by the
President and/or Chief Operating Officer or by the Board of Directors (the “Board”) of the
Company. The Executive’s office shall be located at the Company’s principal place of business in
Batavia, New York. The Executive agrees to travel to the extent reasonably necessary for the
performance of his duties. The Executive shall devote his full time to the business and affairs
of the Company and shall use his best efforts, skill and ability in performing his duties on
behalf of the Company.

          (b) The Executive agrees that the Company, in its discretion, may apply for and procure in
its own name and for its own benefit, life insurance on the life of the Executive in any amount or
amounts considered advisable, and that he shall have no right, title or interest therein. The
Executive further agrees to submit to any medical or other examination and to execute and deliver
any application or other instrument in writing, reasonably necessary to effectuate such insurance,
provided such actions do not materially harm the Executive’s ability to otherwise obtain or retain
personal life insurance.

     3. Term.

          (a) Except as otherwise provided in this Agreement to the contrary, this Agreement shall be
and remain in effect during the period of employment (the “Term”) established under this Section
3.

          (b) Except as provided in Section 3(c), beginning on the effective date of this Agreement,
the Term shall be for one year and shall be automatically extended for one additional year each
day (such that while this Agreement is in effect the remaining Term shall never be less

 

 

or greater than one year) that this Agreement is in effect, unless either the Company, or the
Executive, respectively, elects not to extend the Term further by giving written notice to the
other party, in which case the Term shall end on the first anniversary of the date on which such
written notice is given; provided, however, that in any event, the Term shall end on the last day
of the month in which the Executive attains the age of 65.

     (c) Notwithstanding anything herein contained to the contrary, (i) this Agreement may be
terminated during the Term as provided for herein and (ii) nothing in this Agreement shall mandate
or prohibit a continuation of the Executive’s employment following the expiration of the Term upon
such terms and conditions as the Company and the Executive may mutually agree upon.

     4. Base Compensation. As the base compensation for all services to be rendered by the
Executive to the Company, the Company agrees to pay to the Executive, and the Executive shall
accepts, a salary at a rate of $152,500 per annum, payable in arrears in equal monthly installments
of $12,708.33 each, subject to such deductions and withholdings as may be required by law.
Periodically, the President and the Board will review the salary of the Executive, taking into
consideration such factors as the Executive’s performance and such other matters as it deems
relevant and, in its discretion alone, may increase the salary of the Executive to such rate as the
Board deems proper; provided that the Company shall in no event be required to grant any such
increase.

     5. Incentive Compensation.

          (a) Bonus. The Executive shall be eligible to receive bonuses and awards under the Company’s
bonus plans or arrangements as may be in effect from time to time, including the Company’s Annual
Executive Cash Bonus Program, as may be from time to time determined by the Board or a committee
thereof. Any bonuses and awards made to the Executive under the Company’s bonus plans or
arrangements for the fiscal year ending March 31, 2008 shall be pro rated based on the date of
this Agreement.

          (b) Long-Term Incentive Compensation. The Executive shall be eligible to participate in any
long-term incentive compensation plan generally made available to similarly situated executive
officers of the Company in accordance with and subject to the terms of such plans, including the
Company’s Annual Stock-Based Incentive Award Plan for Senior Executives, as may from time to time
be determined by the Board of a committee thereof. Any long-term incentive awards made under the
Company’s Annual Stock-Based Incentive Award Plan for Senior Executives for the fiscal year ending
March 31, 2008 shall be pro rated based on the date of this Agreement.

          (c) Other Compensation. The Company may, upon recommendation of the Board or a committee
thereof, award to the Executive such other bonuses and compensation as it deems appropriate and
reasonable.

     6. Benefits. During the term of this Agreement, the Company shall provide the
following benefits to the Executive:

2

 

          (a) Medical. The Company will provide the Executive health coverage for himself and his
family in accordance with the Company’s health and medical insurance plans, as the same may be in
effect from time to time. The Executive shall be responsible for paying the employee portion of
the premiums for such health and medical insurance plans.

          (b) Vacation. The Executive shall be entitled to eight days of paid vacation during the
period commencing on the date hereof and ending on December 31, 2007, which vacation if not used
prior to December 31, 2007 will be forfeited by the Executive. Thereafter, Executive shall be
entitled to vacation in accordance with the Company’s general vacation policies and practices as
may be in effect from time to time. For such purposes, Executive shall be considered to be a
fifteen-year employee of the Company.

          (c) General Benefits. The Executive shall be entitled to participate in all employee benefit
plans and arrangements of the Company that may be in effect from time to time and as may from time
to time be made available to the other similarly situated executive officers of the Company,
subject to and on a basis consistent with the terms, conditions and overall administration of such
plans and arrangements.

          (d) No Limitation of Company’s Rights. Nothing in this Section 6 shall be construed to limit
or restrict the complete discretion of the Company to amend, modify or terminate any employee
benefit plan or plans of the Company where such action generally affects plan participants or
employees, including the Executive.

          (e) Defined Benefit Pension Plan Prior Service Credit. For purposes of participation in the
Company’s Defined Benefit Pension Plan, Executive’s prior years of service on behalf of the
Company will be maintained (but no credit shall be provided under such Plan for time the Executive
was not in the employ of the Company).

          (f) Insurance. The Company shall provide Executive with $2,500 per annum for the purpose of
Executive procuring a term insurance policy that names such person(s) of Executive’s choosing as
beneficiary(ies).

     7. Travel and Relocation Expenses.

          (a) Travel Expenses. The Company shall pay or reimburse the Executive for all reasonable and
necessary traveling and other expenses incurred or paid by the Executive in connection with the
performance of his duties under this Agreement upon presentation of expense statements or vouchers
and such other supporting information as the Company may from time to time reasonably request.
However, the amount available for such traveling and other expenses may be fixed in advance by the
Company.

          (b) Relocation Expenses. The Company shall pay for Executive’s relocation expenses incurred
in connection with his move from Dover, New Hampshire to Western New York in accordance with the
policies and procedures set forth in the Company’s “Policy on Relocation (New Employees)” in
effect on the date of this Agreement. Such travel expenses shall include a housing allowance of
$2,000 per month while the Executive’s house remains for sale in Dover, New Hampshire, which
housing allowance shall be paid to Executive until the earlier of such time the sale of such house
is closed or December 31, 2007.

3

 

     8. Termination. This Agreement shall terminate prior to the Term expiration date,
hereinabove set forth, in the event that the Executive shall die or the Board shall reasonably
determine that the Executive has become disabled, or if the Executive’s employment shall be
terminated for cause or without cause, as hereinafter provided.

          (a) Disability. The Board may determine that the Executive has become disabled, for purposes
of this Agreement, in the event that the Executive shall fail, because of illness or incapacity,
to render for three successive months, or for shorter periods aggregating three months or more in
any period of twelve months, services of the character contemplated by this Agreement; and
thereupon this Agreement and all rights of the Executive hereunder shall be deemed to have been
terminated as of the end of the calendar month in which such determination is made.

          (b) For Cause. The Board may dismiss the Executive for cause in the event that it determines
that there has been willful misconduct by the Executive in connection with the performance of his
duties hereunder, or any other conduct on the part of the Executive which has been materially
injurious to the Company; and thereupon this Agreement shall terminate effective upon the delivery
to the Executive of 30-day written notice that the Board has made such determination. For
purposes of this Agreement, “cause” shall be determined only by a good faith finding thereof by
the Board, which shall afford the Executive the opportunity to appear before it prior to
finalizing any such determination. If the Executive in good faith contests a termination for
cause, the Company will pay all reasonable legal fees and other expenses incurred by the
Executive, as the Executive is billed for such costs, within ten days of periodic submission to
the Company of statements of charges of attorneys and statements of other expenses incurred by the
Executive in connection with such challenge. The Executive will reimburse the Company for all
such costs if it should be determined by a court of final adjudication that the Executive did not
act in good faith in bringing such challenge.

          (c) Without Cause. The Executive may resign without cause at any time upon 30 days’ written
notice to the Company, in which event the Company’s obligation to compensate him ceases on the
effective date of his termination except as to amounts due to him under Section 8(c)(i). The
Company may dismiss the Executive without cause at any time upon 30-days’ written notice to the
Executive. In the event the Company dismisses the Executive other than for cause, or if the
Executive resigns because of a material breach of this Agreement by the Company (which Executive
may do only if such breach remains materially uncured after the Executive has provided 30 days’
prior written notice to the Board), the Company shall provide to the Executive:

               (i) payment of the compensation due to him through the effective date of the termination of
the Executive’s employment, within ten business days following such effective date of the
termination of the Executive’s employment;

               (ii) continuation of the Executive’s salary for twelve months following the effective date of
the termination of the Executive’s employment at the higher of the rate specified in Section 4 or
the Executive’s then-current annualized salary, which salary continuation shall be paid monthly in
accordance with the Company’s regular payroll practices; and

               (iii) payment of any Accrued Bonus (as defined below), to be paid as soon as administratively
practicable after the six-month anniversary of the effective date of the

4

 

termination of the Executive’s employment. Accrued Bonus shall mean any amount of bonus with
respect to any year prior to the year in which dismissal without cause occurs (“Prior Bonus Year”)
calculable by applying the formula prescribed by the Company’s incentive compensation plan as it
existed on December 31 of such Prior Bonus Year and employing in the application of such formula
the goals, ratios and weighting percentages and other variable figures which the Bonus Plan calls
for the Company’s Board or any committee thereof to determine annually (“Bonus Plan Variables”)
which the Company’s Board of Directors or any committee thereof adopted for purposes of the Bonus
Plan prior to December 31 of such Prior Bonus Year. Notwithstanding any other provision of this
Section, no Accrued Bonus shall be payable pursuant to this Section 8(c) for any Prior Bonus Year
with respect to which a bonus amount was paid to and accepted by the Executive.

          (d) In the event that the provisions of this Section 8(c) are triggered, the Executive shall
resign from all offices and directorships of the Company and of all subsidiaries and affiliates of
the Company, upon payment to the Executive of the amount referred to in Section 8(c)(i).

          (e) Release of Claims. The Company’s obligation to provide the payments under this Section 8
is conditioned upon the Executive’s execution of an enforceable release of all claims (and upon
the expiration of all applicable rescission periods contained in such release) and his compliance
with all provisions of this Agreement. If the Executive chooses not to execute such a release (or
rescinds such release) or fails to comply with these provisions, then the Company’s obligation to
compensate him ceases on the effective date of his termination except as to amount due to him
under Section 8(c)(i).

          (f) Return of Confidential Documentation. Upon termination of his employment for any reason
whatsoever, the Executive shall return to the Company all working papers, computer equipment,
notebooks, strategic plans and other confidential documents and information, in any form
whatsoever.

     9. Change in Control. In the event a person begins a tender or exchange offer,
circulates a proxy to stockholders, or takes other steps seeking to effect a Change in Control (as
defined below), the Executive agrees that he will not voluntarily leave the employ of the Company,
and will render the services contemplated under this Agreement, until such person has either
abandoned or terminated his or its efforts to effect a Change in Control or until three months
after a Change in Control has occurred. For the purposes of this Agreement, the term “Change in
Control” shall mean:

          (a) any “person” within the meaning of Section 14(d) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), other than the Company, a subsidiary, or any employee benefit
plan(s) sponsored by the Company or any subsidiary, is or has become the “beneficial owner,” as
defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 25 percent or more of the
combined voting power of the outstanding securities of the Company ordinarily having the right to
vote at the election of directors;

          (b) individuals who constitute the Board on the effective date of this Agreement (the
“Incumbent Board”) have ceased for any reason to constitute at least a majority thereof (or a
majority of the Board as then constituted), provided that any person becoming a director
subsequent to the effective date of this Agreement whose election, or nomination for election by
the Company’s stockholders, was approved by a vote of at least three-quarters of the directors

5

 

comprising the Incumbent Board (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee for director without objection
to such nomination) shall be, for purposes of this Plan, considered as though such person were a
member of the Incumbent Board;

          (c) the closing of a reorganization, merger or consolidation of the Company, other than one
with respect to which all or substantially all of those persons who were the beneficial owners,
immediately prior to such reorganization, merger or consolidation, of outstanding securities of
the Company ordinarily having the right to vote in the election of directors own, immediately
after such transaction, more than three-quarters of the outstanding securities of the resulting
corporation ordinarily having the right to vote in the election of directors;

          (d) the closing of a sale or other disposition of all or substantially all of the assets of
the Company, other than to a subsidiary; or

          (e) the complete liquidation and dissolution of the Company.

     10. Covenants of Executive. The Executive acknowledges that: (i) the business of the
Company and its affiliates, as currently conducted and as conducted from time to time throughout
the term of this Agreement (collectively, the “Business”), is conducted by and is proposed to be
conducted by the Company on a world-wide basis (the “Company’s Market”); (ii) the Business involves
providing design, engineering and manufacture of certain vacuum and heat transfer equipment,
including but not limited to steam condensers, steam jet ejectors, shell and tube heat exchangers,
plate and frame heat exchangers, Heliflow heat exchangers, liquid ring vacuum pumps and rotary
piston pumps; (iii) the Company has developed trade secrets and confidential information concerning
the Business; and (iv) the agreements and covenants contained in this Section 10 are essential to
protect the Business. In order to induce the Company to enter into this Employment Agreement, the
Executive covenants and agrees that:

          (a) Agreement Not To Compete. For a period of 18 months after the termination of Executive’s
employment with the Company for any reason (such period of time hereinafter referred to as the
“Restricted Period”), neither the Executive nor any entity of which 20 percent or more of the
beneficial ownership is held by the Executive or a person related to the Executive by blood or
marriage (“Controlled Entity”) will, anywhere in the Company’s Market, directly or indirectly own,
manage, operate, control, invest or acquire an interest in, or otherwise engage or participate in,
whether as a proprietor, partner, stockholder, director, officer, member manager, employee or
otherwise any business which competes in the Company’s Market with the Business, without the prior
written consent of the Company. Notwithstanding any other provisions of this Agreement, the
Executive may make a passive investment in any publicly-traded company or entity in an amount not
to exceed five percent of the voting stock of any such company or entity.

          (b) Agreement Not To Interfere in Business Relationships.

               (i) During the Restricted Period, neither the Executive nor any Controlled Entity will
directly or indirectly solicit, induce or influence any customer, or any other person which has a
business relationship with the Company or any affiliate, or which had on the date of this

6

 

Agreement such a relationship with the Company or any affiliate, to discontinue or reduce the
extent of such relationship with the Company or any affiliate in the Company’s Market.

               (ii) During the Restricted Period, neither the Executive nor any Controlled Entity will (1)
directly or indirectly recruit, solicit or otherwise induce or influence any stockholder or
employee of the Company or any of its affiliates to discontinue such employment or other
relationship with the Company or any affiliate, or (2) employ or seek to employ, or cause any
business which competes in the Company’s Markets to employ or seek to employ for any reason, any
person who is then (or was at any time within six months prior to the date the Executive or such
business employs or seeks to employ such person) employed by the Company or any affiliate without
the prior written consent of the Company.

          (c) Confidentiality. During the Restricted Period, neither the Executive nor any Controlled
Entity will directly or indirectly disclose to anyone, or use or otherwise exploit for the
Executive’s or any Controlled Entity’s own benefit or for the benefit of anyone other than the
Company, any confidential information, including, without limitation, any confidential “know-how”,
trade secrets, customer lists, details of customer contracts, pricing policies, operational
methods, marketing plans or strategies, product development techniques or plans, business
acquisition plans and new personnel acquisition plans of the Company or any affiliate related to
the Business or any portion or phase of any scientific, engineering or technical information,
design, process, procedure, formula, improvement, discovery, invention, machinery or device of the
Company or any affiliate, whether or not in written or tangible form (all of the preceding is
hereinafter referred to as “Confidential Information”). The term “Confidential Information” does
not include, and there shall be no obligation hereunder with respect to, information that becomes
generally available to the public or the Company’s competitors other than as a result of a
disclosure by the Executive or a Controlled Entity or any agent or other representative thereof.
Neither the Executive nor any Controlled Entity shall have any obligation hereunder to keep
confidential any Confidential Information to the extent disclosure is required by law, or
determined in good faith by the Executive to be necessary or appropriate to comply with any legal
or regulatory order, regulation or requirement; provided, however, that in the event disclosure is
required by law, the Executive or the Controlled Entity concerned shall provide the Company with
prompt advance written notice of such requirement so that the Company may seek an appropriate
protective order. It is understood that in any new employment, the Executive may use his ordinary
skill and non-confidential knowledge, even though said skill and non-confidential knowledge may
have been gained at the Company. The Executive’s obligations under this Section 10(c) shall be in
addition to, not in substitution for, any common law fiduciary duties the Executive has to the
Company regarding information acquired during the course of his employment.

          (d) Intellectual Property. The Executive shall communicate to the Company full information
concerning all inventions, improvements, discoveries, formulas, processes, systems of
organization, management procedures, software or computer applications (hereinafter, collectively,
“Intellectual Property”) made or conceived by him either solely or jointly with others while in
the employ of the Company, whether or not perfected during his period of employment and which
shall be within the existing or contemplated scope of the Company’s business during his
employment. The Executive will assist the Company and its nominees in every way at the Company’s
expense in obtaining patents for such Intellectual Property as may be patentable in any and all
countries and the Executive will execute all papers the Company may desire and

7

 

assignments thereof to the Company or its nominees and said Intellectual Property shall be
and remain the property of the Company and its nominees, if any, whether patented or not or
assigned or not.

          (e) Survival of Covenants. In the event of a termination of this Agreement, the covenants
and agreements contained in this Section 10 shall survive, shall continue thereafter, and shall
not expire unless and except as expressly set forth in this Section.

          (f) Remedies. The parties to this Agreement agree that (i) if either the Executive or any
Controlled Entity breaches any provision of this Section 10, the damage to the Company and its
affiliates will be substantial, although difficult to ascertain, and money damages will not afford
an adequate remedy, and (ii) if either the Executive or any Controlled Entity is in breach of this
Agreement, or threatens a breach of this Agreement, the Company shall be entitled in its own right
and/or on behalf of one or more of its affiliates, in addition to all other rights and remedies as
may be available at law or in equity, to (1) injunctive and other equitable relief to prevent or
restrain a breach of this Agreement and (2) may require the breaching party to pay damages as the
result of any transactions constituting a breach hereof.

     11. Indemnification of Executive. In the event the Executive is terminated for any
reason, (a) the Company will hold harmless and indemnify the Executive for all third party claims,
actions or other proceedings against the Executive initiated either prior to the termination of
employment or thereafter which relate to duties performed in good faith by the Executive while
employed by the Company; and (b) the Company will retain the Executive as named insured under any
directors’ and officers’ insurance policies it may have, for acts of the Executive during the time
he served as an officer of the Company. Additionally, all reasonable legal and other costs
incurred by the Executive to defend himself will be paid by the Company, as the Executive is billed
for such costs, within ten days of periodic submission to the Company of statements of charges of
attorneys and statements of other expenses incurred by the Executive in connection with such
defense.

     12. Effect of Waiver. The waiver by either party of a breach of any provision of this
Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof.

     13. Notice. Any and all notices provided for herein shall be in writing and shall be
physically delivered or mailed by registered or certified mail, return receipt requested to the
parties at their respective addresses set forth hereinabove. Either party may from time to time
designate a different address for notices to be sent to such party by giving the other party due
notice of such different address.

     14. Validity. If any part of this Agreement shall be found to be invalid or
unenforceable, the same shall be deemed to be severable and the remaining portions of this
Agreement shall remain in full force and effect.

     15. Modification and Assignment. This Agreement shall not be modified or amended
except by an instrument in writing signed by the parties hereto. This Agreement and all of its
terms and conditions shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, legal representatives, successors and assigns, including but not limited to
any corporation or other entity with or into which the Company is merged or consolidated or any
other

8

 

successor of the Company. The Executive agrees that he will not and may not assign, transfer
or convey, pledge or encumber this Agreement or his right, title or interest therein, or his power
to execute the same or any monies due or to become due hereunder, this Agreement being intended to
secure the personal services of the Executive, and the Company shall not recognize any such
assignment, transfer, conveyance, pledge or encumbrance.

     16. Applicable Law. This Agreement and the rights and obligations of the parties
hereunder shall be construed and interpreted in accordance with the laws of the State of New York,
without giving effect to the conflict of laws provisions thereof. Any action or proceeding brought
by either party against the other arising out of or related to the Agreement shall be brought only
in a state court of competent jurisdiction located in the County of Monroe, State of New York or
the Federal District Court for the Western District of New York located in Monroe County, New York
and the parties hereby consent to the personal jurisdiction and venue of said courts.

     17. Prior Agreements. This Agreement shall supersede any prior employment agreement,
arrangement or understanding between the Company and the Executive, without limitation, and shall
be effective from the date specified hereinabove.

     18. Business Combinations. In the event of any sale, merger or any form of business
combination affecting the Company, including without limitation the purchase of assets or any other
form of business combination, the Company will obtain the express written assumption of this
Agreement by the acquiring or surviving entity from such combination, and failure of the Company to
obtain such an assumption will constitute a breach of this Agreement, entitling the Executive to
all payments and other benefits to be provided in the event of termination without cause provided
in Section 8.

     19. Section 409A. This Agreement is intended to comply with Section 409A of the Code
to the extent its provisions are subject to that law. The parties agree that they will negotiate
in good faith regarding amendments necessary to bring this Agreement into compliance with the terms
of that Section or an exemption therefrom as interpreted by guidance issued by the Internal Revenue
Service, taking into account any limitations on amendments imposed by Section 409A or Internal
Revenue Service guidance. The parties further agree that to the extent the terms of this Agreement
fail to qualify for exemption from or satisfy the requirements of Section 409A, this Agreement may
be operated in compliance with Section 409A pending amendment to the extent authorized by the
Internal Revenue Service. In such circumstances the Company and the Executive will administer the
Agreement in a manner which adheres as closely as possible to the existing terms and intent of the
Agreement while complying with Section 409A.

     20. Headings. The section headings of this Agreement are for convenience of reference
only and are not to be considered in the interpretation of the terms and conditions of this
Agreement.

     21. Invalidity or Unenforceability. If any term or provision of this Agreement is
held to be invalid or unenforceable, for any reason, such invalidity or unenforceability shall not
affect any other term or provision hereof and this Agreement shall continue in full force and
effect as if such invalid or unenforceable term or provision (to the extent of the invalidity or
unenforceability) had not been contained herein. If any court determines that any provision of
Section 10 hereof is unenforceable because of the duration or geographic scope of such provision,
such court shall have

9

 

the power to reduce the scope or duration of such provision, as the case may be, and, in its
reduced form, such provision shall then be enforceable.

     22. Counterparts. This Agreement may be executed in any number of counterparts, each
of which for all purposes shall be deemed to be an original.

[Remainder of page intentionally left blank.]

10

 

     IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the day and
year first above written.

	 	 	 	 	 
	 	 	GRAHAM CORPORATION
	 
	 	 	 	 
	 

	 	By:
	 	/s/ James R. Lines
	 

	 	 	 	 
	 

	 	Name:
	 	James R. Lines
	 

	 	Title:
	 	President and Chief Operating Officer
	 
	 	 	 	 
	 

	 	 	 	/s/ Alan E. Smith
	 

	 	 	 	 
	 

	 	 	 	Alan E. Smith

	 	 	 	 	 
	STATE OF NEW YORK

	 	) 
	 	 
	 

	 	ss:	 	 
	COUNTY OF MONROE

	 	) 	 	 

     On this 1st day of August, 2007, before me personally came James R. Lines, to me known, who,
being by me duly sworn did depose and say that the above-named person resides in Lancaster, NY,
that said person is the President and the Chief Operating Officer of Graham Corporation, the
corporation described in and which executed the foregoing instrument; and that the above-named
person signed thereto by order of the Board of Directors of said corporation.

	 	 	 	 	 
	 	 	 
	 	/s/ Carole M. Anderson
 	 
	 	Notary Public 	 
	 	[notary stamped] 	 
	 

	 	 	 	 	 
	STATE OF NEW YORK

	 	) 	 	 
	 

	 	ss:
	 	 
	COUNTY OF MONROE

	 	) 	 	 

     On the 1st day of August, in the year 2007, before me, the undersigned, a Notary Public in and
for said State, personally appeared Alan E. Smith, personally known to me or proved to me on the
basis of satisfactory evidence to be the individual whose name is subscribed to the within
instrument and acknowledged to me that he executed the same in his capacity, and that by his
signature on the instrument, the individual, or the person upon behalf of which the individual
acted, executed the instrument.

	 	 	 	 	 
	 	 	 
	 	/s/ Carole M. Anderson
 	 
	 	Notary Public 	 
	 	[notary stamped] 	 
	 

[Signature Page to the Employment Agreement of Alan E. Smith]

11

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