Document:

exv10w23

 

Exhibit 10.23

WARRANT NO.: [                    ]

FORM OF WARRANT

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES REPRESENTED HEREBY HAVE BEEN TAKEN BY
THE REGISTERED OWNER FOR INVESTMENT, AND WITHOUT A VIEW TO RESALE OR DISTRIBUTION THEREOF, AND MAY
NOT BE SOLD, TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER
THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED, THE
RULES AND REGULATIONS THEREUNDER OR OTHER APPLICABLE SECURITIES LAWS.

WARRANT TO PURCHASE

COMMON STOCK OF
 TOUCHSTONE RESOURCES USA, INC.

Void after 5:00 p.m. Eastern Standard Time on [                    ], 2007

     This warrant (“Warrant”) is to verify that, FOR VALUE RECEIVED,
[                     ] (“Holder”) is entitled to purchase, subject to the terms and
conditions hereof, from TOUCHSTONE RESOURCES USA, INC., a Delaware corporation (the
“Company”), [                     ] shares of common stock, $.001 par value per share, of the
Company (the “Common Stock”), at any time during the period commencing at 9:00 a.m.,
Eastern Standard Time on [                    ], 2004 (the “Commencement Date”) and
ending at 5:00 p.m. Eastern Standard Time on the third (3rd) anniversary of the
Commencement Date (the “Termination Date”), at an exercise price (the “Exercise Price”) of $2.00
per share of Common Stock. The number of shares of Common Stock purchasable upon exercise of this
Warrant and the Exercise Price per share shall be subject to adjustment from time to time upon the
occurrence of certain events as set forth below.

     The shares of Common Stock or any other shares or other units of stock or other securities or
property, or any combination thereof, then receivable upon exercise of this Warrant, as adjusted
from time to time, are sometimes referred to hereinafter as “Exercise Shares.” The exercise price
per share as from time to time in effect is referred to hereinafter as the “Exercise Price.”

1. Exercise of Warrant; Issuance of Exercise Shares.

     (a) Exercise of Warrant. Subject to the terms hereof, the purchase rights represented
by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to

 

 

time, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly
completed and executed on behalf of the Holder, at the office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company) accompanied by payment of the Exercise Price in
full either (i) in cash or by bank or certified check for the Exercise Shares with respect to
which this Warrant is exercised; (ii) by delivery to the Company of shares of the Company’s Common
Stock having a Fair Market Value (as defined below) equal to the aggregate Exercise Price of the
Exercise Shares being purchased that Holder is the record and beneficial owner of and that have
been held by the Holder for at least six (6) months; (iii) provided that the sale of the Exercise
Shares are covered by an effective registration statement, by delivering to the Company a Notice
of Exercise together with an irrevocable direction to a broker-dealer registered under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), to sell a sufficient portion of
the Exercise Shares and deliver the sales proceeds directly to the Company to pay the Exercise
Price; or (iv) by any combination of the procedures set forth in subsections (i), (ii) and (iii)
of this Section 1(a). For the purposes of this Section 1(a), “Fair Market Value” shall be an
amount equal to the average of the Current Market Value (as defined below) for the ten (10) days
preceding the Company’s receipt of the duly executed Notice of Exercise form attached hereto as
Appendix A.

     In the event that this Warrant shall be duly exercised in part prior to the Termination Date,
the Company shall issue a new Warrant or Warrants of like tenor evidencing the rights of the
Holder thereof to purchase the balance of the Exercise Shares purchasable under the Warrant so
surrendered that shall not have been purchased.

     (b) Issuance of Exercise Shares: Delivery of Warrant Certificate. The Company
shall, within ten (10) business days or as soon thereafter as is practicable of the exercise
of this Warrant, issue in the name of and cause to be delivered to the Holder one or more certificates
representing the Exercise Shares to which the Holder shall be entitled upon such exercise
under the terms hereof. Such certificate or certificates shall be deemed to have been issued and
the Holder shall be deemed to have become the record holder of the Exercise Shares as of the date
of the due exercise of this Warrant.

     (c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and
covenants that all Exercise Shares issuable upon the due exercise of the Warrant represented
by this Warrant certificate (“Warrant Certificate”) will, upon issuance and payment therefor in
accordance with the terms hereof, be duly authorized, validly issued, fully paid and non-assessable and free and clear of all taxes (other than taxes which, pursuant to Section 2
hereof, the Company shall not be obligated to pay) or liens, charges, and security interests created
by the Company with respect to the issuance thereof.

     (d) Reservation of Exercise Shares. The Company covenants that during the term
that this Warrant is exercisable, the Company will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the Exercise Shares
upon the exercise of this Warrant, and from time to time will take all steps necessary to
amend its articles of incorporation to provide sufficient reserves of shares of Common Stock
issuable upon the exercise of the Warrant.

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     (e) Fractional Shares. The Company shall not be required to issue fractional shares of
capital stock upon the exercise of this Warrant or to deliver Warrant Certificates that evidence
fractional shares of capital stock. In the event that any fraction of an Exercise Share would,
except for the provisions of this subsection (e), be issuable upon the exercise of this Warrant,
the Company shall pay to the Holder exercising the Warrant an amount in cash equal to such
fraction multiplied by the Current Market Value of the Exercise Share on the last business day
prior to the date on which this Warrant is exercised. For purposes of this subsection (e), the
“Current Market Value” for any day shall be determined as follows:

          (i) if the Exercise Shares are traded in the over-the-counter market and not on any national
securities exchange and not on the NASDAQ National Market System or NASDAQ Small Cap Market
(together, the “NASDAQ Reporting System”), the average of the mean between the last bid and asked
prices per share, as reported by the National Quotation Bureau, Inc., or an equivalent generally
accepted reporting service, or if not so reported, the average of the closing bid and asked prices
for an Exercise Share as furnished to the Company by any member of the National Association of
Securities Dealers, Inc., selected by the Company for that purpose; or

          (ii) if the Exercise Shares are listed or traded on a national securities exchange or the
NASDAQ Reporting System, the closing price on the principal national securities exchange on which
they are so listed or traded, on the NASDAQ Reporting System, as the case may be, on the last
business day prior to the date of the exercise of this Warrant. The closing price referred to in
this clause (ii) shall be the last reported sales price or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices, in either case on the
national securities exchange on which the Exercise Shares are then listed or in the NASDAQ
Reporting System; or

          (iii) if no such closing price or closing bid and asked prices are available, as determined
in any reasonable manner as may be prescribed by the Board of Directors of the Company.

2. Payment of Taxes.

     (a) Stamp Taxes. The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of Exercise Shares upon the exercise of this Warrant;
provided, however, that the Company shall not be required to pay any tax or taxes which may be payable
in respect of any transfer involved in the issue of any Warrant Certificates or any
certificates for Exercise Shares in a name other than that of the Holder of a Warrant Certificate surrendered
upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.

     (b) Withholding. The Holder shall pay to the Company, or make arrangements
satisfactory to the Company regarding payment of, any federal, state, local and/or payroll
taxes of any kind required by law to be withheld with respect to the grant of this Warrant or the
issuance of the Exercise Shares. The Company may, to the extent permitted by law, deduct any

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such taxes from any payment of any kind otherwise due to the Holder whether or not pursuant
to this Warrant. The Holder may elect, with the consent of the Company, to have such tax
withholding obligation satisfied, in whole or in part, by: (i) authorizing the Company to withhold
from the Exercise Shares a number of shares of Common Stock having an aggregate Fair Market Value
that would satisfy the minimum withholding amount due, or (ii) delivering to the Company a number
of shares of Common Stock of which the Holder is the record and beneficial owner and that have
been held by the Holder for at least six (6) months with an aggregate Fair Market Value that would
satisfy the minimum withholding amount due. The Company may require that any fractional share
amount be settled in cash. For the purposes of this Section 2, Fair Market Value shall be
determined as of the date on which the amount of tax to be withheld is determined

3. Mutilated or Missing Warrant Certificates. In case any Warrant shall be mutilated,
lost, stolen or destroyed, the Company may in its discretion issue, in exchange and substitution for
and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant
lost, stolen or destroyed, a new Warrant or Warrants of like tenor and in the same aggregate
denomination, but only (i) in the case of loss, theft or destruction, upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Warrant and indemnity or
bond, if requested, also satisfactory to them and (ii) in the case of mutilation, upon surrender of
the mutilated Warrant. Applicants for such substitute Warrants shall also comply with such
other reasonable regulations and pay such other reasonable charges as the Company or its
counsel may prescribe.

4. Rights of Holder. The Holder shall not, by virtue of anything contained in this Warrant
or otherwise, be entitled to any right whatsoever, either in law or equity, of a stockholder of the
Company, including without limitation, the right to receive dividends or to vote or to consent or
to receive notice as a shareholder in respect of the meetings of shareholders or the election of
directors of the Company or any other matter.

5. Registration of Transfers and Exchanges. The Warrant shall be transferable, subject to
the provisions of Section 7 hereof, only upon the books of the Company, if any, to be maintained
by it for that purpose, upon surrender of the Warrant Certificate to the Company at its principal
office accompanied (if so required by the Company) by a written instrument or instruments of
transfer in form satisfactory to the Company and duly executed by the Holder thereof or by the
duly appointed legal representative thereof or by a duly authorized attorney and upon payment of
any necessary transfer tax or other governmental charge imposed upon such transfer. In all cases
of transfer by an attorney, the original letter of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited and remain with the Company. In case of transfer by
executors, administrators, guardians or other legal representatives, duly authenticated evidence
of their authority shall be produced, and may be required to be deposited and remain with the
Company in its discretion. Upon any such registration of transfer, a new Warrant shall be issued
to the transferee named in such instrument of transfer, and the surrendered Warrant shall be
canceled by the Company.

     Any Warrant may be exchanged, at the option of the Holder thereof and without change, when
surrendered to the Company at its principal office, or at the office of its transfer agent, if any,
for another Warrant or other Warrants of like tenor and representing in the aggregate the

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right to purchase from the Company a like number and kind of Exercise Shares as the Warrant
surrendered for exchange or transfer, and the Warrant so surrendered shall be canceled by the
Company or transfer agent, as the case may be.

6. Adjustment of Exercise Shares and Exercise Price. The Exercise Price and the number and
kind of Exercise Shares purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as hereinafter provided. The
Exercise Price in effect at any time and the number and kind of securities purchasable upon
exercise of each Warrant shall be subject to adjustment as follows:

     (a) In case of any consolidation or merger of the Company with another corporation
(other than a merger with another corporation in which the Company is the surviving
corporation and which does not result in any reclassification or change — other than a change in par
value, or from par value to no par value, or from no par value to par value, or as a result of a
subdivision or combination — of outstanding Common Stock issuable upon such exercise), the rights of the
Holder of this Warrant shall be adjusted in the manner described below:

          (i) In the event that the Company is the surviving corporation, this Warrant shall, without
payment of additional consideration therefor, be deemed modified so as to provide that the Holder
of this Warrant, upon the exercise thereof, shall procure, in lieu of each share of Common Stock
theretofore issuable upon such exercise, the kind and amount of shares of stock, other securities,
money and property receivable upon such reclassification, change, consolidation or merger by the
holder of each share of Common Stock, had exercise of this Warrant occurred immediately prior to
such reclassification, change, consolidation or merger. This Warrant (as adjusted) shall be deemed
to provide for further adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6. The provisions of this clause (i) shall similarly apply
to successive reclassifications, changes, consolidations and mergers.

          (ii) In the event that the Company is not the surviving corporation, Holder shall be given at
least fifteen (15) days prior written notice of such transaction and shall be permitted to
exercise this Warrant, to the extent it is exercisable as of the date of such notice, during this
fifteen (15) day period. Upon expiration of such fifteen (15) day period, this Warrant and all of
Holder’s rights hereunder shall terminate.

     (b) If the Company, at any time while this Warrant, or any portion thereof, remains
outstanding and unexpired, by reclassification of securities or otherwise, shall change any of
the securities as to which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, this Warrant shall thereafter represent
the right to acquire such number and kind of securities as would have been issuable as the result of
such change with respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the Exercise Price therefor
shall be appropriately adjusted, all subject to further adjustment as provided in this Section 6.

     (c) In case the Company shall (i) pay a dividend or make a distribution on its shares
of Common Stock in shares of Common Stock, (ii) subdivide or classify its outstanding
Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding

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Common Stock into a smaller number of shares, the Exercise Price in effect at the time of
the record date for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification, shall be proportionally adjusted so that the Holder of this
Warrant exercised after such date shall be entitled to receive the aggregate number and kind of
shares that, if this Warrant had been exercised by such Holder immediately prior to such date, he
would have owned upon such exercise and been entitled to receive upon such dividend, subdivision,
combination or reclassification. For example, if the Company declares a 2 for 1 stock dividend or
stock split and the Exercise Price immediately prior to such event was $2.00 per share, the
adjusted Exercise Price immediately after such event would be $1.00 per share. Such adjustment
shall be made successively whenever any event listed above shall occur. Whenever the Exercise
Price payable upon exercise of each Warrant is adjusted pursuant to this subsection (c), the
number of Exercise Shares purchasable upon exercise of this Warrant shall simultaneously be
adjusted by multiplying the number of Exercise Shares initially issuable upon exercise of this
Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by
the Exercise Price, as adjusted.

     (d) In the event that at any time, as a result of an adjustment made pursuant to
subsection (a), (b) or (c) above, the Holder of this Warrant thereafter shall become entitled
to receive any Exercise Shares of the Company, other than Common Stock, thereafter the number
of such other shares so receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in subsections (a), (b) or (c) above.

     (e) Irrespective of any adjustments in the Exercise Price or the number or kind of
Exercise Shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares as are stated in
the similar Warrants initially issuable pursuant to this Warrant

     (f) Whenever the Exercise Price shall be adjusted as required by the provisions of the
foregoing Section 6, the Company shall forthwith file in the custody of its Secretary or an
Assistant Secretary at its principal office and with its stock transfer agent, if any, an
officer’s certificate showing the adjusted Exercise Price determined as herein provided, setting forth
in reasonable detail the facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be necessary to show
the reason for and the manner of computing such adjustment. Each such officer’s certificate
shall be made available at all reasonable times for inspection by the holder and the Company shall,
forthwith after each such adjustment, mail a copy by certified mail of such certificate to the
Holder.

     (g) All calculations under this Section 6 shall be made to the nearest cent or to the
nearest one one-hundredth (l/100th) of a share, as the case may be.

7. Restrictions on Transferability: Restrictive Legend. Neither this Warrant nor the
Exercise Shares shall be transferable except in accordance with the provisions of this Section.

     (a) Restrictions on Transfer; Indemnification. Neither this Warrant nor any
Exercise Share may be offered for sale or sold, or otherwise transferred or sold in any
transaction which

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would constitute a sale thereof within the meaning of the Securities Act of 1933, as amended (the
“1933 Act”), unless (i) such security has been registered for sale under the 1933 Act and
registered or qualified under applicable state securities laws relating to the offer and sale of
securities, or (ii) exemptions from the registration requirements of the 1933 Act and the
registration or qualification requirements of all such state securities laws are available and the
Company shall have received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without registration under the 1933
Act and would not result in any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale, such counsel and such opinion to be
satisfactory to the Company.

     The Holder agrees to indemnify and hold harmless the Company against any loss, damage, claim
or liability arising from the disposition of this Warrant or any Exercise Share held by such
holder or any interest therein in violation of the provisions of this Section 7.

     (b) Restrictive Legends. Unless and until otherwise permitted by this Section 7, this
Warrant Certificate, each Warrant Certificate issued to the Holder or to any transferee or
assignee of this Warrant Certificate, and each certificate representing Exercise Shares issued
upon exercise of this Warrant or to any transferee of the person to whom the Exercise Shares
were issued, shall bear a legend setting forth the requirements of subsection (a) of this
Section 7, together with such other legend or legends as may otherwise be deemed necessary or appropriate
by counsel to the Company.

     (c) Removal of Legend. The Company shall, at the request of any registered holder
of a Warrant or Exercise Share, exchange the certificate representing such security for a
certificate representing the same security not bearing the restrictive legend required by
subsection (b) if, in the opinion of counsel acceptable to the Company, such restrictive
legend is no longer necessary.

8. Registration Rights. The Holder shall be entitled to the rights and subject to the
obligations set forth in Section 6 of that certain Securities Purchase Agreement dated on or about
the date hereof by and between the Company and the Holder.

9. Notices. All notices or other communications under this Warrant shall be in writing and
shall be deemed to have been given on the day of delivery if delivered by hand, on the fifth day
after deposit in the mail if mailed by certified mail, postage prepaid, return receipt requested,
or on the next business day after mailing if sent by a nationally recognized overnight courier such
as federal express, addressed as follows:

          If to the Company:

Touchstone Resources USA, Inc.

111 Presidential Boulevard

Suite 165

Bala Cynwyd, PA 19004

Attention: President

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          with a copy to:

Duane Morris LLP

240 Princeton Avenue

Suite 150

Hamilton, NJ 08619-2304

Attention: Vincent A. Vietti, Esquire

          and to the Holder at the address of the Holder appearing on the books of the Company
or the Company’s transfer agent, if any.

     Either of the Company or the Holder may from time to time change the address to which notices
to it are to be mailed hereunder by notice in accordance with the provisions of this Section 9.

10. Supplements and Amendments. The Company may from time to time supplement or
amend this Warrant without the approval of any holders of Warrants in order to cure any
ambiguity or to correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision, or to make any other provisions in regard to matters or
questions herein arising hereunder which the Company may deem necessary or desirable and
which shall not materially adversely affect the interests of the Holder.

11. Successors and Assigns. This Warrant shall inure to the benefit of and be binding on
the respective successors, assigns and legal representatives of the Holder and the Company.

12.
Severability. If for any reason any provision, paragraph or terms of this Warrant is held
to be invalid or unenforceable, all other valid provisions herein shall remain in full force and
effect and all terms, provisions and paragraphs of this Warrant shall be deemed to be severable.

13. Governing Law. This Warrant shall be deemed to be a contract made under the laws of
the State of Delaware and for all purposes shall be governed by and construed in accordance with
the laws of said jurisdiction without regard to such jurisdiction’s conflicts of laws provisions.

14. Headings. Section and subsection headings used herein are included herein for
convenience of reference only and shall not affect the construction of this Warrant nor constitute
a part of this Warrant for any other purpose.

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     IN WITNESS WHEREOF, the Company has caused these presents to be duly
executed as of
the                     
day of                      , 2004.

	 	 	 	 	 
	 	TOUCHSTONE RESOURCES USA, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

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APPENDIX A

NOTICE OF EXERCISE

			
	To:	 	Touchstone Resources USA, Inc.

111 Presidential Boulevard

Suite 165

Bala Cynwyd, PA 19004

Attention: President

     (1) The undersigned hereby elects to purchase _____ shares of Common
Stock (as defined in the attached Warrant) of TOUCHSTONE RESOURCES USA, INC. pursuant to the terms
of the attached Warrant, and tenders herewith payment of the Exercise Price (as defined in the
attached Warrant) for such shares in full in the following manner (please check one of the
following choices):

     o In Cash;

     o Cashless exercise through a broker; or

     o Delivery of previously owned shares of Common Stock.

     (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges
that the shares of Common Stock to be issued upon conversion hereof are being acquired solely
for the account of the undersigned, not as a nominee for any other party, and for investment
purposes only (unless such shares are subject to resale pursuant to an effective prospectus),
and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common
Stock except under circumstances that will not result in a violation of the Securities Act of
1933, as amended, or any state securities laws.

     (3) Please issue a certificate or certificates representing said shares of Common Stock
in the name of the undersigned.

	 	 	 
	 

	 	HOLDER
	 
	 	 
	 

	 	 
	(Date)

	 	(Signature)

10exv10w42

 

Exhibit
10.42

CYGNUS OIL AND GAS CORPORATION

2005 STOCK INCENTIVE PLAN

Section 1. General Purpose of the Plan; Definitions. The purpose of the Plan is to provide
officers, employees, directors and consultants of Cygnus Oil and Gas Corporation (the “Company”)
and other members of the Participating Company Group the opportunity to receive stock options,
stock appreciation rights, and stock awards and thereby acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in the Company’s
welfare will assure a closer identification of their interests with those of the Company’s
stockholders, thereby encouraging the participants to contribute materially to the growth and
development of the Company and strengthening their desire to remain with the Company.

     The following terms shall be defined as set forth below:

     “Act” means the Securities Exchange Act of 1934, as amended.

     “Award” or “Awards,” except where referring to a particular category of grant under the Plan,
shall include Incentive Stock Options, Non-Qualified Stock Options, SARs, and Stock Awards.

     “Award Agreement” means any written or electronic instrument that establishes the terms,
conditions, restrictions, and/or limitations applicable to an Award in addition to those
established by this Plan and by the Plan Administrator’s exercise of its administrative powers.

     “Board” means the Board of Directors of the Company.

     “Cause” means (a) with respect to an individual who is party to a written agreement with a
Participating Company which contains a definition of “cause” or “for cause” or words of similar
import for purposes of termination of Service thereunder by the Participating Company, “cause” or
“for cause” as defined in such agreement; (b) in all other cases (i) any violation of a law, rule
or regulation other than minor traffic violations, including without limitation, any violation of
the Foreign Corrupt Practices Act; (ii) a breach of fiduciary duty for personal profit; (iii)
fraud, dishonesty or other acts of misconduct in the rendering of services on behalf of the Company
or relating to the employee’s employment; (iv) misconduct by the employee which would cause the
Company to violate any state or federal law relating to sexual harassment or age, sex or other
prohibited discrimination or any violation of written policy of the Company or any successor entity
adopted in respect to such law; (v) failure to follow Company work rules or the lawful instructions
(written or otherwise) of the Board of Directors of the Company or a responsible executive to whom
the employee directly or indirectly reports, provided compliance with such directive was reasonably
within the scope of the employee’s duties and the employee was given notice that his or her conduct
could give rise to termination and such conduct is not, or could not be cured, within ten (10) days
thereafter; or (vi) any violation of a confidentiality or non-competition agreement or patent
assignment agreement or any agreement relating to the Company’s protection of intellectual property
rights.

 

 

     “Code” means the Internal Revenue Code of 1986, as amended, and any successor Code, and
related rules, regulations and interpretations.

     “Effective Date” means the date on which the Plan is approved by the Board as set forth in
Section 20.

     “Fair Market Value” of the Stock on any given date means (i) if the Stock is listed on any
established stock exchange or a national market system, including without limitation the National
Market or SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of determination, as reported
in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) if the
Stock is regularly traded on the Nasdaq OTC Bulletin Board Service, or a comparable automated
quotation system, its Fair Market Value shall be the mean between the high bid and low asked prices
for the Stock on the last market trading day prior to the day of determination; or (iii) in the
absence of an established market for the Stock, the Fair Market Value thereof shall be determined
in good faith by the Plan Administrator.

     “Incentive Stock Option” means any Stock Option designated and qualified as an “incentive
stock option” as defined in Section 422 of the Code.

     “Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option.

     “Option” or “Stock Option” means any Option to purchase shares of Stock granted pursuant to
Section 6.

     “Option Period” means the period commencing on the grant date of an Option and ending on the
last day of the term of such Option as established pursuant to Section 8.2.

     “Participating Company” means the Company or any Subsidiary Corporation or any other member of
the Participating Company Group.

     “Participating Company Group” means, at any point in time, any Participating Company or all
corporations collectively which are then Participating Companies.

     “Performance Goal” means with respect to a Performance Measure selected by the Plan
Administrator, the specific target that must be met before a Stock Award subject to section 162(m)
of the Code will be payable to the recipient of the Award.

     “Performance Measure” means each of the business criteria the Company may use in establishing
a Performance Goal. For purposes of the Plan, Performance Measures are economic, value-added
parameters such as earnings per share, share price, net income, cash flows, reserve additions or
replacements, production volume, finding and operating costs, drilling results, acquisitions and
divestitures, risk management activities, return on equity, and/or total or comparative shareholder
return.

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     “Performance Period” means the period established by the Plan Administrator at the time any
Award is granted or at any time thereafter over which a Performance Goal specified by the Plan
Administrator with respect to such Award will be measured.

     “SAR Price” means the Fair Market Value of each share of Stock covered by an SAR, determined
on the date the SAR is granted.

     “Service” means a participant’s employment or service with any member of the Participating
Company Group, whether in the capacity of an employee, officer, director or a consultant. The
participant’s Service shall not be deemed to have terminated merely because of a change in the
Participating Company for which the participant renders such Service, provided that there is no
interruption or termination of the participant’s Service. Furthermore, a participant’s Service
with the Participating Company Group shall not be deemed to have terminated if the participant
takes any military leave, sick leave, or other bona fide leave of absence approved by a
Participating Company; provided, however, that if any such leave exceeds ninety (90) days, on the
ninety-first (91st) day of such leave the participant’s Service shall be deemed to have terminated
unless the participant’s right to return to Service with the Participating Company is guaranteed by
statute or contract.

     “Stock” means the Common Stock, par value $.001 per share, of the Company, subject to
adjustments pursuant to Section 13.

     “Stock Appreciation Right” or “SAR” means the right to receive a payment, in cash and/or
Stock, equal to the excess of the Fair Market Value of a specified number of shares of Stock on the
date the SAR is exercised over the SAR Price for such shares.

     “Stock Award” means any award granted pursuant to Section 11.

     “Subsidiary” means any, whether now or hereafter existing, corporation or other entity (other
than the Company) in any unbroken chain of corporations or other entities, beginning with the
Company, if each of the corporations or entities owns stock or other interests possessing 50% or
more of the economic interest or the total combined voting power of all classes of stock or other
interests in one of the other corporations or entities in the chain, whether now or hereafter
existing.

Section 2. Administration. The Plan shall be administered by the full Board or a committee
designated by the Board which will consist of not less than two members of the Board who meet the
definition of “Non-Employee Directors” within the meaning of Rule 16b-3(a)(3) promulgated under the
Act and who also meet the definition of “Outside Director” within the meaning of Section 162(m) of
the Code (the “Plan Administrator”). Subject to the provisions of the Plan, the Plan Administrator
is authorized:

	 	(a)	 	to construe the Plan and any Award under the Plan;
	 
	 	(b)	 	to select the directors, officers, employees and consultants of any
Participating Company to whom Awards may be granted;
	 
	 	(c)	 	to determine the number of shares of Stock to be covered by any Award;

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	 	(d)	 	to determine and modify from time to time the terms and conditions, including
restrictions, of any Award and to approve the form of written instrument evidencing
Awards;
	 
	 	(e)	 	to accelerate at any time the exercisability or vesting of all or any portion
of any Award and/or to include provisions in Awards providing for such acceleration;
	 
	 	(f)	 	to impose limitations on Awards, including limitations on transfer and
repurchase provisions;
	 
	 	(g)	 	to extend the exercise period within which Stock Options or SARs may be
exercised;
	 
	 	(h)	 	to determine at any time whether, to what extent, and under what circumstances
Stock and other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the participant and whether and to what extent the
Company shall pay or credit amounts constituting interest (at rates determined by the
Plan Administrator) or dividends or deemed dividends on such deferrals;
	 
	 	(i)	 	in connection with a Stock Option or an SAR granted and administered in a
manner designed to preserve the deductibility of the resulting compensation in
accordance with section 162(m) of the Code, to ensure that the exercise price of such
Stock Option or SAR is not less than the Fair Market Value of the Stock on the date the
Stock Option or the SAR is granted; and
	 
	 	(j)	 	in connection with a Stock Award granted and administered in a manner designed
to preserve the deductibility of the resulting compensation in accordance with section
162(m) of the Code, to:

	 	(i)	 	select the Performance Measure that will be applicable to the
Stock Award;
	 
	 	(ii)	 	establish the Performance Period over which the Performance
Measure will be evaluated;
	 
	 	(iii)	 	with respect to the Performance Measure selected, establish in
writing (i) not later than the earlier of (A) 90 days after the commencement of
the relevant Performance Period, and (B) the date as of which 25% of the
Performance Period has elapsed, and (ii) while the outcome of the Performance
Measure is substantially uncertain, the objectively determinable, specific
target that must be met for the Performance Period before the Performance Goal
will be achieved and the Stock Award will be earned;
	 
	 	(iv)	 	within the limit provided in Section 5, establish in writing
the maximum number of shares of Stock that a Stock Award recipient will receive
if the related Performance Goal is achieved;

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	 	(v)	 	provide in any Stock Award Agreement that the Stock Award will
not be payable to the Award recipient unless the pre-established Performance
Goal is achieved and that the pre-established Performance Goal may not be
varied or changed during the applicable Performance Period; and
	 
	 	(vi)	 	certify in writing within ninety (90) days following the end of
the applicable Performance Period, but prior to the payment of any Stock Award,
that the pre-established Performance Goal has been achieved.

The determination of the Plan Administrator on any such matters shall be conclusive.

Section 3. Delegation of Authority to Grant Awards. In accordance with applicable laws, the Plan
Administrator, in its discretion, may delegate to one or more executive officers of the Company all
or part of the Plan Administrator’s authority and duties with respect to granting Awards and all
references in the Plan to the “Plan Administrator” shall include such executive officers to the
extent they are acting pursuant to such delegation. The Plan Administrator may revoke or amend the
terms of such a delegation at any time, but such revocation shall not invalidate prior actions of
the executive officers that were consistent with the terms of the Plan.

Section 4. Eligibility. Awards may only be granted to employees, directors, and consultants with
any member of the Participating Company Group. For purposes of the foregoing sentence,
“employees,” “directors” and “consultants” shall include prospective employees, prospective
directors and prospective consultants to whom Awards are granted in connection with written offers
of an employment or other service relationship with a Participating Company.

Section 5. Shares Subject to the Plan. The number of shares of Stock which may be issued pursuant
to the Plan shall be 10,000,000. For purposes of the foregoing limitation, the shares of Stock
underlying any Awards which are forfeited, canceled, reacquired by the Company, satisfied without
the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the
number of shares of Stock available for issuance under the Plan. Stock to be issued under the Plan
may be either authorized and unissued shares or shares held in treasury by the Company.
Notwithstanding the foregoing, on and after the date that the Plan is subject to Section 162(m) of
the Code, Awards with respect to no more than 2,500,000 shares of Stock may be granted to any one
individual participant during any one calendar year period.

Section 6. Stock Options. Options granted pursuant to the Plan may be either Options which are
Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options and Non-Qualified
Stock Options shall be granted separately hereunder. The Plan Administrator, shall determine
whether and to what extent Options shall be granted under the Plan and whether such Options granted
shall be Incentive Stock Options or Non-Qualified Stock Options; provided, however, that: (i)
Incentive Stock Options may be granted only to employees of the Company or any Subsidiary that is a
“subsidiary corporation” within the meaning of Section 424(f) of the Code; and (ii) no Incentive
Stock Option may be granted following the tenth anniversary of the Effective Date of the Plan. The
provisions of the Plan and any Stock Award Agreement pursuant to which Incentive Stock Options
shall be issued shall be construed in a manner consistent with Section 422 of the Code (or any
successor provision) and rules and regulations promulgated thereunder.

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Section 7. ISO Fair Market Value Limitation. To the extent that Options designated as Incentive
Stock Options (granted under all stock option plans of the Participating Company Group, including
the Plan) become exercisable by a participant for the first time during any calendar year for Stock
having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of
such Options which exceeds such amount shall be treated as Non-Qualified Stock Options. For
purposes of this Section 7, Options designated as Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of Stock shall be
determined as of the time the Option with respect to such Stock is granted. If the Code is amended
to provide for a different limitation from that set forth in this Section 7, such different
limitation shall be deemed incorporated herein effective as of the amendment date and with respect
to such Options as required or permitted by such amendment to the Code. If an Option is treated as
an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 7, the participant may designate which portion of such Option
the participant is exercising. In the absence of such designation, the participant shall be deemed
to have exercised the Incentive Stock Option portion of the Option first. Separate certificates
representing each such portion shall be issued upon the exercise of the Option.

Section 8. Terms of Options. Each Option granted under the Plan shall be evidenced by an Award
Agreement between the Company and the person to whom such Option is granted and shall be subject to
the following terms and conditions:

          8.1 Exercise Price. Subject to adjustment as provided in Section 13 of this Plan, the price
at which each share covered by an Option may be purchased shall be determined in each case by the
Plan Administrator; provided, however, that such price shall not, in the case of an Incentive Stock
Option, or a Stock Option granted and administered in a manner designed to preserve the
deductibility of the resulting compensation under section 162(m) of the Code, be less than the Fair
Market Value of the underlying Stock at the time the Option is granted. If a participant owns (or
is deemed to own under applicable provisions of the Code and rules and regulations promulgated
thereunder) more than ten percent (10%) of the combined voting power of all classes of the stock of
the Company and an Option granted to such participant is intended to qualify as an Incentive Stock
Option, the Option price shall be no less than 110% of the Fair Market Value of the Stock covered
by the Option on the date the Option is granted.

          8.2 Exercise Period. Options shall be exercisable at such time or times, or upon such event
or events, and subject to such terms, conditions, performance criteria, and restrictions as shall
be determined by the Plan Administrator and set forth in the Award Agreement evidencing such
Option; provided, however, that (i) no Option shall be exercisable after the expiration of ten (10)
years after the date of grant of such Option, (ii) no Incentive Stock Option granted to a
participant who owns more than 10% of the combined voting power of all classes of stock of the
Company (or any parent or subsidiary of the Company) shall be exercisable after the expiration of
five (5) years after the date of grant of such Option, and (iii) no Option granted to a prospective
employee, prospective consultant or prospective director may become exercisable prior to the date
on which such person commences Service with the Participating Company.

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          8.3 Payment of Exercise Price. The Option exercise price of each share purchased pursuant to
an Option shall be paid in full at the time of each exercise (the “Payment Date”) of the Option (i)
in cash; (ii) by delivering to the Company a notice of exercise with an irrevocable direction to a
broker-dealer registered under the Act to sell a sufficient portion of the shares and deliver the
sale proceeds directly to the Company to pay the exercise price, provided however, that such a
broker-dealer facilitated transaction shall not be available if such a transaction would be treated
as a personal loan prohibited under Section 13(k) of the Act; (iii) in the discretion of the Plan
Administrator, through the delivery to the Company of previously-owned shares of Common Stock
having an aggregate Fair Market Value equal to the Option exercise price of the shares being
purchased pursuant to the exercise of the Option; provided, however, that shares of Common Stock
delivered in payment of the Option price must have been held by the participant for at least six
(6) months in order to be utilized to pay the Option price; (iv) in the discretion of the Plan
Administrator, by an election to have the Company withhold shares otherwise issuable to the
participant having a Fair Market Value equal to the Option exercise price of the shares being
purchased pursuant to the exercise of the Option; or (v) in the discretion of the Plan
Administrator, through any combination of the payment procedures set forth in subsections (i)-(iv).

Section 9. Stock Appreciation Rights. The Company may issue Stock Appreciation Rights. The terms
of any Stock Appreciation Right shall be established in an Award Agreement evidencing such Award.
An SAR shall entitle the participant at his election to surrender to the Company the SAR, or
portion thereof, as the participant shall choose, and to receive from the Company in exchange for
the portion of the SAR surrendered cash in an amount equal to the excess (if any) of the Fair
Market Value (as of the date of the exercise of the SAR) per share of Stock over the SAR Price per
share of Stock as specified in the Award Agreement, multiplied by the total number of shares with
respect to which the SAR is being surrendered. In the discretion of the Plan Administrator, the
Company may satisfy its obligation upon exercise of an SAR by the distribution of that number of
shares of Stock having an aggregate Fair Market Value (as of the date of the exercise of the SAR)
equal to the amount of cash otherwise payable to the participant, as described above, with a cash
settlement to be made for any fractional share interests, or the Company may settle such obligation
in part with shares of Stock and in part with cash.

     Subject to the conditions of this Section 9, the applicable Award Agreement and such
administrative regulations as the Plan Administrator may from time to time adopt, an SAR may be
exercised by the delivery (including by FAX) of written notice to the Plan Administrator setting
forth the number of shares of Stock with respect to which the SAR is to be exercised and the date
of exercise thereof (the “Exercise Date”) which shall be at least three (3) days after giving such
notice unless an earlier time shall have been mutually agreed upon. On the Exercise Date, the
participant shall receive from the Company in exchange therefor cash in an amount equal to the
excess (if any) of the Fair Market Value (as of the date of the exercise of the SAR) per share of
Stock over the SAR Price per share of Stock as specified in the Award Agreement, multiplied by the
total number of shares of Stock with respect o which the SAR is being surrendered. In the
discretion of the Plan Administrator, the Company may satisfy its obligation upon exercise of an
SAR by the distribution of that number of shares of Stock having an aggregate Fair Market Value (as
of the date of the exercise of the SAR) equal to the amount of cash otherwise payable to the
participant, as described above, with a cash settlement to be made

7

 

for any fractional share interests, or the Company may settle such obligation in part with
shares of Stock and in part with cash.

Section 10. Terms Applicable to Options and SARs.

          10.1 Effect of Termination of Service. Unless otherwise provided in such participant’s Award
Agreement:

	 	(a)	 	Death. If a participant shall cease to perform Service
as a result of such participant’s death, any Options or SARs then exercisable
shall be exercisable until the earlier to occur of one year anniversary of the
participant’s death or the expiration of the Option Period or the term of the
SAR and only by the participant’s personal representative or persons entitled
thereto under the participant’s will or the laws of descent and distribution.
	 
	 	(b)	 	Termination of Service. If a participant shall cease to
perform Service to any member of the Participating Company Group, all Options
and SARs to which the participant is then entitled to exercise may be exercised
until the earlier to occur of the three month anniversary of the participant’s
termination of Service or the expiration of the Option Period or the term of
the SAR, if such termination was due to disability or retirement (as
hereinafter defined), until the earlier to occur of the one year anniversary of
the participant’s termination of Service or the expiration of the Option Period
or the term of the SAR. Notwithstanding the foregoing, in the event that any
termination of Service shall be for “Cause” (as defined herein) or the
participant voluntarily terminates his or her Service, then any and all Options
held by such participant shall terminate within 15 days’ notice of such
termination. For purposes of the Plan, “retirement” shall mean the termination
of employment with the Participating Company Group, other than for Cause, at
any time under circumstances which would entitle such participant to other
retirement benefits provided by the Participating Company to whom the
participant was providing Service immediately prior to the termination of
Service or such other circumstances that the Plan Administrator concludes
should be deemed a retirement.
	 
	 	(c)	 	Limitation on Shares. An Option or SAR may not be
exercised for more shares (subject to adjustment as provided in Section 13)
after the termination of the participant’s Service than the participant was
entitled to purchase thereunder at the time of the termination of such
relationship.

          10.2 Nontransferability of Options and SARs. No Awards shall be assignable or transferable
other than by will or the laws of descent and distribution. During the lifetime of the
participant, an Option or SAR shall be exercisable only by the participant or, in the event of the
participant’s incapacity, by the participant’s legal guardian or legal representative.
Notwithstanding the foregoing, Options and SARs may be transferred pursuant to a valid qualified
domestic relations order as defined in section 414(p) of the Code or Title I of

8

 

the Employee Retirement Income Security Act of 1974, as amended pursuant to which a court has
determined that a spouse or former spouse of a participant has an interest in the participant’s
Options or SARs under the Plan. Any Incentive Stock Option transferred pursuant to this Section
10.2 shall cease to be an Incentive Stock Option on the date of such transfer and shall be treated
for all purposes as a Non-Qualified Stock Option in the hands of the transferee. Following any
such transfer each Option or SAR transferred shall continue to be subject to the same terms and
conditions of the Plan and the applicable Award Agreement that were applicable to the Option or SAR
immediately prior to transfer, provided that for all purposes under the Plan the term “participant”
shall be deemed to include the transferee. The effect a termination of Service shall have on the
exercisability of an Option or SAR with respect to the original participant shall continue to apply
to a transferee after a transfer pursuant to this Section 10.2, so that the Options or SARs
transferred shall be exercisable by the transferee only to the extent and for the periods specified
in Section 10.1, unless different periods are otherwise provided in a participant’s original Award
Agreement. The Plan Administrator and the Company shall have no obligation to inform any
transferee of a Stock Option or SAR of any expiration, termination, lapse or acceleration of such
Option or SAR. The Company shall have no obligation to register with any federal or state
securities commission or agency any Stock issuable or issued under a Stock Option or SAR that has
been transferred pursuant to this Section 10.2.

          10.3 Tandem Awards. The Plan Administrator may grant Options and SARs in one Award in the
form of a “tandem award,” so that the right of the participant to exercise one type of Award shall
be canceled if, and to the extent, the other type of Award is exercised. For example, if a Stock
Option and an SAR are issued in a tandem Award, and the participant exercises the SAR with respect
to 100 shares of Stock, the right of the participant to exercise the related Stock Option shall be
canceled to the extent of 100 shares of Stock.

Section 11. Stock Awards.

	 	(a)	 	The Plan Administrator may grant Stock Awards to any officer,
employee or consultant with any member of the Participating Company Group. A
Stock Award entitles the recipient to acquire shares of Stock subject to such
restrictions and conditions as the Plan Administrator may determine at the time
of grant. Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives.

	 	(b)	 	Upon execution of a written instrument setting forth the Stock
Award and paying any applicable purchase price, a participant shall have the
rights of a shareholder with respect to the Stock subject to the Stock Award,
including, but not limited to the right to vote and receive dividends with
respect thereto; provided, however, that shares of Stock subject to Stock
Awards that have not vested shall be subject to the restrictions on
transferability described in Section 11(d) below. Unless the Plan
Administrator shall otherwise determine, certificates evidencing the Stock
Awards shall remain in the possession of the Company until such Stock is vested
as provided in Section 11(c) below.

9

 

	 	(c)	 	The Plan Administrator at the time of grant shall specify the
date or dates and/or the attainment of pre-established performance goals,
objectives and other conditions on which Stock shall become vested, subject to
such further rights of the Company or its assigns as may be specified in the
instrument evidencing the Stock Award. If the participant or the Company, as
the case may be, fails to achieve the designated goals or the participant’s
relationship with the Company is terminated prior to the expiration of the
vesting period, the participant shall forfeit all shares of Stock subject to
the Stock Award which have not then vested. The Plan Administrator will ensure
that a Stock Award granted and administered in a manner designed to preserve
the deductibility of the resulting compensation under section 162(m) of the
Code complies with the requirements of Section 2(j) of the Plan.

	 	(d)	 	Unvested Stock may not be sold, assigned transferred, pledged
or otherwise encumbered or disposed of except as specifically provided herein
or in the written instrument evidencing the Stock Award.

Section 12. Tax Withholding.

	 	(a)	 	Whenever shares of Stock are to be issued under a Stock Award
or pursuant to the exercise of an Option or SAR or cash is to be paid pursuant
to the terms of the Plan, under circumstances in which the Plan Administrator
believes that any federal, state or local tax withholding may be imposed, the
Company or Subsidiary, as the case may be, shall have the right to require the
participant to remit to the Company or Subsidiary, as the case may be, an
amount sufficient to satisfy the minimum federal, state and local tax
withholding requirements prior to the delivery of any certificate for shares or
any proceeds; provided, however, that in the case of a participant who receives
a Stock Award under the Plan which is not fully vested, the participant shall
remit such amount on the first business day following the Tax Date. The “Tax
Date” for purposes of this Section 12 shall be the date on which the amount of
tax to be withheld is determined. If a participant makes a disposition of
Stock acquired upon the exercise of an Incentive Stock Option within either two
years after the Option was granted or one year after its exercise by the
participant, the participant shall promptly notify the Company and the Company
shall have the right to require the participant to pay to the Company an amount
sufficient to satisfy federal, state and local tax withholding requirements.

	 	(b)	 	A participant who is obligated to pay the Company an amount
required to be withheld under applicable tax withholding requirements may pay
such amount (i) in cash; (ii) in the discretion of the Plan Administrator,
through the delivery to the Company of previously-owned shares of Stock having
an aggregate Fair Market Value on the Tax Date equal to the tax obligation
provided that the previously owned shares delivered in satisfaction of the
withholding obligations must have been held by the

10

 

	 	 	 	participant for at least six (6) months; (iii) in the discretion of the Plan
Administrator, through an election to have the Company withhold shares of
Stock otherwise issuable to the participant having a Fair Market Value on
the Tax Date equal to the amount of tax required to be withheld, or (iv) in
the discretion of the Plan Administrator, through a combination of the
procedures set forth in subsections (i), (ii) and (iii) of this Section
12(b).

	 	(c)	 	An election by a participant to have shares of Stock withheld
to satisfy federal, state and local tax withholding requirements pursuant to
Section 12(b) must be in writing and delivered to the Company prior to the Tax
Date.

Section 13. Adjustment of Number and Price of Shares. Any other provision of the Plan
notwithstanding:

	 	(a)	 	If, through or as a result of any merger, consolidation, sale
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, the outstanding shares of Stock are
increased or decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or additional shares or new or
different shares or other securities of the Company or other non-cash assets
are distributed with respect to such shares of Stock or other securities, the
Plan Administrator shall make an appropriate or proportionate adjustment in (i)
the number of Stock Options or SARs that can be granted to any one individual
participant, (ii) the number and kind of shares or other securities subject to
any then outstanding Awards under the Plan, and (iii) the price for each share
subject to any then outstanding Stock Options or SARs under the Plan, without
changing the aggregate exercise price (i.e., the exercise price multiplied by
the number of shares) as to which such Stock Options or SARs remain
exercisable. The adjustment by the Plan Administrator shall be final, binding
and conclusive.
	 
	 	(b)	 	In the event that, by reason of a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation, the Board of Directors shall authorize the issuance or assumption
of Options or SARs in a transaction to which Section 424(a) of the Code
applies, then, notwithstanding any other provision of the Plan, the Plan
Administrator may grant Options or SARs upon such terms and conditions as it
may deem appropriate for the purpose of assumption of the old Options or SARs,
or substitute a new Option or SAR for the old Option or SAR, as applicable, in
conformity with the provisions of Code Section 424(a) and the rules and
regulations thereunder, as they may be amended from time to time.

11

 

	 	(c)	 	No adjustment or substitution provided for in this Section 13
shall require the Company to issue or to sell a fractional share under any
Award Agreement or share award agreement and the total adjustment or
substitution with respect to each Option or SAR and share award agreement shall
be limited accordingly.
	 
	 	(d)	 	In the case of (i) the dissolution or liquidation of the
Company, (ii) a merger, reorganization or consolidation in which the Company is
acquired by another person or entity (other than a holding company formed by
the Company), (iii) the sale of all or substantially all of the assets of the
Company to an unrelated person or entity, or (iv) the sale of all of the stock
of the Company to a unrelated person or entity (in each case, a “Fundamental
Transaction”), the Plan and all Awards granted hereunder shall terminate,
unless provision is made in connection with the Fundamental Transaction for the
assumption of the Awards heretofore granted, or the substitution of such Awards
with new awards of the successor entity, with appropriate adjustment as to the
number and kind of shares and, if appropriate, the per share exercise price as
provided in Subsections (a) and (b) of this Section 13. In the event of such
termination and in the event the Board does not provide for the Cash Payment
described in Subsection (e) of this Section each participant shall be notified
of such proposed termination and permitted to exercise for a period of at least
15 days prior to the date of such termination all Options or SARs held by such
participant which are then exercisable.
	 
	 	(e)	 	In the event that the Company shall be merged or consolidated
with another corporation or entity, other than a corporation or entity which is
an “affiliate” of the Company under the terms of which holders of Stock of the
Company will receive upon consummation thereof a cash payment for each share of
Stock of the Company surrendered pursuant to such Business Combination (the
“Cash Purchase Price”), the Board of Directors may provide that all outstanding
Options and SARs shall terminate upon consummation of such transaction and each
participant shall receive, in exchange therefor, a cash payment equal to the
amount (if any) by which (i) the Cash Purchase Price multiplied by the number
of shares of Stock of the Company subject to the outstanding Options or SARs
held by such participant exceeds (ii) the aggregate exercise price of such
Options or the aggregate SAR Price of such SARs.

Section 14. Change in Control.

	 	(a)	 	Unless otherwise provided in such participant’s Award
Agreement, agreements relating to Stock Awards or in a written employment or
other agreement directly addressing the same subject matter as addressed below,
in the event that the Plan is terminated as a result of or following a Change
in Control (as defined herein), all vested Options, SARs, and Stock Awards then
outstanding at the time of such Plan termination may be

12

 

	 	 	 	exercised for a period of thirty (30) days from the date of notice of the
proposed termination. In such event, all participants shall be credited
with an additional six (6) months of service for the purpose of any
otherwise unvested Options, SARs, and Stock Awards. Upon a Change in
Control in which the Plan is either assumed or otherwise not subject to
termination, if during the remaining term of such a participant’s Options,
SARs or Stock Awards, the participant is terminated other than for Cause,
the participant will, at the time of such termination, be credited with an
additional six (6) months of service for the purpose of any otherwise
unvested Options, SARs and Stock Awards; however, in the event of a
termination for Cause, all Options and SARs shall immediately terminate and
all unvested portions of Stock Awards shall immediately terminate.
	 
	 	(b)	 	As used herein, a “Change in Control” shall be deemed to have
occurred if: (i) any “person” (as such term is used in Section 13(d) and 14(d)
of the Exchange Act) acquires “beneficial ownership” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the voting power of the then
outstanding securities of the Company except where the acquisition is approved
by the Board; or (ii) if the Company is to be consolidated with or acquired by
another entity in a merger or other reorganization in which the holders of the
outstanding voting stock of the Company immediately preceding the consummation
of such event, shall, immediately following such event, hold, as a group, less
than a majority of the voting securities of the surviving or successor entity
or in the event of a sale of all or substantially all of the Company’s assets
or otherwise.
	 
	 	(c)	 	Notwithstanding anything in the Plan to the contrary, the
acceleration of vesting and exercisability provided by Subsection (a) of this
Section shall not occur in the event that such acceleration would make the
transaction causing the Change in Control to be ineligible for pooling of
interests accounting treatment, provided pooling of interest treatment is then
still available and, in the absence of such acceleration, the transaction would
qualify for such treatment and the Company intends to use such treatment with
respect to such transaction.

Section 15. No Right to Future Employment. Nothing contained in the Plan nor in any Award
agreement shall confer upon any participant any right with respect to the continuance of employment
by the Company nor interfere in any way with the right of the Company to terminate his employment
or change his compensation at any time.

Section 16. Amendment and Discontinuance. The Board of Directors may alter, amend, suspend or
discontinue the Plan, provided that no such action shall deprive any person without such person’s
consent of any rights theretofore granted pursuant hereto.

Section 17. Compliance with Section 16. With respect to persons subject to Section 16 of the Act,
transactions under this Plan are intended to comply with all applicable conditions of

13

 

Rule 16b-3 (or its successor rule and shall be construed to the fullest extent possible in a manner
consistent with this intent ). To the extent that any Award fails to so comply, it shall be deemed
to be modified to the extent permitted by law and to the extent deemed advisable by the Plan
Administrator in order to comply with Rule 16b-3.

Section 18. Compliance with Governmental Regulations. Notwithstanding any provision of the Plan or
the terms of any agreement entered into pursuant to the Plan, the Company shall not be required to
issue any shares of Stock hereunder prior to registration of the shares subject to the Plan under
the Securities Act of 1933 or the Act, if such registration shall be necessary, or before
compliance by the Company or any participant with any other provisions of either of those acts or
of regulations or rulings of the Securities and Exchange Commission thereunder, or before
compliance with other federal and state laws and regulations and rulings thereunder, including the
rules any applicable exchange or of the Nasdaq Stock Market. The Company shall use its best
efforts to effect such registrations and to comply with such laws, regulations and rulings
forthwith upon advice by its counsel that any such registration or compliance is necessary.

Section 19. Participation by Foreign Nationals. The Plan Administrator may, in order to fulfill
the purposes of the Plan and without amending the Plan, modify grants to foreign nationals or
United States citizens employed abroad in order to recognize differences in local law, tax policy
or custom.

Section 20. Effective Date of Plan — Shareholder Approval. The Plan was approved by the Board and
became effective on September, 2005. Those provisions of the Plan that for federal tax purposes
require approval of the stockholders of the Company (i.e., the granting of incentive stock options)
shall not become effective until adopted by the stockholders, however, the Company reserves the
right to grant Incentive Stock Options provided stockholder approval is secured within one (1) year
from the date thereof. In the event Incentive Stock Options are granted and Stockholder approval
is not timely secured, such Options shall remain in full force and effect, however, shall
automatically convert to Non-Qualified Options.

Section 21. Governing Law. The Plan shall be governed by the internal laws of the State of
Delaware without giving effect to its choice of law provisions. Unless otherwise provided in an
Award Agreement or Award Agreement, Awards shall be governed by the same laws as the Plan.

14

 

Option No. 2005-1

CYGNUS OIL AND GAS CORPORATION

STOCK OPTION AGREEMENT

UNDER THE

CYGNUS OIL AND GAS CORPORATION

2005 STOCK INCENTIVE PLAN (the “Plan”)

     This Agreement is made as of the date set forth on Schedule A hereto (the “Grant Date”) by and
between Cygnus Oil and Gas Corporation (the “Company”), and the person named on Schedule A hereto
(the “Optionee”).

     WHEREAS, Optionee is a valuable employee of either the Company or any Company Participating
Group (hereinafter collectively or separately referred to as the “Company”), which includes all
subsidiaries of the Company, and whereas the Company considers it desirable and in its best
interest that Optionee be given an inducement to acquire a proprietary interest in the Company and
an incentive to advance the interests of the Company by granting the Optionee an option to purchase
shares of common stock of the Company (the “Common Stock”); and

     WHEREAS, to cover the granting of such Options, the Company has adopted the 2005 Stock
Incentive Plan (the “Plan”).

     NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree that as of the
Grant Date, the Company hereby grants Optionee an option (the “Option”) to purchase from it, upon
the terms and conditions set forth in this Agreement and the Plan, that number of shares of the
authorized and unissued Common Stock of the Company as is set forth on Schedule A hereto.

     1. Terms of Stock Option. The Option to purchase Common Stock granted hereby is
subject to the terms, conditions, and covenants set forth in the Plan as well as the following:

	 	(a)	 	The Optionee has been provided with, reviewed and fully
understood, the terms, conditions and covenants, of the Plan;
	 
	 	(b)	 	This Option is granted under, and subject in its entirety to,
the terms of the Plan;
	 
	 	(c)	 	The Optionee has been provided with, and fully understands, the
“Disclosure Document for the Cygnus Oil and Gas Corporation 2005 Stock
Incentive Plan “(the “Disclosure Document”);
	 
	 	(d)	 	This Option is intended to be an Incentive Stock Option (“ISO”)
to the extent that it qualifies as such under Section 422 of the Internal
Revenue Code of 1986, as amended (the “Code”), but the Company does not

1

 

	 	 	 	represent or warrant that the Option qualifies as an ISO under the Code.
The Optionee should consult with the Optionee’s own tax advisors regarding
the tax consequences of this Option and the requirements necessary to obtain
favorable income tax treatment under Section 422 of the Code. To the extent
that all or a portion of the Option does not qualify as an ISO, the portion
of the Option that does not qualify as an ISO shall be treated as a
nonstatutory option or as otherwise required by applicable tax law;
	 
	 	(e)	 	The per share exercise price for the shares subject to this
Option shall be no less than the Fair Market Value (as defined in the Plan) of
the Common Stock on the Grant Date, which exercise price is set forth
on-Schedule A hereto;
	 
	 	(f)	 	This Option shall vest in accordance with the vesting schedule
set forth on Schedule A hereto, subject to whatever other limitations are set
forth within the Plan or contained in this Agreement;
	 
	 	(g)	 	No portion of this Option may be exercised more than ten (10)
years from the Grant Date; and
	 
	 	(h)	 	This Option shall be subject to the restrictions on
transferability set forth within the Plan.

     2. Miscellaneous.

	 	(a)	 	This Agreement is binding upon the parties hereto and their
respective heirs, personal representatives, successors and assigns.
	 
	 	(b)	 	This Agreement will be governed and interpreted in accordance
with the laws of the State of Delaware, and may be executed in more than one
counterpart, each of which shall constitute an original document.
	 
	 	(c)	 	No alterations, amendments, changes or additions to this
agreement will be binding upon either the Corporation or Optionee unless
reduced to writing and signed by both parties.
	 
	 	(d)	 	Capitalized terms used within this Agreement unless otherwise
defined, shall have the meaning ascribed thereto in the Plan.
	 
	 	(e)	 	Nothing contained herein shall be construed as a guarantee of
continued employment of Optionee for any specific duration of time.

2

 

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

	 	 	 	 	 	 	 
	 	 	CYGNUS OIL AND GAS CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Authorized Executive Officer
	 	 
	 
	 	 	 	 	 	 
	 	 	OPTIONEE	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 	 	Signature	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 	 	Print Name	 	 

3

 

Schedule A

	2.	 	Optionee:                                         
	 
	3.	 	Grant Date:                                         
	 
	4.	 	Number of Shares of Common Stock covered by the Option:                     
	 
	5.	 	Exercise Price: $                    
	 
	6.	 	The Option shall vest in accordance with the following schedule:

	 	(a)	 	General Vesting Provisions:

	 	(i)	 	Options to purchase shares shall vest on                                         
(                    ) (the “First Anniversary Date”) provided Optionee remains
continuously employed by the Company from the Grant Date through the First
Anniversary Date; and if Optionee shall not remain continuously employed by the
Company through the First Anniversary Date, Optionee shall forfeit upon such
termination of Service (as defined in the Plan), the right to vest in all of
the Options granted under this Agreement;
	 
	 	(ii)	 	thereafter, on the (“Second Anniversary Date”), Options to
purchase shares shall vest provided Optionee remains continuously employed by
the Company from the Grant Date through the Second Anniversary Date; and if a
termination of Service occurs prior to the Second Anniversary Date, all of the
unvested Options as of the date such termination of Service shall no longer
continue to vest after such termination of Service, and thereafter Optionee
shall forfeit any and all rights to any unvested Options;
	 
	 	(iii)	 	thereafter, on (the “Third Anniversary Date”), Options to
purchase shares shall vest provided Optionee remains continuously employed by
the Company from the Grant Date through the Third Anniversary Date; and if a
termination of Service occurs prior to the Third Anniversary Date, all of the
unvested Options as of the date of such termination of Service shall no longer
continue to vest after such termination of Service, and thereafter Optionee
shall forfeit any and all rights to any unvested Options;
	 
	 	(iv)	 	thereafter, on (the “Fourth Anniversary Date”), Options to
purchase shares shall vest provided Optionee remains continuously employed by
the Company from the Grant Date through the Fourth Anniversary Date; and if a
termination of Service occurs prior to the Fourth Anniversary Date, all of the
unvested Options as of the date of such termination of Service shall no longer
continue to vest after such termination of Service, and thereafter Optionee
shall forfeit any and all rights to any unvested Options;

4

 

	 	(v)	 	thereafter, on (the “Fifth Anniversary Date”), Options to
purchase shares shall vest provided Optionee remains continuously employed by
the Company from the Grant Date through the Fifth Anniversary Date; and if a
termination of Service occurs prior to the Fifth Anniversary Date, all of the
unvested Options as of the date of such termination of Service shall no longer
continue to vest after such termination of Service, and thereafter Optionee
shall forfeit any and all rights to any unvested Options;

	 	(b)	 	Upon a Change of Control:
	 
	 	 	 	Notwithstanding any provision to the contrary in the Plan, or as set forth above, in
the event of a Change of Control during the term of Optionee’s employment with the
Company, all of the Options granted hereunder shall fully vest as of the date of the
Change of Control;
	 
	 	(c)	 	Other:

	 	(i)	 	upon whatever earlier dates as are permitted by the Company in
its sole discretion; or
	 
	 	(ii)	 	as otherwise provided for, and in accordance with, the terms
and provisions of the Plan.

	7.	 	Once a termination of Service occurs, all Options to which Optionee is then entitled to
exercise may only be exercised, if at all, in accordance with, and subject to, the terms and
provisions of the Plan, unless otherwise provided for in this Award Agreement.

	 	 	 	 	 	 	 
	 	 	CYGNUS OIL AND GAS CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Authorized Executive Officer
	 	 
	 
	 	 	 	 	 	 
	 	 	OPTIONEE	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 	 	Signature	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 	 	Print Name	 	 

5

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