Document:

Exhibit 10.2
 
STOCK OPTION AWARD AGREEMENT
 
pursuant to the
XETA TECHNOLOGIES, INC.
2004 OMNIBUS STOCK INCENTIVE PLAN
 
 
SUMMARY OF STOCK OPTION AWARD
 

	Employee Name (the “Employee”):
	 
	 
	 

	Date of Grant (“Date of Grant”):
	 
	 
	 

	No. of Shares Subject to Option (the “Shares”):
	 
	 
	 

	Exercise Price per Share (the “Exercise Price”):
	 
	 
	 

	Vesting Date (the “Vesting Date”):
	 
	 
	 

	Option  Expiration Date: (the “Expiration Date”)
	 
	 
	 

	Identification of Option as either (check one): 
	 
	 
	 
	 

	                                  
	 
	Incentive Stock Option
	 
	 

	 
	 
	(subject to Section 2 below)
	 
	 

	 
	OR
	 
	 
	 

	                          
	 
	Non-qualifying Stock Option
	 
	 

 
The foregoing Stock Option Award was granted by XETA Technologies, Inc. (the “Company”) on December 5, 2007 pursuant to its 2004 Omnibus Stock Incentive Plan as amended April 15, 2004 (the “Plan”), and is subject to all of the terms and conditions set forth in this Stock Option Award Agreement (the “Agreement”) and the Plan, all of which are deemed incorporated herein in their entirety as one single and fully integrated agreement.

 

TERMS OF AWARD

 

Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to them in the Plan.

 

1.             Grant of Option.  As of the Date of Grant, the  Company has granted to the Employee a right to purchase the
Shares at the Exercise Price per share, subject to the terms and provisions of
this Agreement and the Plan, as may be amended from time to time (the “Option”).  Except as otherwise provided in Section 6
below, the Option will automatically expire on the Expiration Date.  In no event shall the Option or any portion
thereof be exercised or deemed exercisable at any time beyond the Expiration
Date.

 

2.             Qualification of Option.  The Option is
intended to qualify as an Incentive Stock Option as defined in Section 422
of the Code. However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares

 

 

designated as Incentive Stock Options which become exercisable for the
first time by the Employee during any calendar year (under the Plan and any
other stock option plans of the Company) exceeds $100,000, the Shares that
exceed such limit (according to the order in which they were granted) shall be
treated as Non-Qualified Stock Options for tax purposes.

 

3.             Option
Term.  The Option shall have a
term of six (6) years measured from the Date of Grant (the “Term”) and
shall accordingly expire at the close of business on the Expiration Date,
unless sooner terminated in accordance with Section 6 below or otherwise
as may be provided under the Plan.

 

4.             Vesting
Schedule and Right to Exercise.  The
Option shall be unvested until December 5, 2010, when it will become fully
vested and exercisable.  Once the Option
is vested, the Option may be exercised in whole or in part at any time and from
time to time during the Term until the Expiration Date, or until sooner
termination of the Term pursuant to Section 6 below or as otherwise may be
provided under the Plan.

 

5.             Manner
of Exercising Option.

 

(a)           Notice of Exercise.  The
Option shall be exercisable by
delivering a written notice at least one business day in advance of the
proposed exercise date.  The notice shall
be delivered to the attention of the Company’s Corporate Secretary at the
Company’s principal office in Broken Arrow, OK. 
The notice shall be signed by the Employee (or such other person as may
have the right to exercise the Option) and shall state (i) the election to
exercise the Option, (ii) the whole number of shares in respect of which
the Option is being exercised, and (iii) the date of the proposed
exercise.

 

(b)           Payment.  Payment of the Exercise Price for the shares purchased upon exercise
shall be made on or before the proposed exercise date either by:

 

(i)                                   cash, certified check, bank cashier’s check
or wire transfer;

(ii)                                payment through a broker-dealer sale and
remittance procedure pursuant to which the Employee (x) shall provide
written instructions to a brokerage firm to effect the immediate sale of some
or all of the purchased shares and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares, and (y) shall
provide written instructions to the Company to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete the sale
transaction;

(iii)                             delivering (x) such number of shares of
common stock in the Company which have been owned by the Employee for at least
six months, and which have a Fair Market Value as of the Exercise Date equal to
the Exercise Price due for the purchased shares, and (y) appropriate stock
powers duly signed by the Employee; or

 

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(iv)                              any combination of the foregoing methods or
such other method as may be permitted by the Committee.

 

(c)           Taxes.  The Employee shall make appropriate arrangements with the Company for
the satisfaction of all federal, state and local income and employment tax
withholding obligations applicable to the Option exercise, as provided under
the Plan.

 

(d)           Other Documentation.  The Employee shall execute and deliver to the
Company such written representations as may be requested by the Company in
order for it to comply with applicable requirements of federal and state
securities laws, as well as any other applicable laws, rules or
regulations.

 

(e)           Exercise Date.  The Option shall be deemed to be exercised upon receipt by the Company
of each of the foregoing (the “Exercise Date”).

 

6.             Termination
of Employment.

 

(a)           If
the Employee’s employment with the Company terminates for any reason before
the Option vests, then the Option shall automatically expire upon such date of
termination and cease to be outstanding.

 

(b)           If,
after the Option vests, the Employee’s employment with the Company
terminates:

 

(i)            for any
reason other than death, Disability or Cause,
the Employee will have the right to exercise the Option for a period of three
months (or 120 days in the case of a Non-Qualified Stock Option) following the
date of such termination or until the Expiration Date, whichever first
arrives.  At the end of such three months
(or 120 days if applicable), the Term of the Option will expire;

 

(ii)           due to the Employee’s death, then the
Employee or the person or persons to whom his rights pass by will or by the
laws of descent and distribution, will have the right to exercise the Option
for a period of one (1) year following the Employee’s date of death or
until the Expiration Date, whichever first arrives;

 

(iii)          due to the Employee’s Disability, then the Employee or
his duly appointed guardian, if any, will have the right to exercise the Option
for a period of  one (1) year after
the date of such termination or until the Expiration Date, whichever first
arrives;

 

(iv)          for Cause (as defined in the Plan), the Option shall
be immediately forfeited unless already duly exercised prior to the date of
such termination for Cause.

 

(c)           Notwithstanding anything to the contrary
contained in this Agreement, in no event shall the Option be exercised at any
time after its Expiration Date.

 

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7.             Shareholder Rights.   Employee’s ownership of the
shares purchased by exercise of the Option shall not be registered on the books
of the Company until all requirements for exercise of the Option under Section 5
of this Agreement and under the Plan have been satisfied with respect to such
Shares.  The Employee shall not be deemed
to be a shareholder or to have any rights of a shareholder with respect to any
Shares until such time as ownership of the shares purchased upon exercise has
been recorded on the books of the Company, either by direct registration or the
issuance of a stock certificate, whichever is applicable.

 

8.             Transferability. 
The Option
is not transferable and may not be assigned by the Employee, other than by will
or by the laws of descent and distribution following the Employee’s death.  A transfer by will or by the laws of descent
and distribution shall not be effective to bind the Company until the documents
described in Section 20 of the Plan have been duly provided to the
Company.  Notwithstanding the foregoing,
Options that are not Incentive Stock Options may, in the sole discretion
of the Committee, be transferred during the Employee’s lifetime to certain
family members only upon the conditions and as further prescribed in Section 20
of the Plan.

 

9.             Change in Control. 
In the event of a Change in Control as defined in the Plan, the Option
will be governed by the terms of Section 7(f) of the Plan.

 

10.          Construction;
Governing Law.  This Agreement and the Option evidenced
hereby are made and granted pursuant to the Plan and in are in all respects
limited by and subject to the terms of the Plan.  All decisions of the Committee we respect to
any question or issue arising under the Plan or this Agreement shall be
conclusive and binding on all persons having an interest in the Option.  In the event of any conflict between the
terms of the Plan and the terms of this Agreement, the terms of the Plan shall
govern.  This Agreement shall be governed
by the laws of the State of Oklahoma, without resort to that state’s
conflict-of-laws rules.

 

11.          Nature
of Option and Acknowledgement of Employee.  In accepting the Option, the Employee acknowledges
and agrees that:

 

(a)           the
Plan is established voluntarily by the Company, it is discretionary in nature
and it may be modified, amended, suspended or terminated by the Company at any
time, unless otherwise provided in the Plan or this Agreement;

 

(b)           the
award of the Option is voluntary and does not create any right on the part of
the Employee to receive future grants of options; all decisions with respect to
future option grants, if any, will be at the sole discretion of the Company;

 

(c)           neither
the Option, nor this Agreement confers upon the Employee any right with respect
to the continuation of employment with the Company; and

 

(d)           the
future value of the Shares is unknown and cannot be predicted with any degree
of certainty.

 

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EXECUTED
in Broken Arrow, Oklahoma, on and as of the Effective Date.

 

 

XETA TECHNOLOGIES, INC.

 

 

	
   

  	
   

  
	
  Greg D. Forrest

  
	
  Chief Executive Officer

  
	
   

  
	
   

  
	
  “Employee”

  
	
   

  
	
   

  	
   

  

 

5Exhibit 10.1

 

RICHARD J. ALARIO

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

 

THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (as from time to time amended in
accordance with the provisions hereof, this “Agreement”), is entered into as of the
31st day of December, 2007, by and between RICHARD J. ALARIO,
residing at 5342 Bordley Drive, Houston Texas 77056 (the “Executive”), KEY
ENERGY SERVICES, INC., a Maryland corporation with executive offices at 1301
McKinney Street, Suite 1800, Houston, Texas 77010 (the “Parent”) and KEY ENERGY SHARED
SERVICES, LLC, a Delaware limited liability company (the “Company”).

 

WHEREAS,
the Executive and the Parent are parties to the Employment Agreement dated as
of May 1, 2004, as amended October 26, 2006 (the “Original Employment Agreement”); and

 

WHEREAS,
the parties desire to amend and restate the Original Employment Agreement in
order to provide for compliance with the provisions of Internal Revenue Code Section 409A
concerning, inter alia, the payment of potential
future benefits to the Executive; and

 

WHEREAS,
pursuant to the terms of Section 22 hereof, the Parent desires to assign
the Original Employment Agreement to the Company and Company desires to accept
such assignment and to assume the obligations of the Parent under the Original
Employment Agreement, as amended by this Agreement; and

 

WHEREAS,
pursuant to the terms of Section 22 and subject to the terms thereof, the
Executive hereby consents to such assignment; and

 

WHEREAS,
the Executive is willing to serve as the Parent’s Chief Executive Officer and
President, pursuant to the terms and conditions set forth herein;

 

NOW,
THEREFORE, in consideration of the premises and mutual covenants and agreements
herein contained, the parties agree as follows:

 

1.                                       Employment; Term.

 

(a)                            Commencing
on May 1, 2004, the Company hereby employs the Executive, and the
Executive hereby accepts employment and promotion by the Company, as the
Company’s President and the Parent’s Chief Executive Officer and
President.   The Executive shall have the
responsibilities, duties and authority commensurate with his positions as the
Chief Executive Officer and President, including, without limitation, the
general supervision and control over, and responsibility for, the management
and operation of the Company, the Parent, and its Subsidiaries, subject,
however, to the supervision of the Board insofar as such supervision is
required by the Maryland General Corporation Law, and the Company’s Articles of
Incorporation and By-Laws. Such responsibilities, duties and authority shall
not be expanded or contracted without the express consent of the Executive; provided, however, that Executive agrees
that the Company may select or employ one or more other officers to serve as
President

 

 

and/or Chief
Operating Officer so long as the Executive continues to be the most senior
officer.  The Executive will report only
to the Board.

 

(b)                           The
Executive shall hold such employment and position with the Company and Parent
hereunder until the close of business on January 1, 2010, unless sooner
terminated in accordance with Section 5, and at the close of business on
each anniversary of such date, commencing with January 1, 2010, the term
of the Executive’s employment hereunder shall be automatically extended for
twelve (12) months (unless sooner terminated in accordance with Section 5
hereof) unless either the Executive or the Company shall have given written
notice (in each case, a “Non-Renewal
Notice”) to the other that such automatic extension shall not
occur, which Non-Renewal Notice shall have been given no later than ninety (90)
days next preceding the relevant Anniversary Date. (The entire period of
employment of Executive, until termination in accordance herewith, is referred
to hereby as the “Employment
Period”).

 

(c)                            The
Executive will devote his full time and his best efforts to the business and
affairs of the Company, the Parent and its Subsidiaries; provided, however,
that nothing contained in this Section 1 shall be deemed to prevent or
limit the Executive’s right to: (i) make investments in the securities of
any publicly-owned corporation; or (ii) make any other investments with
respect to which he is not obligated or required to, and to which he does not
in fact, devote managerial efforts that interfere with his fulfillment of his
duties hereunder; or (iii) to serve on boards of directors and to serve in
such other positions with non-profit and for-profit organizations as to which
the Board may from time to time consent, which consent shall not be
unreasonably withheld or delayed. Reference is made to Section 7 hereof,
which contains limitations on some of the above activities.

 

(d)                           The
principal location at which the Executive will substantially perform his duties
will be the Company’s Houston, Texas offices, or as otherwise agreed between
the Executive and the Board of Directors of the Company.  If any agreed change in location would
increase the Executive’s one-way commuting distance between his then-current
principal residence and the offices to which he is assigned by 20 miles or
more, the Company will pay to the Executive, and/or will reimburse the
Executive for, each of the following expenses and costs incurred in connection
with the Executive’s relocation and will pay to the Executive the bonus
specified in clause (vii) below: (i) the excess, if any, of (A) the
Executive’s aggregate tax basis in his primary residence at the time of its
sale over (B) the proceeds realized by the Executive from such sale net of
ordinary and reasonable fees and expenses incurred in connection with such sale
(other than such fees and expenses described in clause (ii) of this
sentence), (ii) ordinary and reasonable realtor fees and closing costs
incurred in connection with the sale of the Executive’s primary residence, (iii) ordinary
and reasonable closing costs incurred in connection with the purchase of the
Executive’s new primary residence in the vicinity of the new location at which
the Executive is to render his services hereunder, (iv) ordinary and
reasonable costs incurred to pack, transport, unpack, and insure the Executive’s
household furnishings and effects to his new primary residence, (v) ordinary
and reasonable fees for connecting utilities in his new primary residence, (vi) ordinary
and reasonable costs for trips to look for a new residence as well as up to
thirty (30) days of temporary housing, and (vii) a cash bonus calculated
to pay all of the federal, state and local income and payroll taxes which the
Executive will incur, if any, as a result of (A) the Company’s reimbursement
of the preceding expenses and (B) the amount of such bonus (that is, a “gross-up”
bonus).  Each of the expenses or other
items reimbursable under this Section 1(d)

 

2

 

shall be reimbursed in a separate payment.  It shall be a condition precedent to any
payment pursuant to this Section 1(d) that Executive has been
continuously employed by the Company through the date on which such payment is
made.

 

(e)                            The
Executive represents and warrants to the Company that the representations and
warrants he made in Section 1(e) of the 2003 Agreement remain correct
and that he is not now and will not become subject to any covenants against
competition or similar covenants or agreements that would affect the performance
of his obligations hereunder.  The
Executive covenants that he will not disclose or use confidential or
proprietary materials, documents, information or other property of a third
party (including, without limitation, any present or former employer) in any
way which could create a claim against the Company or the Executive or which
would violate any agreement, written or oral, relating to such materials,
documents, information or other property.

 

2.                                       Salary; Bonuses; Expenses.

 

(a)                            During
the Employment Period beginning with the Commencement Date, the Company will
pay base compensation to the Executive at the annual rate of Eight Hundred
Thousand Dollars ($800,000) per year (the “Base Salary”), payable in substantially equal
installments in accordance with the Company’s existing payroll practices, but
no less frequently than monthly. The Company will review the Base Salary on a
yearly basis following the end of each fiscal year of the Company to determine
if an increase is advisable, and the Base Salary may be increased (but not
decreased) at the discretion of the Compensation Committee of the Board (the “Compensation Committee”)
or the Board, taking into account, among other factors, the Executive’s
performance and the performance of the Company.

 

(b)                           For each
six-month or other applicable period commencing on January 1, 2004 and
thereafter, the Executive shall be eligible to participate in all of the
Company’s cash performance compensation plans (collectively, the “Performance Cash Compensation Plans”) for the Company’s
executives providing for the payment of cash bonuses or other cash incentives
payable upon the achievement of goals set forth in the Company’s strategic plan
as developed by the Compensation Committee after consultation with the
Executive, payable in accordance with the provisions thereof.  The performance goals for the Performance
Cash Compensation Plans will be based on objective criteria specified in good
faith in advance by the Compensation Committee after consultation with the
Executive. The Executive shall also receive such bonuses other than pursuant to
the Performance Cash Compensation Plans in such amounts and at such times as
the Compensation Committee in its discretion determines are appropriate to
recognize extraordinary performance by the Executive.  Exhibit A provides additional details
regarding bonus arrangements.

 

(c)                            The
Executive shall be reimbursed by the Company for reasonable travel, lodging,
meal, entertainment and other expenses incurred by him in connection with
performing his services hereunder in accordance with the Company’s
reimbursement policies from time to time in effect.

 

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3.                                       Equity-Based Incentives.

 

The Executive shall be eligible to participate in
awards of stock options, restricted stock, deferred stock, stock appreciation
rights, and other equity-based incentives (collectively, “Equity-Based Incentives”),
at the discretion of the Board or the Compensation Committee.  Any performance goals for the grant of such
Equity-Based Incentives will be based on objective criteria mutually negotiated
and agreed upon in good faith in advance by the Board or the Compensation
Committee after consultation with the Executive.

 

4.                                       Benefit Plans; Vacations.

 

In connection with the Executive’s employment
hereunder, he shall be entitled during the Employment Period (and thereafter to
the extent provided in Section 5(f) hereof) to the following
additional benefits:

 

(a)                            At the
Company’s expense, such fringe benefits, including without limitation group
medical and dental, life, executive life, accident and disability insurance and
retirement plans and supplemental and excess retirement benefits, as the
Company may provide from time to time for its senior management, but in any
case, at least the benefits described on Exhibit B hereto.

 

(b)                           The
Executive shall be entitled to no less than the number of vacation days in each
fiscal year determined in accordance with the Company’s vacation policy as in
effect from time to time, but not less than twenty (20) business days in any
fiscal year (prorated in any fiscal year during which he is employed hereunder
for less than the entire year in accordance with the number of days in such
fiscal year in which he is so employed). The Executive shall also be entitled
to all paid holidays and personal days given by the Company to its executives.

 

(c)                            The
Executive shall be entitled to receive an allowance of $1,100 per month, plus
reimbursement for reasonable insurance and maintenance expenses, to cover costs
incurred by the Executive in connection with the use of his automobile during
the Employment Period.

 

(d)                           The
Company will pay the reasonable fees for personal: (i) financial advisory,
counseling, accounting and related services; (ii) legal advisory or
attorneys’ fees and related expenses; and (iii) income tax return
preparation and tax audit services as reasonably requested by the Executive,
provided by certified public accountants and tax attorneys acceptable to him;
provided, however, that the maximum aggregate amount paid by the Company
pursuant to this Section 4(d) shall not exceed $15,000 in any fiscal
year of the Company, and shall be reimbursed within 90 days of the end of the
tax year in which they were incurred.

 

(e)                            Nothing
herein contained shall preclude the Executive, to the extent he is otherwise
eligible, from participation in all group insurance programs or other fringe
benefit plans which the Company may from time to time in its sole and absolute
discretion make available generally to its personnel, or for personnel
similarly situated, but the Company shall not be required to establish or
maintain any such program or plan except as may be otherwise expressly provided
herein.

 

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(f)                              The
Company shall pay the initiation fee and any other initial membership fee for
the Executive to become and remain a member of one private country club, golf
club, tennis club or similar club or association for business use selected by
the Executive and approved by the Compensation Committee, which approval shall
not be unreasonably withheld or delayed. In addition, the Company shall pay all
annual or other periodic fees, dues and costs, for the Executive’s membership
in such club or association.  Fees and
expenses under this Section 4(f) are subject to an annual budget to
be prepared by the Executive and approved by the Compensation Committee, which
budget will take into account the heightened expenses applicable to an initial
membership year.

 

5.                                       Termination, Change in Control and Reassignment of
Duties.

 

(a)                            Termination
by the Company. The Company shall have the right to terminate the Executive’s
employment under this Agreement and the Employment Period for Cause (as defined
below) at any time without obligation to make any further payments to the
Executive hereunder except the compensation described in Section 5(g) hereof.
Except as otherwise provided in Section 5(b) hereof, which Section shall
apply in the event the Executive becomes unable to perform his obligations
hereunder by reason of Disability (as defined below), the Company shall have
the right to terminate the Executive’s employment hereunder and the Employment
Period for any reason other than for Cause (including, without limitation, by
giving the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof)
only upon at least ninety (90) days prior written notice to him (provided that,
in the event the Company gives the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof,
only the 90-day notice period therein provided shall be required). In the event
the Company terminates the Executive’s employment hereunder for any reason
other than for Disability or Cause (including, without limitation, by giving
the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof),
then for the purpose of effecting a transition during the ninety (90) day
notice period of the Executive’s management functions from the Executive to
another person or persons, during such period the Company may reassign the Executive’s
duties hereunder to another person or other persons. Such reassignment shall
not reduce the Company’s obligations hereunder to make salary, bonus and other
payments to the Executive and to provide other benefits to him during the
remainder of his employment and, if applicable, following the termination of
employment.  Notwithstanding a notice of
termination that does not, when made, specify Cause, the Company may, during
the 90 day notice period (the “Cause Review Period”), convert the termination to a
Cause termination, subject to the procedural safeguards specified in the next
paragraph.

 

As used in this Agreement, the term “Cause” shall mean (i) any breach of
any representation, warranty or covenant of the Executive contained in Section 1(e) hereof;
(ii) the willful and continued failure by the Executive to substantially
perform his duties hereunder (other than (A) any such willful or continued
failure resulting from his incapacity due to physical or mental illness or
physical injury or (B) any such actual or anticipated failure after the
issuance of a notice of termination by the Executive for Good Reason (as
defined below)), after a written demand for substantial performance is
delivered by the Company to the Executive that specifically identifies the
manner in which the Company believes the Executive has not substantially
performed his duties; (iii) the willful engaging by the Executive in
misconduct which is materially injurious to the Company, monetarily or
otherwise; (iv) the conviction of the Executive of a felony by a court of
competent jurisdiction; or (v) willful violation of the Key

 

5

 

Energy Services, Inc. Amended and Restated Policy
Regarding Acquisition, Ownership and Disposition of Company Securities, as
amended from time to time. For purposes of this paragraph, no act, or failure
to act on the part of the Executive shall be considered “willful” unless done or omitted to be done
by him in bad faith and without reasonable belief that his action or omission
was in the best interest of the Company. Notwithstanding the foregoing, the
Executive’s employment shall not be deemed to have been terminated for Cause
unless (A) reasonable notice shall have been given to him setting forth in
detail the reasons for the Company’s intention to terminate for Cause, and if
such termination is pursuant to clause (ii) or (iii) above and any
damage to the Company is curable, only if Executive has been provided a period
of ten (10) business days from receipt of such notice to cease the actions
or inactions and otherwise cure such damage, and he has not done so (provided
that only one such period needs to be provided in any period of three (3) consecutive
months); (B) an opportunity shall have been provided for the Executive to
be heard before the Board; and (C) if such termination is pursuant to
clause (i) or (ii) above, delivery shall have been made to the
Executive of a notice of termination from the Board finding that in the good
faith opinion of a majority of the Board (excluding the Executive, if
applicable) he was guilty of conduct set forth in clause (i) or (ii) above.

 

(b)           Termination
upon Disability and Temporary Reassignment of Duties Due to Disability;
Termination upon Death

 

(i)                                     If
the Executive becomes totally and permanently disabled during the Employment
Period so that he is unable to perform his obligations hereunder by reasons
involving physical or mental illness or physical injury for an aggregate of
ninety (90) days (whether or not consecutive) during any period of twelve (12)
consecutive months during the Employment Period (“Disability”), then the Executive’s
employment hereunder and the Employment Period may be terminated by the Company
within sixty (60) days after the expiration of such ninety (90) day period
(whether or not consisting of consecutive days), such termination to be
effective ten (10) days after written notice to the Executive. In the
event the Company shall give a notice of termination under this Section 5(b)(i),
then the Company may reassign the Executive’s duties hereunder to another
person or other persons. Such reassignment shall not reduce the Company’s
obligations hereunder to make salary, bonus and other payments to the Executive
and to provide other benefits to him, during the remainder of his employment
and, if applicable, following the termination of employment.

 

(ii)                                  During
any period that the Executive is totally disabled such that he is unable to
perform his obligations hereunder by reason involving physical or mental illness
or physical injury, as determined by a physician chosen by the Company and
reasonably acceptable to the Executive (or his legal representative), the
Company may reassign the Executive’s duties hereunder to another person or
other persons, provided if the Executive shall again be able to perform his
obligations hereunder prior to the Company’s termination of the Executive’s
employment hereunder and the Employment Period in accordance with the terms of
this Agreement, all such duties shall again be the Executive’s duties. The cost
of any examination by such physician shall be borne by the Company.
Notwithstanding the foregoing, if the Executive has been unable to perform his
obligations hereunder by reasons involving physical or mental illness or physical
injury for an aggregate of ninety (90) days (whether or not consecutive) during
any period of twelve (12) consecutive months during the Employment

 

6

 

Period, then a determination by a physician of disability
will not be required prior to any such reassignment. Any such reassignment
shall not be a termination of employment and in no event shall such
reassignment reduce the Company’s obligation to make salary, bonus and other
payments to the Executive and to provide other benefits to him under this
Agreement during his employment or, if applicable, following a termination of
employment.

 

(iii)                               The
Executive’s employment hereunder and the Employment Period shall automatically
terminate immediately upon the death of the Executive.

 

(c)           Termination
by Executive. The Executive’s employment hereunder and the Employment
Period may be terminated by the Executive by giving written notice to the
Company as follows: (i) at any time for any reason other than Good Reason (including,
without limitation, by giving the Company a Non-Renewal Notice pursuant to Section 1(b) hereof)
by notice of at least ninety (90) days (provided that, in the event the
Executive gives the Company a Non-Renewal Notice pursuant to Section 1(b) hereof,
only the 90-day notice period therein provided shall be required); or (ii) at
any time for Good Reason, provided that the Executive can only give a notice of
resignation for Good Reason in connection with a “Change in Control” (as
defined in Exhibit B) beginning on the ninetieth (90th) day after the
closing of the transaction or the event constituting a Change in Control.  In the event of a termination by the
Executive of his employment, the Company may reassign the Executive’s duties
hereunder to another person or other persons.

 

As used herein, “Good Reason” shall mean the continued
existence from the date of the notice from the Executive referred to below
until after the expiration of the Cure Period of any one or more of only the
following circumstances or conditions:

 

(i)                                     A
material diminution in the Executive’s Base Compensation, authority, duties or
responsibilities,

 

(ii)                                  A
material diminution in the authority, duties or responsibilities of a
supervisor to whom the Executive reports (including a requirement that the
Executive report to another individual rather than to the Board of Directors of
the Company),

 

(iii)                               A
material diminution in the budget over which the Executive retains authority,

 

(iv)                              A
material change in the geographic location at which the Executive must perform
the services required by this Agreement, provided, however, that no change in
such geographic location will be considered material if Executive has received
any reimbursement pursuant to Section 1(d) of this Agreement in connection
with such relocation; or

 

(v)                                 Any
other action or inaction by the Company that constitutes a material breach of
this Agreement.

 

7

 

The existence of any circumstance or condition shall
not constitute Good Reason unless (i) the Executive provided notice
to the Company of the existence of the circumstance or conditions
within 90 days of the initial existence of such circumstance or condition, and (ii) the
circumstance or condition continued to exist after the last day of the Cure
Period.  For purposes of this Section 5(c),
the term “Cure Period” means the period of 30 consecutive days beginning on the
date notice was given by the Executive of the existence of the circumstance or
condition alleged to be Good Reason.

 

(d)           Severance
Compensation.

 

(i)                                     Termination
by the Executive for Good Reason or by the Company for Other than Cause.  In the event the Executive’s employment
hereunder is terminated (A) by the Executive for Good Reason or (B) by
the Company other than (x) for Cause, (y) Disability, or (z) by
giving the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof,
the Executive shall be entitled, in addition to the other compensation and
benefits herein provided for, to (A) severance compensation in an
aggregate amount equal to three (3) times his Base Salary at the rate in
effect on the termination date, payable in thirty-six (36) substantially equal
monthly installments commencing at the end of the calendar month in which the
termination date occurs.  If Executive’s
employment is terminated by the Company’s giving Executive a Non-Renewal Notice
pursuant to Section 1(b) hereof, the Executive shall be entitled, in
addition to the other compensation and benefits herein provided for, and in
lieu of the compensation under clause (A) in the preceding sentence,
severance compensation in an aggregate amount equal to the greater of (i) one
(1) times his Base Salary at the rate in effect on the termination date,
payable in twelve (12) substantially equal monthly installments commencing at
the end of the calendar month in which the termination date occurs or (ii) the
highest multiple of Base Salary in effect for nonrenewal under any other
executive officer’s contract in effect at the time of non-renewal under this
Agreement, payable in comparable installments; provided that clause (ii) will
only apply to increase the severance beyond one year’s salary if the other
executive’s contract was also either in effect on the Commencement Date or
approved by the Compensation Committee after the Commencement Date.  Each monthly installment payment required
under this Section 5(d)(i) shall be payable on or about the first day
of the month to which it relates, and the right to any series of separate
installment payments under this Section 5(d)(i) shall at all times be
a right to a series of separate payments under Treasury Reg.
1.409A-2(b)(2)(iii).

 

(ii)                                  Termination
following Disability. In the event the Executive’s employment should be
terminated by the Company as a result of Disability in accordance with Section 5(b) hereof,
then the Executive shall be entitled, in addition to the other compensation and
benefits herein provided for, to severance compensation in an aggregate amount
equal to three (3) times his Base Salary at the rate in effect on the
termination date, payable in thirty-six (36) substantially equal monthly
installments commencing at the end of the calendar month in which the
termination date occurs, reduced by the amount of any disability insurance proceeds
actually paid to the Executive or for his benefit during such time period (but
only those proceeds from disability insurance provided by the Company to the
Executive pursuant to Section 4(a) hereof).

 

(iii)                               Change
in Control. If the Executive’s employment is terminated within one (1) year
following a Change in Control that is a “change in control event” as defined

 

8

 

in Treas. Reg. §1.409A-3(i)(5) and the Executive
is entitled to severance compensation pursuant to Section 5(d)(i) or
5(d)(ii) hereof as a result of such termination, the severance
compensation otherwise payable to the Executive (A) shall be increased by
an amount (the “Enhanced Severance Amount”) sufficient, when added to the
amount payable under Section 5(d)(i) or 5(d)(ii) hereof,  to cause the total amount payable as the
result of such termination to equal three (3) times the Base Salary then
in effect plus three (3) times the Executive’s annual target cash bonus as
provided in Section 2 (b) above and (B) the Enhanced Severance
Amount shall be payable in one lump sum on the effective date of such
termination.  In the event severance
compensation becomes payable in a lump sum pursuant to this Section 5(d)(iii),
and if the Executive’s employment is or has been terminated for Disability,
such lump sum shall be reduced by a good faith estimate of the aggregate amount
of any disability insurance proceeds which will be actually paid to the
Executive or for his benefit (but only those proceeds from disability insurance
provided by the Company to the Executive pursuant to Section 4(a) hereof)
during the remaining period over which such severance would otherwise have been
paid.

 

(iv)                              Termination
for Death. In the event of the Executive’s death during the Employment
Period, the Executive’s estate shall not be entitled to any severance
compensation.

 

(v)                                 Termination
by Executive other than for Good Reason or by Company for Cause. In the
event of the Executive’s termination by resignation under Section 5(c)(i) (i.e.,
other than for Good Reason) or by the Company for Cause, the Executive shall
not be entitled to any severance under Section 5(d) or otherwise, any
continued benefits under Section 5(f) (other than as required by
statute), or any accrued compensation under (x) Section 5(g) (iii) (for
prior year bonuses, to the extent specified in that clause), or (y) Section 5(g)(iv) (prorated
bonus for year of termination).  Under
the foregoing situations, the treatment of equity incentives shall be as
specified in Section 5(e)(ii), and the Executive shall receive the accrued
compensation described in Section 5(g).

 

(vi)                              Release.  Executive agrees that except in the case of a
termination resulting from Executive’s death, all payments under Subsections
(d), (e), (f), and (g)(iii) of this Section 5, and Section 6 are
conditioned on the Executive’s prior execution and non-revocation of a full
release of the Company and its officers, employees, affiliates and agreements
for all claims relating to his employment, compensation, and termination and
such other matters as the Company reasonably requests on termination, in a form
provided by the Company, which execution shall not occur earlier than the day
after termination of the Executive’s employment and not later than 60 days
following delivery by the Company to the Executive of the form for such
release; provided, however, that if no form for such
release is delivered to the Executive within seven (7) days of the
termination of Executive’s employment, this Agreement shall be applied without
regard to this Section 5(d)(vi); and provided further, however,  that any Release previously executed under this Section 5(d)(vi) will
be null and void if the Company reaches a determination of Cause within the
Cause Review Period.  If any amount is
payable under Subsections (d), (e), (f), and (g)(ii) of this Section 5
because of a separation from service that is not an “involuntary separation
from service” as defined in Treas. Reg. § 1.409A-1(n)(1) or a
separation from service which, pursuant to Treas. Reg. § 1.409A-1(n)(2) is
entitled to treatment as an “involuntary separation from service” as so
defined, and if a form of release is delivered by the Company to the Executive
within seven (7) days of such separation from service, then any

 

9

 

other provision of this Agreement to the contrary
notwithstanding, any such amount shall not be payable until the sixtieth day
after the date of such separation from service.

 

(vii)                           For
purposes of this Agreement, Executive’s employment will not be considered to
have terminated unless, as a result of a termination, Executive has had a “separation
from service” (as that term is defined in Treas. Reg. § 1.409A-1(h)) with
the “Key Energy Controlled Group.”  The
term “Key Energy Controlled Group” means the group of corporations and trades
or businesses (whether or not incorporated) composed of the Company and every
entity or other person which together with the Company constitutes a single “service
recipient” (as that term is defined in Treas. Reg. § 1.409A-1(g)) as the
result of the application of Treas. Reg. § 1.409A-1(h)(3).

 

(e)           Effect
of Termination or Change in Control upon Equity-Based Incentives. In all
cases subject to the provisions of Section 5(e)(vi) hereof:

 

(i)                                     In
the event the Executive’s employment hereunder is terminated by the Company for
any reason other than for Cause or Disability (including, without limitation,
by giving the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof),
or in the event the Executive should terminate his employment for Good Reason,
then, unless the provisions of Section 5(e)(iv) hereof shall apply,
any Equity-Based Incentives held by the Executive which have not vested prior
to the effective date of such termination shall immediately vest and shall
remain exercisable until the earlier to occur of (x) the third anniversary
of the effective date of such termination and (y) the final stated
expiration date of the Equity-Based Incentive. In addition, in the event of
such a termination, any Equity-Based Incentives held by the Executive which
have vested prior to the effective date of such termination shall remain
exercisable until the earlier to occur of (x) the third anniversary of the
effective date of such termination and (y) the final stated expiration
date of the Equity-Based Incentive.

 

(ii)                                  In
the event the Executive’s employment hereunder is terminated by the Company for
Cause or is terminated by the Executive other than for Good Reason (including,
without limitation, by giving the Company a Non-Renewal Notice pursuant to Section 1(b) hereof),
then effective upon the date such termination is effective, any Equity-Based
Incentives which have not vested prior to the effective date of such
termination shall be forfeited. Any Equity-Based Incentives held by the
Executive entitling the Executive to retain or purchase securities of the
Company which have vested prior to the effective date of such termination shall
remain subject to the terms and provisions of the plan and/or the agreement
under which they were awarded.

 

(iii)                               In
the event of the Executive’s death while employed by the Company or in the
event that the Executive’s employment should terminate as a result of
Disability, then, unless the provisions of Section 5(e)(iv) hereof
shall apply, any Equity-Based Incentives held by the Executive which have not
vested prior to the effective date of such termination shall immediately vest
and shall also remain exercisable until the earlier to occur of (x) the
third anniversary of the death of the Executive or the effective date of such
termination and (y) the final stated expiration date of the Equity-Based
Incentives. In addition, in the event of such death or such a termination, any
Equity-Based Incentives held by the Executive which have vested prior to the
effective date of such death or termination shall remain exercisable until the

 

10

 

earlier to occur of (x) the third anniversary of
the effective date of such death or termination and (y) the final stated
expiration date of the Equity-Based Incentives.

 

(iv)                              In
the event of a Change in Control while the Executive is employed by the
Company, then as of the date immediately prior to the date such Change in
Control shall occur, any Equity-Based Incentives held by the Executive which
have not vested prior to such date shall immediately vest and all Equity-Based
Incentives held by the Executive shall remain exercisable in accordance with
the terms and provisions governing such Equity-Based Incentives. In the event
that the Executive’s employment is terminated for any reason within one (1) year
following a Change in Control, all Equity-Based Incentives held by the
Executive shall continue to remain exercisable until their respective final
stated expiration dates. In the event that the Executive’s employment is
terminated by the Company other than for Cause or Disability (including,
without limitation, by giving the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof)
in anticipation of a Change in Control, then as of the date immediately prior
to the date on which notice of such termination is given, any Equity-Based
Incentives held by the Executive which have not vested prior to such date shall
immediately vest and all Equity-Based Incentives held by the Executive shall
remain exercisable until their respective final stated expiration dates.

 

(v)                                 In
the event of a conflict between the preceding terms and provisions of this Section 5(e) and
any other terms and provisions governing any Equity-Based Incentives held (now
or in the future) by the Executive (including without limitation the terms and
provisions contained in the agreements and/or plans pursuant to which such
Equity-Based Incentives were (or will in the future be) granted but excluding
matters covered by Section 5(e)(vi)), the preceding terms and provisions
of this Section 5(e) shall control; provided, however,
that, if an Equity-Based Incentive (including, without limitation, a grant of
restricted stock or a Deferred Stock Grant) does not by its terms require any
exercise, no requirement of exercise shall be implied from the preceding terms
and provisions of this Section 5(e).

 

(vi)                              Anything
to the contrary in this Agreement notwithstanding, the final stated expiration
date of an Equity Based Incentive shall not be extended beyond the tenth
anniversary of the date on which such Equity-Based Incentive was granted.

 

(f)            Continuation
of Benefits.

 

(i)                                     Subject
to Section 5(f)(ii) hereof, in the event that Executive’s employment
hereunder is terminated by the Executive for Good Reason or by the Company for
Disability or other than for Cause (including, without limitation, by giving
the Executive a Non-Renewal Notice pursuant to Section 1(b) hereof)
and not as a result of the death of the Executive, the Executive shall continue
to be entitled, at the Company’s expense, to the post-employment benefits under
Section 4, if any, that such benefits provide under their terms for a
period of time following the termination date ending on the first to occur of (I) the
third anniversary of the termination date, (II) the last date of
eligibility under the applicable benefits or (III) the date on which the
Executive commences full-time employment with another employer.  The Company will pay the premiums for COBRA
health coverage for Executive and his covered family members for the period
COBRA provides. At such time as the Company is no longer required to provide
the Executive with life and/or disability insurance, as the case may be, the
Executive

 

11

 

shall be entitled, at the Executive’s expense, to
convert such life and disability insurance, as the case may be, into
individually owned policies, except if and to the extent such conversion is not
available from the provider of such insurance.

 

(ii)                                  In
the event the Executive’s employment hereunder is terminated by the Company
within one (1) year of a Change in Control (other than a termination
because of the Executive’s death) or is terminated by the Company other than
for Cause in anticipation of a Change in Control, the Company shall pay to the
Executive, in lieu of providing the benefits contemplated by Section 5(f)(i) above,
an amount in cash equal to the aggregate reasonable expenses that the Company
would incur if it were to provide such benefits for a period of time following
the termination date ending on the third anniversary of the termination date,
which amount shall be paid in one lump sum on the date of such termination.

 

(iii)                               In
the event the Executive’s employment hereunder is terminated by reason of
death, the Executive’s spouse and her dependents shall be entitled at the
Company’s expense to continued health coverage under COBRA under the Company’s
group medical and dental plans applicable to executives (for a period of
thirty-six months or such shorter period as COBRA provides because of
replacement coverage).

 

(g)           Accrued
Compensation. In the event of any termination of the Executive’s employment
for any reason, the Executive (or his estate) shall be paid (i) any unpaid
portion of his Base Salary through the effective termination date, (ii) for
any accrued but unused vacation (payable in an amount equal to the Base Salary
divided by 255 and multiplied by the number of accrued but unused vacation
days), (iii) any prior fiscal year bonus earned, but not paid (unless
Executive resigns without Good Reason or is terminated for Cause less than 90
days after the end of the period for which the bonus is to be paid), (iv) a
pro-rata portion (based upon the number of days of employment during the fiscal
year) of any bonus for the current fiscal year, so long as (A) the
performance goals required to be achieved in order to earn such bonus had been
established, (B) those goals were on or above target at the date of
termination, and (C) Executive has not resigned without Good Reason and
was not terminated for Cause, (v) any amounts for expense reimbursement
and similar items which have been properly incurred in accordance with the provisions
hereof prior to termination and have not yet been paid, including without
limitation any sums due under Sections 2(c), 2(d), 4(c), 4(d) and 4(f) hereof,
and (vi) any Gross-Up Payment which may become due under the terms of Section 5(i) hereof.  Such amounts shall be paid within ten (10) days
of the termination date, except that the amount provided under clause (iv) above
shall be paid no later than ten (10) days after the Company is reasonably
able to determine that the performance goals were on or above target at the
date of termination for a performance period that concludes after the
termination date.

 

(h)           Director/Officer
Resignations. If the Executive’s employment hereunder shall be terminated
by him or by the Company in accordance with the terms set forth herein, then
effective upon the date such termination is effective, he will be deemed to
have resigned from all positions as an officer and director of the Company and
of any of its Subsidiaries, except as the parties may otherwise agree.

 

12

 

6.             Certain Tax Consequences.

 

(a)           Tax
Consequences under Section 280G.

 

(i)                                     Whether
or not the Executive becomes entitled to the payments and benefits described in
Section 5 or 6, if any of the payments or benefits received or to be
received by the Executive in connection with a change in ownership or control
of the Company, as defined in section 280G of the Code (a “Statutory Change in Control”),
or the Executive’s termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with the Company,
any person whose actions result in a Statutory Change in Control or any person
affiliated with the Company or such person) (collectively, the “Severance Benefits”)
will be subject to any excise tax (the “Excise Tax”) imposed under section 4999
of the Code, the Company shall pay to the Executive an additional amount equal
to the Excise Tax, plus any amount necessary to “gross up” the Executive for
additional taxes resulting from the payments to the Executive by the Company
under this Section 6(a)(i) (the “Excise Tax Payment”). Each Excise
Tax Payment shall be made not less than five (5) business days prior to
the due date for payment of the Excise Tax.

 

(ii)                                  For
purposes of determining whether any of the Severance Benefits will be subject
to the Excise Tax and the amount of such Excise Tax:

 

(A)                              all
of the Severance Benefits shall be treated as “parachute payments” within the
meaning of Code section 280G(b)(2) if the aggregate present value
(determined as provided in Code Section 280G(d)(4)) of such Severance
Benefits equals or exceeds three times the Executive’s “Base Amount” (within
the meaning of Code Section 280G(b)(3)), and all “excess parachute
payments” within the meaning of Code section 280G(b)(1) shall be
treated as subject to the Excise Tax, unless the Executive receives a written
opinion from a nationally recognized law or accounting firm (“280G Advisers”)
selected by the Compensation Committee or the Board, and reasonably acceptable
to the Executive, that such other payments or benefits (in whole or in part) do
not constitute parachute payments, including by reason of Code section 280G(b)(4)(A),
or such excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered, within the meaning of Code section 280G(b)(4)(B),
in excess of the “Base
Amount” as defined in Code section 280G(b)(3) allocable
to such reasonable compensation, or are otherwise not subject to the Excise
Tax; and

 

(B)                                the
value of any non-cash benefits or any deferred payment or benefit shall be
determined by a certified public accountant or appraisal company of recognized
national standing forming part of or selected by 280G Adviser and reasonably acceptable
to the Executive, in accordance with the principles of Code section 280G(d)(3) and
(4).

 

(iii)                               In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder, the
Executive shall repay to the Company, at the time that the amount of such
reduction in Excise Tax is finally determined (the “Reduced Excise Tax”),
an amount (the “Gross-Up
Repayment”) equal to the sum of (A) the difference of the
Excise Tax Payment and the Reduced Excise Tax plus
(B) an amount representing the difference

 

13

 

between (1) the amount paid
by the Company to the Executive to “gross up” the Executive for taxes on
payments made by the Company to the Executive in respect of the Excise Tax and (2) the
amount which should have been paid to the Executive by the Company to “gross up”
the Executive for taxes on payments made by the Company to the Executive in
respect of the Reduced Excise Tax; provided, however, that in no event shall
the Gross-Up Repayment exceed the actual aggregate cash refunds of, or cash
reductions in, taxes paid by the Executive by virtue of paying the Gross-Up
Repayment; and provided, further, that if such refunds or reductions are
realized from time to time, the Executive shall make a repayment to the Company
at the time of each such realization equal to the excess of the Gross-Up
Repayment due after giving effect to such realization over the Gross-Up
Repayment due immediately prior to giving effect to such realization. The
Executive shall (1) take such actions with respect to taxes and tax
returns as the Company may from time to time request in order to obtain such
refunds and reductions, including, without limitation, by taking positions on
tax returns and filing amended tax returns, (2) provide the Company with
copies of all tax returns filed by the Executive which reflect such refunds or
reductions or are otherwise requested by the Company in order to determine the
Executive’s compliance with the immediately preceding clause (1), (3) permit
the Company to participate in any proceedings relating to such refunds and
reductions and (4) take all such other actions as may be reasonably
requested by the Company from time to time in connection with the realization
of such refunds or reductions, including, without limitation, borrowing money
from the Company (on terms and conditions reasonably satisfactory to the
Executive and the Company, including,
without limitation, having the Company make the Executive whole, on an
after-tax basis, for any interest costs) so that the payments made from time to
time by the Executive to the Company hereunder maximize (to the extent
reasonably possible) such refunds and reductions, the aggregate amount of such
payments by the Executive not to exceed the Gross-Up Repayment; provided,
however, that the Company shall bear and directly pay, or shall promptly
reimburse the Executive for, all costs and expenses (including any additional
penalties and interest) incurred by the Executive in connection with any
actions taken or omitted by the Executive in accordance with instructions from
the Company pursuant to this sentence, and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income tax
(including any additional penalties and interest) imposed as a result of the
Company’s payment of such costs and expenses. In the event that the
Excise Tax is subsequently determined to exceed the amount taken into account
hereunder (including by reason of any payment the existence or amount of which
could not be determined at the time of the Excise Tax Payment), the Company
shall make an additional Excise Tax Payment in respect of such excess (together
with any interest or penalties payable by the Executive with respect to such
excess) at the time that the amount of such excess if finally determined, plus
any additional taxes resulting from the payment to the Executive by the Company
for such excess and the interest and penalties thereon. The Executive and the
Company shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Severance Benefits.

 

(iv)                              The Executive shall give the Company written
notice of any determination by the Executive, or any claim by any taxing
authority, that he owes Excise Tax on any Severance Benefit. Such notice shall
be given as soon as practicable but no later than ten (10) business days
after the Executive makes such determination or is informed of such claim, and
shall, to the extent Executive has or may reasonably obtain such information,
apprise the Company of the amount of such Excise Tax and the date on which it
is required to be paid. If the

 

14

 

Company gives the Executive written notice at least
thirty (30) days prior to the due date for payment of such Excise Tax, or
within ten (10) business days of having received the foregoing notice from
the Executive (whichever is later), that it disagrees with or wishes to contest
the amount of the Excise Tax, the Company and the Executive shall consult with
each other and their respective tax advisors regarding the amount and payment
of any Excise Tax. In the event there is a contest with any taxing authority
regarding the amount of the Excise Tax, the Company shall bear and pay directly
all costs and expenses (including additional interest, penalties and legal
fees) incurred in connection with any such contest, and shall indemnify and
hold the Executive harmless, on an after-tax basis, to the extent not otherwise
paid hereunder, on (x) the Excise Tax Payment (including any interest and
penalties with respect thereto) and (y) the Company’s payment of the
Executive’s costs and expenses hereunder.

 

(b)                           Tax
Consequences Under Section 409A.

 

(i)                                     In
the event that any amount arising from this Agreement is includable in
Executive’s gross income for a taxable year of the Executive under Section 409A
of the Internal Revenue Code as the result of the terms of this Agreement
and/or the administration of those terms (“the Included Amount”), and the
Included Amount is subjected to a 20 percent additional tax, then the Company
shall pay to the Executive an amount equal to the additional tax imposed under Section 409A
on the Included Amount, together with any underpayment penalties and interest
(the “Additional Tax”) resulting from the inclusion of the additional
amount.  The Company also will pay the
Executive an additional amount necessary to “gross up” the Executive for
additional income taxes on the Additional Tax payment.

 

(ii)                                  The
payments required by this Section 6(b) will be made on the earlier of
(a) the thirtieth day following the date on which it is finally determined
by a court or administrative agency that the Included Amount was includible in
Executive’s income as the result of the application of Section 409A(a)(1)(B) to
the Included Amount; or (b) the last day of the Executive’s taxable year
next following the taxable year in which the Executive remitted the taxes due
as the result of the application of Section 409A(a)(1)(B) to the
Included Amount.

 

(iii)                               It
shall be a condition precedent to the Company’s obligations under this Section 6
that the Executive (a) has given the Company written notice of any
determination by the Executive, or any claim by any taxing authority, that he
owes Additional Tax as the result of the inclusion of the Included Amount; (b) that
such notice was given as soon as practicable but no later than ten (10) business
days after the Executive makes such determination or is informed of such claim;
(c) that such notice shall, to the extent Executive has or may reasonably
obtain such information, apprise the Company of the amount of such Additional
Tax and the date on which it is required to be paid. If the Company gives the
Executive written notice at least thirty (30) days prior to the due date for
payment of such Additional Tax, or within ten (10) business days of having
received the foregoing notice from the Executive (whichever is later), that it
disagrees with or wishes to contest the inclusion of the Included Amount and/or
the amount of the Additional Tax, the Company and the Executive shall consult
with each other and their respective tax advisors regarding the amount and
payment of any Additional Tax, and it shall be a further condition precedent to
the Company’s obligations hereunder that the Executive will take all reasonable
steps requested by the Company to contest the inclusion of the Included Amount
and/or the amount of the Additional Tax resulting from such inclusion, provided
that in the event

 

15

 

there is a contest with any taxing authority regarding
the inclusion and/or the amount of the Additional Tax, the Company shall bear
and pay directly all costs and expenses (including additional interest,
penalties and legal fees) incurred in connection with any such contest, and
shall indemnify and hold the Executive harmless, on an after-tax basis, to the
extent not otherwise paid hereunder, on the Additional Tax (including any
interest and penalties with respect thereto) and the Company’s payment of the
Executive’s costs and expenses hereunder.

 

7.             Limitation on Competition.

 

The Executive acknowledges that he will have
continuing access to the financial and other confidential information of the
Company.  As an agreement ancillary to
the receipt of such information and the other undertakings in this Agreement,
the Executive covenants as follows: 
During the Employment Period, and for such period thereafter (A) as
the Executive is entitled to receive severance compensation under this
Agreement, or (B) in the event payment of Enhanced Severance compensation
is paid, for a period of three (3) years following the end of the
Employment Period, or (C) in the event the Executive’s employment is
terminated by the Company for Cause or the Executive terminates his employment
for any reason other than Good Reason (including, without limitation, by giving
the Company a Non-Renewal Notice pursuant to Section 1(b) hereof),
for a period of twelve months following the Employment Period:

 

(a)                                  the
Executive shall not, directly or indirectly, without the Company’s prior
written consent, participate or engage in, whether as a director, officer,
employee, advisor, consultant, investor, lender, stockholder, partner, joint
venturer, owner or in any other capacity, any Competitive Business (as defined
below) conducted in any Competitive Market Area (as defined below); provided, however,
that the Executive shall not be deemed to be participating or engaging in any
such business solely by virtue of his ownership of not more than five percent
of any class of stock or other securities which is publicly traded on a
national securities exchange or in a recognized over-the-counter market;

 

(b)                                 the
Executive shall not, without the Company’s prior written consent, (i) solicit
(other than by way of generalized employment advertising undertaken in the
ordinary course of business) the service of or employ any employee of the Key
Companies for the Executive’s own benefit or for the benefit of any person or
entity other than the Key Companies, (ii) induce any such employee to
leave employment with the Key Companies, or (iii) employ or cause any other
person or entity other than the Company to employ any former employee of the
Key Companies whose termination of employment with the Key Companies occurred
less than six (6) months prior to such employment by the Executive or such
other person or entity; and

 

(c)                                  the
Executive shall not, without the Company’s prior written consent, (i) induce
or attempt to induce any customer, supplier or contractor of the Key Companies
to terminate or breach any agreement or arrangement with the Key Companies or
otherwise to cease doing business with the Key Companies, or (ii) induce
or attempt to induce any customer, supplier or contractor of the Key Companies
(including any prospective customer, supplier or contractor which any of the
Key Companies are actively pursuing prior to the Executive’s termination of
employment), not to enter into any agreement or arrangement with the Key
Companies or not to do business with the Key Companies.

 

16

 

As used herein, the term “Competitive Business” shall mean any
business: (1) that is competitive with any business (A) which was
conducted by the Company or any of its affiliated companies during the
Employment Period or on the date of termination of Executive’s employment
hereunder or (B) which, on the date of such termination or during the
twelve months immediately preceding such termination, the Company or any of its
affiliated companies was actively investigating with a view to conducting or
was actively pursuing a plan to conduct; and (2) from which the Company or
such affiliated companies derive (or reasonably expect to derive) annual
revenues of not less than $1,000,000. As used herein, the term “Competitive Market Area”
shall mean any geographic market area (1) if the Company or any of its
affiliated companies conducted business in such geographic market area during
the Employment Period or on the date of termination of Executive’s employment
hereunder, or (2) if, on the date of such termination or during the twelve
months immediately preceding such termination, the Company or any of its
affiliated companies was actively investigating with a view to conducting
business in such geographic market area or was actively pursuing a plan to
conduct business in such geographic market area.

 

The Executive agrees and acknowledges that a portion
of the consideration to be paid by the Company to the Executive pursuant to
this Agreement is in consideration of the covenants under this Section 7
and that such consideration is fair and adequate, even though the Executive
will not receive any severance compensation in the event he terminates his
employment with the Company other than for Good Reason or the Company
terminates his employment for Cause. The Executive acknowledges and agrees that
any breach or anticipatory breach by him of any of the provisions of this Section 6
would cause the Key Companies irreparable injury not compensable by monetary
damages alone and that, accordingly, in any such event, the Key Companies shall
be entitled to injunctions, both preliminary and permanent, enjoining or
restraining such breach or anticipatory breach without the necessity of showing
irreparable injury (and the Executive hereby consents to the issuance thereof
without bond by a court of competent jurisdiction).

 

8.                                       Confidential Information.

 

The Executive acknowledges that during the course of
his employment with the Company he will have access to trade secrets,
confidential and proprietary information and know-how of the Key Companies (“Confidential Information”).
Except in the ordinary course of properly performing his duties for the Key
Companies, the Executive shall not at any time, without the Key Companies’
prior written consent while employed or after termination of his employment,
disclose, communicate or divulge, or use for the benefit of himself or of any
third party, any of the Confidential Information of the Key Companies. In the
event the Executive learns during his employment with the Company any trade
secrets, confidential or proprietary information or know-how of any customer,
supplier or contractor of the Key Companies, the Executive shall maintain the
confidence of such information.

 

9.                                       Return of Materials.

 

Upon termination of the Executive’s employment for any
reason, the Executive shall promptly deliver to the Company or, with the
Company’s consent, destroy all documents and other materials in the Executive’s
possession or custody (whether prepared by the Executive or

 

17

 

others) that the Executive obtained from the Key
Companies or a customer, supplier or contractor of the Key Companies during the
Employment Period and which relate to the past, present or anticipated business
and affairs of the Key Companies, including without limitation, any Confidential
Information.

 

10.                                 Enforceability.

 

If any provision of this Agreement shall be deemed
invalid or unenforceable as written, this Agreement shall be construed, to the
greatest extent possible, or modified, to the extent allowable by law, in a
manner which shall render it valid and enforceable and any limitation on the
scope or duration of any such provision necessary to make it valid and
enforceable shall be deemed to be a part thereof. No invalidity or
unenforceability of any provision contained herein shall affect any other
portion of this Agreement unless the provision deemed to be so invalid or
unenforceable is a material element of this Agreement, taken as a whole.

 

11.                                 Legal Expenses.

 

The Company shall pay the Executive’s reasonable fees
for legal and other related expenses associated with any disputes arising
hereunder or under any other agreements, arrangements or understandings
regarding Executive’s employment with the Company (including, without
limitation, all agreements, arrangements and understandings regarding bonuses,
Equity-Based Incentives, employee benefits or other compensation issues) if
either a court of competent jurisdiction or an arbitrator shall render a final
judgment or an arbitrator’s final decision in favor of the Executive on the
issues in such dispute, from which there is no further right of appeal. If it
shall be determined in such judicial adjudication or arbitration that the
Executive is successful on some of the issues in such dispute, but not all,
then the Executive shall be entitled to receive a portion of such legal fees
and other expenses as shall be appropriately prorated.  For purposes of this Section 11, the
phrase “reasonable fees for legal and other related expenses” shall mean only
the reasonable fees incurred by the Executive for legal and other related
expenses, to the extent and only to the extent to which either (a) the
reimbursement or payment of such fees and expenses by the Company does not
constitute “compensation” within the meaning of that word where it appears in
the phrase “a legally binding right during a taxable year to compensation” in
the first sentence of Treas. Reg. § 1.409A-1(b)(1); or (b) the
reimbursement or payment of such fees and expenses by the Company is a
settlement or award resolving bona fide legal claims based on wrongful
termination, employment discrimination, the Fair Labor Standards Act, or worker’s
compensation statutes, including claims under applicable Federal, state, local,
or foreign laws, or for reimbursements or payments of reasonable attorneys fees
or other reasonable expenses incurred by a service provider related to such
bona fide legal claims described in Treas. Reg. § 1.409A-1(b)(10).

 

12.                                 Notices.

 

All notices which the Company is required or permitted
to give to the Executive shall be given by registered or certified mail or
overnight courier, with a receipt obtained, addressed to the Executive at his
primary residence, or at such other place as the Executive may from time to
time designate in writing, or by personal delivery to the Executive, or by
facsimile to the Executive with oral confirmation of his receipt and with a
copy immediately sent to the

 

18

 

Executive by first class U.S. Mail, and to counsel for
the Executive as may be requested in writing by the Executive from time to
time. All notices which the Executive is required or permitted to give to the
Company shall be given by registered or certified mail or overnight courier,
with a receipt obtained, addressed to the Company at the address set forth
above, or at such other address as the Company may from time to time designate
in writing, or by personal delivery to the Lead Director (the “Lead Director”) of
the Company, or by facsimile to the Lead Director with oral confirmation of his
receipt and with a copy immediately sent to the Lead Director by first class
U.S. Mail, and to counsel for the Company as may be requested in writing by the
Company. A notice will be deemed given upon personal delivery, the mailing
thereof or delivery to an overnight courier for delivery the next business day,
or the oral confirmation of receipt by facsimile, except for a notice of change
of address, which will not be effective until receipt, and except as otherwise
provided in Section 5(a) hereof.

 

13.                                 Waivers.

 

No waiver by either party of any breach or
nonperformance of any provision or obligation of this Agreement shall be deemed
to be a waiver of any preceding or succeeding breach of the same or any other
provision of this Agreement. Any waiver of any provision of this Agreement must
be in writing and signed by the party granting the waiver.

 

14.                                 Headings; Other Language.

 

The headings contained in this Agreement are for
reference purposes only and shall in no way affect the meaning or
interpretation of this Agreement. In this Agreement, as the context may
require, the singular includes the plural and the singular, the masculine
gender includes both male and female reference, the word “or” is used in the
inclusive sense and the words “including,” “includes,” and “included” shall not
be limiting.  As used herein, the term “Subsidiary” shall
mean any corporation or other entity the voting equity of which the Company or
another Subsidiary holds at least fifty percent.

 

15.                                 Withholding and Timing of Payments.

 

The Executive acknowledges and agrees that any or all
payments under this Agreement may be subject to reduction for tax and other
required withholdings.  Notwithstanding
any provision of this Agreement, if the payment of any amount under this
Agreement would cause an amount to be included in Executive’s taxable income
under Section 409A of the Internal Revenue Code because the timing of such
payment is not delayed as provided in Section 409A(a) (2) (B) of
the Internal Revenue Code, then any such payment that Executive would otherwise
be entitled to during the first six months following the date of Executive’s
separation from service shall be accumulated and paid on the date that is six
months after the date of Executive’s separation from service (or if such
payment date does not fall on a business day of the Company, the next following
business day of the Company), or such earlier date upon which such amount can
be paid without causing any amount to be included in the Executive’s taxable
income under Section 409A of the Internal Revenue Code.

 

19

 

16.                                 Counterparts.

 

This Agreement may be executed in duplicate
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one agreement.

 

17.                                 Agreement Complete; Amendments.

 

This Agreement, together with the Exhibits hereto, the
agreements referred to herein, and the instruments, agreements, plans,
resolutions and other documents pursuant to which any Equity-Based Incentives
are held (now or in the future) by the Executive, constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect thereto. This Agreement
may not be amended, supplemented, canceled or discharged except by a written
instrument executed by both of the parties hereto, provided, however, that the
immediately foregoing provision shall not prohibit the termination of rights
and obligations under this Agreement which termination is made in accordance
with the terms of this Agreement.

 

18.                                 Benefit of the Successors and Permitted Assigns of
the Respective Parties Hereto.

 

This Agreement and the rights and obligations
hereunder are personal to the Company and the Executive and are not assignable
or transferable to any other person, firm or corporation without the consent of
the other party, except as contemplated hereby; provided, however, in the event
of the sale, merger or consolidation of the Company, whether or not the Company
is the surviving or resulting corporation, the transfer of all or substantially
all of the assets of the Company, or the voluntary or involuntary dissolution
of the Company, then the surviving or resulting corporation or the transferee
or transferees of the Company’s assets shall be bound by this Agreement and the
Company shall take all actions necessary to insure that such corporation,
transferee or transferees are bound by the provisions of this Agreement; and
provided, further, this Agreement shall inure to the benefit of the Executive’s
estate, heirs, executors, administrators, personal and legal representatives,
distributees, devisees, and legatees. Notwithstanding the foregoing provisions
of this Section 18, the Company shall not be required to take all actions
necessary to insure that a buyer, survivor, transferee or transferees of the
Company’s assets (“Transferee”)
are bound by the provisions of this Agreement and such Transferee shall not be
bound by the obligations of the Company under this Agreement if the Company
shall have (a) paid to the Executive or made provision satisfactory to the
Executive for payment to him of all amounts which are or may become payable to
him hereunder in accordance with the terms hereof and (b) made provision
satisfactory to the Executive for the continuance of all benefits required to
be provided to him in accordance with the terms hereof, in each case as if the
Executive had been terminated without Cause in anticipation of a Change in
Control.

 

19.                                 Governing Law.

 

This Agreement will be governed and construed in
accordance with the laws of Texas applicable to agreements made and to be
performed entirely within such state, without giving effect to any choice or
conflicts of laws principles which would cause the application of the domestic
substantive laws of any other jurisdiction.

 

20

 

20.                                 Survival.

 

The covenants, agreements, representations, warranties
and provisions contained in this Agreement that are intended to survive the
termination of the Executive’s employment hereunder and the termination of the
Employment Period shall so survive such termination.

 

21.                                 Interpretation.

 

The
terms of this Agreement shall be construed and administered in a manner
calculated to avoid the inclusion of any amount in Executive’s gross income
under Code Section 409A,
and any provisions regarding the timing of payments shall have an effective
date of August 1, 2005, as required by Code Section 409A.

 

The Company and the Executive each acknowledge and
agree that this Agreement has been reviewed and negotiated by such party and
its or his counsel, who have contributed to its revision, and the normal rule of
construction, to the effect that any ambiguities are resolved against the
drafting party, shall not be employed in the interpretation of it.

 

22.                                 Assignment and Assumption of Original Employment
Agreement; Consent to Assignment.

 

The Parent hereby assigns, transfers and conveys to
the Company, and the Company hereby accepts such assignment and assumes the
obligations of the Parent contained in the Original Employment Agreement, as
amended by this Agreement.  In order to
induce the Executive to consent to such assignment and assumption,
simultaneously with the execution and delivery of this Agreement, the Parent
has executed and delivered to the Executive the Guaranty dated the date of this
Agreement.  In consideration of the
execution and delivery of such Guaranty by the Parent, and of the terms and
provisions of this Agreement, the Executive hereby consents to such assignment
and assumption.

 

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

 

	
   

  	
  THE PARENT:

  
	
   

  	
   

  
	
   

  	
  KEY ENERGY
  SERVICES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Newton W.
  Wilson III

  
	
   

  	
   

  	
  Newton W. Wilson
  III

  
	
   

  	
   

  	
  Senior Vice
  President and General

  
	
   

  	
   

  	
  Counsel

  

 

21

 

	
   

  	
  THE
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  KEY ENERGY
  SHARED SERVICES, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Newton W.
  Wilson III

  
	
   

  	
   

  	
  Newton W. Wilson
  III

  
	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  THE EXECUTIVE:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Richard J.
  Alario

  
	
   

  	
   

  	
  Richard J.
  Alario

  

 

22

 

EXHIBIT A

 

Performance Bonuses

 

·                  Eligible for
cash incentives under Performance Cash Incentive Plans - target of 100% of Base
Salary and potential for up to another 100% of Base Salary as provided below:

 

·                  No bonus under
this program until at least 80% of goals, as set and later certified by the
Compensation Committee, are achieved.

 

·                  Between 80% and 100%
achievement, the bonus will be 80% to 100% of Base Salary, proportionate to
achievement in the Committee’s sole determination.

 

·                  Above 100%
achievement to 200% achievement, in the Committee’s sole determination,
proportionate additional bonus of up to an additional 100% of Base Salary.

 

·                  An additional
compensation incentive for the first year of employment as Chief Executive
Officer of up to 100% of Base Salary payable based on the Compensation
Committee’s assessment (and approval by the full Board) of Executive’s
performance in addressing current management issues at the Company, including
rebuilding a cohesive management team, managing the process for timely
completion of the audit and restatements and filing of the 10-K, maintaining
and restoring confidence of investors, creditors and other corporate
constituencies (including employees), enhancing the disclosure and internal
control environment, and other factors. 
This assessment would be made based on the results achieved in the first
year after his promotion.

 

·                  Payment requires
continued employment through 90 days after the completion of the period with
respect to which to each bonus is determined, except as the employment
agreement otherwise specifies for certain circumstances of employment termination.

 

23

 

EXHIBIT B

 

Company Paid Coverages

 

1.                                       Term
Life Insurance. $2,000,000 payable to beneficiary designated by the
Executive.  Provided only while employed
and during any following period during which the Executive is subject to a
noncompetition obligation under Section 6, except as provided in Section 5(d)(v) (for
terminations for Cause or terminations by Executive without Good Reason).

 

2.                                       Long
Term Disability Insurance. Salary continuation benefit for total disability.
Benefit commences with ninetieth day of disability and continues to a maximum
of age sixty-five. Annual maximum benefit shall be 60% of the Base Salary.  Coverage offered only while employed.

 

3.                                       Medical
and Dental Plan. Comprehensive medical and dental plans available to the
Company’s senior management, pursuant to which all medical and dental expenses
incurred by the Executive, his spouse and his children will be reimbursed by
the Company, through insurance or, in the absence of insurance, directly by the
Company, so that the Executive has no out-of-pocket cost with respect to such
expenses.

 

4.                                       Director
and Officer Liability Insurance.

 

5.                                       Voluntary
annual physicals at the Executive’s option while employed, with a report by the
examining physician to the Board regarding the Executive’s ability to perform
job related functions.

 

24

 

EXHIBIT C

 

Definition
of “Change
in Control” of the Parent

 

The occurrence of any of
the following shall constitute a “Change
in Control”  of Key
Energy Services, Inc. (hereinafter, the “Company”):

 

(a)                                  If
any person (as defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as from time to time in effect (the “Exchange Act”), or any
successor provision), other than the Company, becomes the beneficial owner
directly or indirectly of more than fifty percent (50%) of the outstanding
Common Stock of the Company, determined in accordance with Rule 13d-3
under the Exchange Act (or any successor provision), or otherwise becomes
entitled to vote more than fifty percent (50%) of the voting power entitled to
be cast at elections for directors (“Voting
Power”)  of the Company;

 

(b)                                 If
the Company is subject to the reporting requirements of Section 13 or 15(d) (or
any successor provision) of the Exchange Act, and any person (as defined in Section 3(a)(9) of
the Exchange Act, or any successor provision), other than the Company,
purchases shares pursuant to a tender offer or exchange offer to acquire Common
Stock of the Company (or securities convertible into or exchangeable for or
exercisable for Common Stock) for cash, securities or any other consideration,
if after consummation of the offer, the person in question is tile beneficial
owner, directly or indirectly, of more than fifty percent (50%) of the
outstanding Common Stock of the Company, determined in accordance with Rule 13d-3
under the Exchange Act (or any successor provision);

 

(c)                                  If
the stockholders or the Board approve any consolidation or merger of the Company
(i) in which the Company is not the continuing or surviving corporation
unless such merger is with a Subsidiary at least fifty percent (50%) of the
Voting Power of which is held by the Company or (ii) pursuant to which the
holders of the Company’s shares of Common Stock immediately prior to such
merger or consolidation would not be the holders immediately after such merger
or consolidation of at least a majority of the Voting Power of the Company;

 

(d)                                 The
stockholders or the Board shall have approved any sale, lease, exchange or
other transfer (in one transaction or a series of transactions) of all or
substantially all of the assets of the Company;

 

(e)                                  Upon
the election of one or more new directors of the Company, a majority of the
directors holding office, including the newly elected directors, were not
nominated as candidates by a majority of the directors in office immediately
before such election. As used in this definition of “Change in Control,” “Common Stock”  means the Common Stock, or if changed,
the capital stock of the Company as it shall be constituted from time to time
entitling the holders thereof to share generally in the distribution of all
assets available for distribution to the Company’s stockholders after the
distribution to any holders of capital stock with preferential rights.

 

25

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