10-Q 1 edg10q09.txt 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q ____________________ (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12757 TMBR/SHARP DRILLING, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1835108 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4607 WEST INDUSTRIAL BLVD. MIDLAND, TEXAS 79703 (Address of principal executive offices) (Zip Code) Registrant's telephone number (including area code) (915) 699-5050 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At November 1, 2002, 5,426,786 shares of the issuer's common stock, $.10 par value, were outstanding. 2 TMBR/SHARP DRILLING, INC. FORM 10-Q REPORT INDEX Page No. Part I. Financial Information (Unaudited) Item 1. Financial Statements Balance Sheets, September 30, 2002 and March 31, 2002 . . . . . . . . . . . . . . . . . . . . 3 Statements of Operations, Three Months Ended September 30, 2002 and 2001 . .. . . . . . . . . 5 Statements of Operations, Six Months Ended September 30, 2002 and 2001 . .. . . . . . . . . 7 Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 9 Statements of Cash Flows, Six Months Ended September 30, 2002 and 2001 . . . . . . . . . . 10 Notes to Financial Statements. . . . . . . . . . . . . . 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . 23 Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . 24 Part II. Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 24 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 25 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 25 -2- 3 PART ONE - FINANCIAL INFORMATION (UNAUDITED) Item 1. FINANCIAL STATEMENTS TMBR/SHARP DRILLING, INC. BALANCE SHEETS September 30, 2002 (Unaudited) and March 31, 2002 (In thousands, except per share data) September 30, 2002 March 31, ASSETS (Unaudited) 2002 ------ ------------- ----------- Current assets: Cash and cash equivalents $ 3,705 $ 3,258 Marketable securities -- 97 Trade receivables, net of allowance for doubtful accounts of $1,401 on both September 30 and March 31, 2002 8,551 11,011 Insurance Receivable 1,620 -- Inventories 156 162 Deposits 614 346 Other 949 1,018 -------- -------- Total current assets 15,595 15,892 -------- -------- Property and equipment, at cost: Drilling equipment 63,421 61,370 Oil and gas properties, based on successful efforts accounting 36,244 34,616 Other property and equipment 3,834 3,531 -------- -------- 103,499 99,517 Less accumulated depreciation, depletion and amortization (76,135) (72,947) -------- -------- Net property and equipment 27,364 26,570 -------- -------- Other assets 173 173 -------- -------- Total assets $ 43,132 $ 42,635 ======== ======== See accompanying notes to financial statements. -3- 4 TMBR/SHARP DRILLING, INC. BALANCE SHEETS September 30, 2002 (Unaudited) and March 31, 2002 (In thousands, except per share data) September 30, 2002 March 31, LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 2002 ------------------------------------ ------------ ----------- Current liabilities: Trade payables $ 2,789 $ 5,193 Other 1,912 1,610 -------- -------- Total current liabilities 4,701 6,803 -------- -------- Contingencies Stockholders' equity: Common stock, $0.10 par value Authorized, 50,000,000 shares; issued 6,690,025 and 6,667,725 shares at September 30, and March 31, 2002, respectively 669 667 Additional paid-in capital 71,685 71,492 Accumulated deficit (33,773) (36,187) Accumulated other comprehensive income -- 10 Treasury stock-common, 1,268,739 shares at September 30, and March 31, 2002, at cost (150) (150) -------- -------- Total stockholders' equity 38,431 35,832 -------- -------- Total liabilities and stockholders' equity $ 43,132 $ 42,635 ======== ======== See accompanying notes to financial statements. -4- 5 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Three months ended September 30, 2002 and 2001 (Unaudited) (In thousands, except per share data) Three months ended September 30, ----------------------------- 2002 2001 ----------- ----------- Revenues: Contract drilling $ 8,038 $ 13,978 Oil and gas 1,709 1,581 ----------- ----------- Total revenues 9,747 15,559 ----------- ----------- Operating costs and expenses: Contract drilling 5,284 7,782 Oil and gas production 374 470 Dry holes and abandonments 317 (5) Exploration 22 -- Depreciation, depletion and amortization 1,706 1,677 General and administrative 753 693 ----------- ----------- Total operating costs and expenses 8,456 10,617 ----------- ----------- Operating income 1,291 4,942 ----------- ----------- Other income (expense): Interest, net 9 10 Gain on sales of assets 19 327 Other, net 24 82 ----------- ----------- Total other income (expense) 52 419 ----------- ----------- Net income before income tax provision 1,343 5,361 Provision for income taxes -- (105) ----------- ----------- Net income $ 1,343 $ 5,256 =========== =========== See accompanying notes to financial statements. -5- 6 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Three months ended September 30, 2002 and 2001 (Unaudited) (In thousands, except per share data) Three months ended September 30, ----------------------------- 2002 2001 ----------- ----------- Net income per common share: Basic $ .25 $ 1.03 Diluted .24 .96 =========== =========== Weighted average number of common shares outstanding: Basic 5,420,143 5,104,238 Diluted 5,641,929 5,486,812 =========== =========== See accompanying notes to financial statements. -6- 7 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Six months ended September 30, 2002 and 2001 (Unaudited) (In thousands, except per share data) Six months ended September 30, ----------------------------- 2002 2001 ----------- ----------- Revenues: Contract drilling $ 15,780 $ 27,425 Oil and gas 3,395 3,161 ----------- ----------- Total revenues 19,175 30,586 ----------- ----------- Operating costs and expenses: Contract drilling 10,550 14,441 Oil and gas production 847 880 Dry holes and abandonments 344 520 Exploration 22 3 Depreciation, depletion and amortization 3,427 3,286 General and administrative 1,683 1,270 ----------- ----------- Total operating costs and expenses 16,873 20,400 ----------- ----------- Operating income 2,302 10,186 ----------- ----------- Other income (expense): Interest, net 20 (10) Gain on sales of assets 65 524 Other, net 27 86 ----------- ----------- Total other income (expense) 112 600 ----------- ----------- Net income before income tax provision 2,414 10,786 Provision for income taxes -- (214) ----------- ----------- Net income $ 2,414 $ 10,572 =========== =========== See accompanying notes to financial statements. -7- 8 TMBR/SHARP DRILLING, INC. STATEMENTS OF OPERATIONS Six months ended September 30, 2002 and 2001 (Unaudited) (In thousands, except per share data) Six months ended September 30, ----------------------------- 2002 2001 ----------- ----------- Net income per common share: Basic $ .45 $ 2.07 Diluted .43 1.93 =========== =========== Weighted average number of common shares outstanding: Basic 5,411,555 5,096,744 Diluted 5,636,651 5,477,989 =========== =========== See accompanying notes to financial statements. -8- 9 TMBR/SHARP DRILLING, INC. STATEMENTS OF STOCKHOLDERS EQUITY Six Months Ended September 30, 2002 (Unaudited) and Year Ended March 31, 2002 (Audited) (In thousands)
Accumulated Common Stock Additional Other Treasury Stock Total -------------- Paid-In Accumulated Comprehensive -------------- Stockholders' Shares Amount Capital Deficit Income (Loss) Shares Amount Equity ------ ------ ------- ----------- ------------- ------ ------ ------------ Balance, March 31, 2002 6,668 $ 667 $ 71,492 $(36,187) $ 10 1,269 $(150) $ 35,832 Exercise of Stock Options 15 2 93 -- -- -- -- 95 Issuance of Stock 7 -- 100 -- -- -- -- 100 Net Income -- -- -- 2,414 -- -- -- 2,414 Other comprehensive loss, net of tax Unrealized loss on marketable equity securities -- -- -- -- (10) -- -- (10) --------- Comprehensive Income -- -- -- -- -- -- -- 2,404 --------- Balance, September 30, 2002 6,690 $ 669 $ 71,685 $(33,773) $ -- 1,269 $(150) $ 38,431 ===== ====== ======== ========= ==== ====== ====== ========
See accompanying notes to financial statements. -9- 10 TMBR/SHARP DRILLING, INC. STATEMENTS OF CASH FLOWS For the six months ended September 30, 2002 and 2001 (Unaudited) (In thousands) Six months ended September 30, ------------------------------ 2002 2001 ---------- ---------- Cash flows from operating activities: Net income $ 2,414 $ 10,572 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 3,427 3,286 Dry holes and abandonments 344 520 Gain on sales of assets (65) (524) Changes in assets and liabilities: Trade receivables 2,460 (2,989) Inventories and other assets (94) (43) Trade payables (2,404) (686) Accrued interest and other liabilities 302 51 -------- -------- Total adjustments 3,970 (385) -------- -------- Net cash provided by operating activities 6,384 10,187 Cash flows from investing activities: Additions to property and equipment (6,662) (9,644) Proceeds from sales of property and equipment 52 668 Insurance proceeds 478 -- -------- -------- Net cash required by investing activities (6,132) (8,976) Cash flows from financing activities: Repayments of Bank Borrowings -- (1,080) Proceeds from exercise of stock options 95 -- Issuance of common stock 100 216 -------- -------- Net cash (required) provided by financing activities 195 (864) -------- -------- Net increase in cash and cash equivalents 447 347 Cash and cash equivalents at beginning of period 3,258 301 -------- -------- Cash and cash equivalents at end of period $ 3,705 $ 648 ======== ======== See accompanying notes to financial statements. -10- 11 TMBR/SHARP DRILLING, INC. NOTES TO FINANCIAL STATEMENTS The amounts presented in the balance sheet as of March 31, 2002 were derived from the Company's audited financial statements included in its Form 10-K Report filed for the year then ended. The notes to such statements are incorporated herein by reference. (1) Management's Representation In the opinion of management, the accompanying unaudited financial statements contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the Company's financial position as of September 30, 2002 and March 31, 2002, the results of operations for the three and six months ended September 30, 2002 and 2001, and the cash flows for the six month periods ended September 30, 2002 and 2001. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these condensed financial statements be read in conjunction with the financial statements and the related notes in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002. (2) Summary of Significant Accounting Policies Marketable Securities Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", marketable securities, such as those owned by the Company, are classified as available-for-sale securities and are to be reported at market value, with unrealized gains and losses, net of income taxes, excluded from earnings and reported as a separate component of stockholders' equity. These securities were sold during the quarter ended September 30, 2002 and a gain of approximately $12,000 was recognized. Inventories Inventories consist primarily of casing and tubing. The Company values its inventories at the lower of cost or estimated net recoverable value using the specific identification method. Property and Equipment Drilling equipment is depreciated on a units-of-production method based on the monthly utilization of the equipment. Drilling equipment which is not utilized during a month is depreciated using a minimum utilization rate of approximately twenty-five percent. Estimated useful lives range from four to eight years. Other property and equipment is depreciated using the straight- line method of depreciation with estimated useful lives of three to seven years. -11- 12 Oil and gas properties are accounted for using the successful efforts method. Accordingly, the costs incurred to acquire property (proved and unproved), all development costs and successful exploratory costs are capitalized, whereas the costs of unsuccessful exploratory wells are expensed. Geological and geophysical costs, including seismic costs, are charged to expense when incurred. In cases where the Company provides contract drilling services related to oil and gas properties in which it has an ownership interest, the Company's proportionate share of costs related to these properties is capitalized as stated above, net of the Company's working interest share of profits from the related drilling contracts. Capitalized costs of undeveloped properties, which are not depleted until proved reserves can be associated with the properties, are periodically reviewed for possible impairment. Depletion, depreciation and amortization of capitalized oil and gas property costs was provided using the units-of-production method based on estimated proved or proved developed oil and gas reserves, as applicable, of the respective property units. Major renewals and betterments are capitalized in the appropriate property accounts while the cost of repairs and maintenance is charged to operating expense in the period incurred. For assets sold or otherwise retired, the cost and related accumulated depreciation amounts are removed from the accounts and any resulting gain or loss is recognized. Net Income Per Common Share The Company accounts for earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and when appropriate, restated to conform to the SFAS 128 requirements. -12- 13
For the Six Months Ended September 30, 2002 2001 --------------------------- -------------------------- Per Per Share Share Income Shares Amount Income Shares Amount ------ ------ ------- ------ ------ ------ Income before extraordinary item and accounting change $2,414 $10,572 Basic EPS Income available to common stockholders 2,414 5,411,555 $ .45 10,572 5,096,744 $2.07 Effect of Dilutive Securities Stock Options 225,096 381,245 ----- --------- ---- ----- --------- ---- Diluted EPS Income available to common stockholders + assumed conversions $2,414 5,636,651 $ .43 $10,572 5,477,989 $1.93 ===== ========= ==== ===== ========= ====
For the Three Months Ended September 30, 2002 2001 --------------------------- -------------------------- Per Per Share Share Income Shares Amount Income Shares Amount ------ ------ ------- ------ ------ ------ Income before extraordinary item and accounting change $1,343 $ 5,256 Basic EPS Income available to common stockholders 1,343 5,420,143 $ .25 5,256 5,104,238 $1.03 Effect of Dilutive Securities Stock Options 221,786 382,574 ----- --------- ---- ----- --------- ---- Diluted EPS Income available to common stockholders + assumed conversions $1,343 5,641,921 $ .24 $ 5,256 5,486,812 $ .96 ===== ========= ==== ===== ========= ====
Reclassifications Certain reclassifications have been made to the September 30, 2001 financial statements to conform to the September 30, 2002 presentation. -13- 14 (3) Debt Line of Credit In May, 1998, the Company entered into a loan agreement with its bank lender which provided for a $5.0 million revolving line of credit secured by substantially all of the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the line of credit bore interest at the bank's base rate and accrued interest was payable monthly. The loan facility originally matured on May 26, 2000 but was extended to July 15, 2000. On June 26, 2000, the Company renewed and extended the prior loan agreements with its bank lender. The second amended and restated loan agreement provides for a $5.0 million revolving line of credit secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under this line of credit bear interest at the Wells Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N. A.) Base rate (4.75% at September 30, 2002) and accrued interest is payable monthly. The loan facility originally matured on August 31, 2002. On February 12, 2002, the maturity date of the loan facility was extended to August 31, 2003, at which time all outstanding principal and interest will be due in full. At March 31, 2002 and September 30, 2002, respectively, no amounts were outstanding under the loan facility. (4) Stockholders' Equity 1984 Stock Option Plan In August 1984, the Company adopted the 1984 Stock Option Plan (the "Plan") which initially authorized 375,000 shares of the Company's common stock to be issued as either incentive stock options or nonqualified stock options. This Plan was amended in August 1986 to increase the authorized shares to 475,000 shares of the Company's common stock. In January 1988, the Plan was amended to reduce the option price on certain options issued prior to March 31, 1986, to reflect the then current fair market value of the Company's common stock. The Plan provides that options may be granted to key employees or directors for various terms at a price not less than the fair market value of the shares on the date of the grant. Options to purchase 100,000 shares of common stock are outstanding and exercisable under the Plan. No additional shares are available for grant as the Plan expired by its own terms in August 1994. The options that were granted prior to the expiration of the Plan, and which are outstanding, remain subject to the terms of the Plan. 1994 Stock Option Plan In July 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan") which authorized the grant of options to purchase up to 750,000 shares of the Company's common stock. These options may be issued as either incentive or nonqualified stock options. The 1994 Plan provides that options may be granted to key employees (including officers and directors who are also key employees) for various terms at a price not less than the fair market value of the shares on the date of grant. The 1994 Plan was ratified and approved by the stockholders at the Company's annual meeting of -14- 15 stockholders held on August 30, 1994. In September 1998, options outstanding under the plan were amended to reduce the option price to $4.125 per share. On September 3, 1996, the Company granted 465,000 shares of nonqualified stock options to key employees under the 1994 Plan. All of the nonqualified stock options granted on September 3, 1996 are earned and exercisable as of May 7, 1997. On September 1, 1998, the Company granted 240,000 shares of incentive stock options at a price of $4.125 to key employees under the 1994 Plan. On March 9, 2002, all of the shares were earned and exercisable. The following sets forth certain information concerning these options. Number of Option Shares Exercise Price Underlying ------------------- Options Per Share Total ---------- ------------------- Outstanding March 31, 2002 250,400 $4.125-4.5375 $ 1,035,375 Exercised (5,400) 4.125 (22,275) Forfeited (6,000) 4.5375 (27,225) ------ ------------ --------- Outstanding September 30, 2002 239,000 $4.125-4.5375 $ 985,875 ======= ============ ========= 1998 Stock Option Plan In September 1998, the Company adopted, subject to stockholder approval, its 1998 Stock Option Plan (the "1998 Plan") which authorizes the grant of options to purchase up to 750,000 shares of the Company's common stock. These options may be issued as either incentive or nonqualified stock options. The 1998 Plan provides that options may be granted to key employees or directors at a price not less than the fair market value of the shares on the date of grant. The Company granted options to purchase 50,000 shares of common stock to two outside directors under the 1998 Plan. These nonqualified options were granted on September 1, 1998, subject to stockholder approval, at $4.125 per share and became exercisable on August 31, 1999, the date on which the stockholders of the Company approved and adopted the 1998 Plan. The fair market value of the Company's common stock on August 31, 1999 was $6.063 per share. As a result, the Company recognized approximately $97,000 in compensation expense related to these nonqualified options during the year ended March 31, 2000. On June 13, 2001, the Company granted options to purchase 40,000 shares of common stock of four directors under the 1998 Plan. The nonqualified options were granted at an exercise price of $17.18 per share which represented the fair market value on the date of the grant. On October 10, 2001, the Company granted options to purchase 292,000 shares of common stock to key employees under the 1998 Plan. These incentive options were granted at an exercise price of $11.50 per share which represented the fair market value on the date of the grant. These options become exercisable over a two year period ending October 10, 2003. At September 30, 2002, options to purchase 327,000 shares were outstanding under the 1998 Plan. -15- 16 Directors' Fee Stock Plan On June 14, 2001, the Company adopted the Directors' Fee Stock Plan (the "Plan") which authorizes the issuance of up to 25,000 shares of the Company's common stock. The Plan provides that 300 shares of the Company's common stock will be issued to each Non-employee Director for each Board of Directors' meeting attended and 100 shares of common stock to each Non- employee Director for each committee meeting attended. During the six months ended September 30, 2002, 6,900 shares were issued under the Plan and the Company recognized approximately $102,000 as Directors' compensation expense. In connection with a private placement completed in February 1997, the Company issued a warrant to purchase 36,250 common shares with an exercise price of $13.20 per share. This warrant became exercisable on February 17, 1998 and expired unexercised on February 17, 2002. (5) Contingencies The Company is a defendant in various lawsuits generally incidental to its business. In addition, in August 2001, the Equal Employment Opportunity Commission ("EEOC") filed suit in the El Paso Division of the United States District Court for the Western District of Texas. The suit involved a claim of hostile work environment made on behalf of four former employees. In May, 2002, the Court transferred the cause to the Midland/Odessa Division. The employees on behalf of whom the Equal Employment Opportunity Commission originally brought suit and one additional employee had recently been allowed to intervene in the litigation on an individual basis. It was expected that these employees would file additional state common law causes of action arising out of the allegations of hostile work environment. The EEOC was seeking back pay, front pay, pecuniary losses and punitive damages of an unspecified amount. The intervenors were seeking unspecified damages. The Company disputed the claims made by the Equal Employment Opportunity Commission and the anticipated claims by the intervenors and intended to defend the lawsuits vigorously. Subsequent to the end of the quarter ended September 30, 2002, these lawsuits, including the lawsuits brought by the EEOC and the five intervenors, were settled within the Company's insurance policy limits. On May 8, 2002, the Company experienced an uncontrolled flow ("flow") on the Leiman #1 well in Loving County, Texas. The Company has a 25% working interest in this well. The uncontrolled flow was encountered while running a 7 liner in the well bore. The flow was ultimately controlled with no injury to personnel or damage to the Company's rig or related equipment. The planned total depth of the well was approximately 22,000 feet but the uncontrolled flow was experienced at a depth of 19,115 feet. The well was not salvageable and has been plugged and abandoned. Costs associated with re-gaining control of the well and plugging and abandonment were approximately $1.5 million. The cost to re-drill the well to a depth of 19,115 feet is estimated to be $5.6 million. The Leiman #1R well was spudded on July 8, 2002. The Company has successfully run and cemented the 7 3/4" drilling liner at 19,120 feet as of November 4, 2002. The Company has submitted claims for reimbursement from its insurance carrier, St. Paul's Surplus Lines, who has acknowledged coverage under both the control of well and re-drill/replacement well provisions under the Company's Operators Extra Expense insurance. An insurance receivable has been recorded for the -16- 17 Company's portion of the costs of the original Leiman #1 well. During the quarter ended September 30, 2002, the Company received approximately $478,000 for its working interest portion of insurance proceeds. The Company's working interest portion of the costs associated with re-drilling this well has been capitalized. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Some statements contained in this Form 10-Q report are "forward-looking statements". All statements other than statements of historical facts included in this report, including, without limitation, statements regarding planned capital expenditures, the availability of capital resources to fund capital expenditures, estimates of proved reserves, the Company's financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology like "may," "will," "expect," "intend,""anticipate," "estimate," "continue," "present value," "future" or "reserves" or other variations of comparable terminology. The Company believes the assumptions and expectations reflected in these forward- looking statements are reasonable. However, no assurance can be given that the Company's expectations will prove to be correct or that it will be able to take any actions that are presently planned. All of these statements involve assumptions of future events and risks and uncertainties. Risks and uncertainties associated with forward-looking statements include, but are not limited to: fluctuations in prices of oil and gas; future capital requirements and availability of financing; risks associated with the drilling of wells; competition; general economic conditions; governmental regulations; receipt of amounts owed to the Company by purchasers of its production and counterparties to its hedging contracts; and hedging activities. For these and other reasons, actual results may differ materially from those projected or implied. Undue reliance should not be placed on forward-looking statements and projections of any future results should not be based on such statements. Before investing in the Company's common stock, one should be aware that there are various risks associated with an investment. Some of these risk factors are described on page 18 in the Company's Form 10-K dated March 31, 2002. -17- 18 Critical Accounting Policies Contract Drilling Operations Drilling revenues from footage and daywork contracts are recognized as work is performed utilizing the percentage-of-completion method. Costs under footage and daywork contracts are recognized in the period they are incurred. The Company utilizes the completed contract method to recognize drilling revenues and expenses relating to turnkey contracts. Expected losses on all in-process contracts are recognized in the period the loss can reasonably be determined. Drilling equipment is depreciated on a units-of-production method based on the monthly utilization of the equipment. Drilling equipment which is not utilized during a month is depreciated using a minimum utilization rate of approximately 25%. Estimated useful lives range from four to eight years. Other property and equipment is depreciated using the straight-line method of depreciation with estimated useful lives of three to seven years. The contract drilling industry is currently experiencing a decrease in demand and downward pressure on prices for contract drilling services due to the uncertainty surrounding oil and gas prices. The Company has been and will continue to be affected by oil and gas industry conditions but cannot predict either the future level of demand for its contract drilling services or future conditions in the contract drilling industry. The contract drilling industry remains highly competitive. The Company believes it owns a sufficient number of drilling rigs to remain competitive within its areas of operation. In addition, the Company believes it competes favorably with respect to the depth capabilities of its rigs, the experience level of its personnel, its reputation and its relationship with existing customers. However, the Company's operating results will continue to be directly affected by the level of drilling activity in the Company's service areas. Oil and Gas Operations The Company's oil and gas producing activities are accounted for using the successful efforts method of accounting. Accordingly, the Company capitalizes all costs incurred to acquire oil and gas properties (proved and unproved), all development costs, and the costs of successful exploratory wells. The costs of unsuccessful exploratory wells are expensed. Geological and geophysical costs, including seismic costs, are charged to expense when incurred. In cases where the Company provides contract drilling for oil and gas properties in which it has an ownership interest, the Company's proportionate share of costs is capitalized as stated above, net of its working-interest share of profits from the related drilling contracts. Capitalized costs of undeveloped properties, which are not depleted until proved reserves can be associated with the properties, are periodically reviewed for possible impairment. -18- 19 For properties with proved or proved developed oil and gas reserves, depletion, depreciation and amortization of capitalized costs is calculated by applying the units-of-production method to the estimated amount of such reserves. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". Statement 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and Statements 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The adoption of this statement had no impact on the Company's financial statements. Also, the FASB has issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which establishes requirements for the accounting of removal- type costs associated with asset retirements. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company will be required to record the fair value of asset retirement obligations as a liability with a corresponding increase to the cost of the asset. Any estimated salvage value will be considered in the calculation of depletion, depreciation and amortization. The Company is currently assessing the impact on its financial statements. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This pronouncement supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed" and eliminates the requirement for SFAS 121 to allocate goodwill to long-lived assets to be tested for impairment. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company adopted this statement on April 1, 2002. The adoption of this statement had no immediate impact on the Company but will change how the Company assesses impairment of long-lived assets and may result in discontinued operations presentation for future sales of certain assets. In April 2002, the FASB issued Statement No. 145 "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Most significantly, this Statement eliminates the requirement under Statement 4 to aggregate all gains and losses from extinguishment of debt, and if material, be classified as an extraordinary item. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. There is no current impact to the Company as it has no outstanding debt. -19- 20 In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company expects no impact to our financial statements as we do not anticipate exiting or disposing of any of our activities. Results of Operations Total revenues were $9,747,000 and $19,175,000 for the three and six months ended September 30, 2002 which represents a 37% decrease for each period when compared to the same periods in 2001. Operating expenses as a percent of revenues were 87% and 88% for the three and six months ended September 30, 2002 versus 68% and 67% for the same periods of the prior year. The operating results were negatively affected by a decrease in demand for the Company's contract drilling services which resulted in a decrease in rig utilization rates. The Company has also experienced a decrease in the average price received for its contract drilling services. Rig utilization rates were 51% and 52% for the three and six months ended September 30, 2002 compared to 75% for both the three and six months ended September 30, 2001. Oil and gas revenues increased by approximately 1% for both the three and six months ended September 30, 2002 from the same periods of the prior year, respectively. The following table sets forth certain information relating to crude oil and natural gas produced: Three months ended Six months ended September 30, September 30, ---------------------- ------------------ 2002 2001 2002 2001 ------- ------- ------ ------- Quantities Produced ------------------ Oil (bbls) 35,607 33,266 81,995 60,849 Gas (mcf) 270,511 191,338 532,082 346,037 Average Price ------------- Oil (bbls) $ 22.82 $ 25.49 $ 23.84 $ 25.84 Gas (mcf) $ 2.40 $ 3.83 $ 2.71 $ 4.59 Average Daily Production ------------------------ Oil (bbls) 387 362 448 333 Gas (mcf) 2,940 2,080 2,907 1,891 -20- 21 Oil and gas production expenses decreased approximately 20% for the three months ended September 30, 2002 when compared to the same period in 2001. This decrease is primarily attributable to the workover of two wells in Reagan County, Texas during the quarter ended September 20, 2001. Production expenses remained relatively flat between the six months ended September 30, 2002 and September 30, 2001. The production expenses for the three months ended June 30, 2002 were higher due to the increase in quantities of crude oil and natural gas produced. In addition, the Company has experienced a general rise in the cost of services and supplies which are included in production expenses. General and administrative expenses increased primarily as a result of an increase in insurance expenses and directors' fees. Net working capital was $10.9 million at September 30, 2002 compared to $9.1 million at March 31, 2002. Income Taxes At March 31, 2002, the Company had approximately $47.2 million of unused net operating loss ("NOL") carryforwards for tax purposes. Use of these carryforwards is dependent upon the Company's ability to generate taxable earnings in future periods. These carryforwards began to expire in fiscal 2000 and approximately $5.7 million will expire in 2002. The Company's ability to utilize its NOL carryforwards may be substantially limited in the future under the Internal Revenue Code of 1986, as amended (the "Code"). If the Company experiences an ownership change under applicable provisions of the Code, the carryforward would be limited to an annual amount determined by specified interest rates and other variables. The Company does not believe an ownership change has occurred to date. The effective tax rates differ from the statutory tax rate of 34% primarily due to the utilization of NOLs. Tax expense is generally limited to alternative minimum tax. The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. The Company has a deferred tax asset primarily due to its NOL carryforwards. The Company has provided a valuation allowance for the entire balance of deferred tax assets as it is more likely than not that the deferred tax asset will not be realized. Liquidity and Capital Resources In June, 2000, the Company entered into a second amended and restated loan agreement with Wells Fargo Bank Texas, N.A. The loan agreement provides for a $5.0 million revolving line of credit facility, of which $5.0 million was available at September 30, 2002. The facility is secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the revolving facility bear interest at annual rate equal to the bank's base rate, or 4.75% at September 30, 2002. Accrued and unpaid interest on outstanding principal is payable monthly. The loan -21- 22 facility matures on August 31, 2003, at which time all outstanding principal and accrued and unpaid interest will be due in full. At September 30, 2002, no amounts were outstanding under the loan facility. The principal amount outstanding at any one time may not exceed the lesser of $5.0 million or one- third of the borrowing base amount. The borrowing base amount is the sum of the Company's accounts receivable and the value of its inventory, drilling rigs, drill pipe and related equipment. The borrowing base amount is redetermined quarterly by the Company, except that the bank may, in its discretion, make its own determination of the borrowing base which will be the controlling borrowing base amount. At September 30, 2002, the borrowing base amount was approximately $37 million. The Company may in the future have to reserve a trade receivable from one specific customer. At September 30, 2002, the customer owed the Company approximately $2.7 million, of which approximately $1.6 million was over 90 days past due. Since the end of the quarter the customer has paid approximately $330,000 related to this receivable. Currently this receivable is not specifically reserved as the customer is making cash payments to the Company and collection efforts are ongoing. If our evaluation of this receivable changes in the future, the Company may have to reserve a portion or the total amount of this receivable. The Company anticipates that funds for its capital expenditures in fiscal 2003 will be available from a combination of sources, including (i) borrowings under the line of credit, (ii) funds raised through issuances of equity or debt securities in public or private transactions, and (iii) internally generated funds. Trends and Prices The contract drilling industry is currently experiencing decreased demand and decreasing prices for contract drilling services due to the instability of oil and gas prices. The Company will be affected by price fluctuations in the industry, but cannot predict either the future level of demand for its contract drilling services or future conditions in the contract drilling industry. In recent years, oil and gas prices have been extremely volatile. Prices are affected by market supply and demand factors as well as by actions of state and local agencies, the U.S. and foreign governments and international cartels. The Company has no way of accurately predicting the supply of and demand for oil and gas, domestic or international political events or the effects of any such factors on the prices received by the Company for its oil and gas. -22- 23 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary sources of market risk for the Company include fluctuations in commodity prices and interest rate fluctuations. At March 31, 2002, the Company had not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas. Commodity Price Risk - The Company produces and sells crude oil, natural gas and natural gas liquids. As a result, its operating results are significantly affected by fluctuations in commodity prices caused by changing market forces. Historically, the Company has not entered into hedging arrangements for its oil and gas production and it does not have any delivery commitments. The Company may, in the future, attempt to reduce its exposure to the volatility of oil and gas prices by hedging a portion of its production. In a typical hedge transaction, the Company would have the right to receive from the counterparty to the hedge, the excess of the fixed price specified in the hedge over a floating price based on a market index, multiplied by the quantity hedge. If the floating price exceeds the fixed price, the Company would be required to pay the counterparty this difference multiplied by the quantity hedged. In the case, the Company would be required to pay the difference regardless of whether it had sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds the fixed price could require the Company to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging could also prevent the hedging party from receiving the full advantage of increases in oil and gas prices above the fixed amount specified in the hedge. Interest Rate Risk - At September 30, 2002 the Company had no borrowings outstanding under its loan agreement. However, when it does have outstanding borrowings, the Company's exposure to changes in interest rates primarily results from short term changes in its bank's prime rate. -23- 24 Item 4. Controls and Procedures On October 16, 2002, the Company supplemented its existing internal controls with the adoption and implementation of certain additional disclosure controls and procedures. The purpose of these additional disclosure controls and procedures is to help ensure that information the Company is required to disclose in reports that the Company files with the SEC is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods prescribed by the SEC. The effectiveness of these disclosure controls and procedures has been evaluated by the Company's chief executive officer, Thomas C. Brown, and its chief financial officer, Patricia R. Elledge. Mr. Brown and Ms. Elledge have concluded that the Company's disclosure controls and procedures are effective for their intended purposes. As part of their evaluation, Mr. Brown and Ms. Elledge also determined that there were no significant changes in internal controls or other factors that could significantly affect internal controls after the date of their evaluation. No corrective actions were required to be taken with regard to significant deficiencies or material weaknesses. Following the signature page of this report, you will find certifications signed by Mr. Brown and Ms. Elledge. PART TWO - OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in various lawsuits generally incidental to its business. In addition, in August 2001, the Equal Employment Opportunity Commission ("EEOC") filed suit in the El Paso Division of the United States District Court for the Western District of Texas. The suit involved a claim of hostile work environment made on behalf of four former employees. In May, 2002, the Court transferred the cause to the Midland/Odessa Division. The employees on behalf of whom the Equal Employment Opportunity Commission originally brought suit and one additional employee had recently been allowed to intervene in the litigation on an individual basis. It was expected that these employees would file additional state common law causes of action arising out of the allegations of hostile work environment. The EEOC was seeking back pay, front pay, pecuniary losses and punitive damages of an unspecified amount. The intervenors were seeking unspecified damages. The Company disputed the claims made by the Equal Employment Opportunity Commission and the anticipated claims by the intervenors and intended to defend the lawsuits vigorously. Subsequent to the end of the quarter ended September 30, 2002, these lawsuits, including the lawsuits brought by the EEOC and the five intervenors, were settled within the Company's insurance policy limits. -24- 25 Item 4. Submission of matters to a vote of security holders. The Company's annual meeting of stockholders was held on August 28, 2002. At the meeting, the following persons were elected to serve as Directors of the Company until the 2003 annual meeting of stockholders and until their respective successors are duly qualified and elected: (1) Raymond E. Batchelor, (2) Thomas C. Brown, (3) Michael M. Cone, (4) David N. Fitzgerald and (5) James B. Taylor. Set forth below is a tabulation of votes with respect to each nominee for Director:
Votes Votes Cast Cast Votes Broker Name For Against Withheld Abstentions Non-Votes ---- ----- ------- -------- ----------- --------- Raymond E. Batchelor 4,487,719 17,931 -- -- -- Thomas C. Brown 4,487,530 18,120 -- -- -- Michael M. Cone 4,487,721 17,929 -- -- -- David N. Fitzgerald 4,487,673 17,977 -- -- -- James B. Taylor 4,487,710 17,940 -- -- --
Item 6. Exhibits and reports on Form 8-K. (a) Exhibits: 3.1 - Articles of Incorporation of the Company, as amended. (Incorporated by reference to exhibit 3.1 in Registrant's Annual Report on Form 10-K dated June 28, 1991) 3.2 - Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Executive Compensation Plans and Arrangements --------------------------------------------- (Exhibits 10.1 through and including Exhibit 10.24 constitute executive compensation plans and arrangements of the Registrant) Exhibit 10.1 - Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.3 in Registrant's Registration Statement on Form 10 as amended, effective October 9, 1984) Exhibit 10.2 - Nonqualified Stock Option Agreement dated August 29, 1990, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.15 in Registrant's Annual Report on form 10-K dated June 25, 1993) Exhibit 10.3 - Nonqualified Stock Option Agreement dated August 30, 1988, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.17 in Registrant's Annual Report on Form 10-K dated June 25, 1993) -25- 26 Exhibit 10.4 - Incentive Stock Option Agreement dated November 16, 1993 between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.5 in Registrant's Annual Report on Form 10- K dated June 27, 1994) Exhibit 10.5 - Incentive Stock Option Agreement dated December 4, 1992 between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 25, 1993) Exhibit 10.6 - Incentive Stock Option Agreement dated December 4, 1992 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 25, 1993) Exhibit 10.7 - Incentive Stock Option Agreement dated November 16, 1993 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Exhibit 10.8 - 1994 Stock Option Plan. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 28, 1995) Exhibit 10.9 - TMBR/Sharp Drilling, Inc. Employee Retirement Plan. (Incorporated by reference to Exhibit 10.11 in Registrant's Annual Report on Form 10-K dated June 28, 1995) Exhibit 10.10 - 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated November 12, 1998) Exhibit 10.11 - Incentive Stock Option Agreement dated September 1, 1998, between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.18 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.12 - Incentive Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.19 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.13 - Incentive Stock Option Agreement dated September 1, 1998, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.14 - Incentive Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.15 - Incentive Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.22 in Registrant's Annual Report on Form 10-K dated June 29, 1999) -26- 27 Exhibit 10.16 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.23 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.17 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.24 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.18 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.25 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.19 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.26 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.20 - Directors' Fee Stock Plan (Incorporated by reference to Exhibit 10.20 of Registrant's Annual Report on Form 10-K dated June 15, 2001) Exhibit 10.21 - Retention Agreement, dated November 8, 2002, between Thomas C. Brown and the Registrant. Exhibit 10.22 - Retention Agreement, dated November 8, 2002, between Jeffrey D. Phillips and the Registrant. Exhibit 10.23 - Retention Agreement, dated November 8, 2002, between Patricia R. Elledge and the Registrant. Exhibit 10.24 - Retention Agreement, dated November 8, 2002, between Don H. Lawson and the Registrant. Exhibit 10.25 - Form of Stock Purchase Agreement, dated as of February 13, 1997, between the Registrant and the stockholders named therein (Incorporated by reference to Exhibit 10.1 in the Registrant's Registration Statement on Form S-3, No. 333-23391) Exhibit 10.26 - Second Amended and Restated Loan Agreement dated June 26, 2000 between Wells Fargo Bank, Texas N. A. and the Registrant. (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated August 9, 2000) Exhibit 99.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -27- 28 Exhibit 99.2 - Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. --------------------------------- (b) Reports on Form 8-K: The following report on Form 8-K was filed during the second quarter ended September 30, 2002: (1) Report dated August 12, 2002, Regulation FD Disclosure- Certifications of Registrant's Chief Executive Officer and Chief Financial Officer. -28- 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TMBR/SHARP DRILLING, INC. November 13, 2002 By: /s/ Patricia R. Elledge ----------------- ------------------------- Date Patricia R. Elledge Controller/Treasurer (Ms. Elledge is the Chief Financial Officer and has been duly authorized to sign on behalf of the Registrant) -29- 30 CERTIFICATIONS I, Thomas C. Brown, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TMBR/Sharp Drilling, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -30- 31 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002. /s/ Thomas C. Brown ---------------------------------------- Thomas C. Brown, Chief Executive Officer -31- 32 CERTIFICATIONS I, Patricia R. Elledge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TMBR/Sharp Drilling, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -32- 33 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002. /s/ Patricia R. Elledge ------------------------------- Patricia R. Elledge, Principal Financial Officer -33- 34 INDEX TO EXHIBITS Description ----------- Exhibit 3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 in Registrant's Annual Report on Form 10-K dated June 28, 1991) Exhibit 3.2 Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Executive Compensation Plans and Arrangements ---------------------------------------------- (Exhibits 10.1 through and including Exhibit 10.24 constitute executive compensation plans and arrangements of the Registrant) Exhibit 10.1 Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.3 in Registrant's Registration Statement on Form 10, as amended, effective October 9, 1984) Exhibit 10.2 Nonqualified Stock Option Agreement dated August 29, 1990, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.15 in Registrant's Annual Report on Form 10-K dated June 25, 1993) Exhibit 10.3 Nonqualified Stock Option Agreement dated August 30, 1988, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.17 in Registrant's Annual Report on Form 10-K dated June 25, 1993) Exhibit 10.4 Incentive Stock Option Agreement dated November 16, 1993 between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.5 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Exhibit 10.5 Incentive Stock Option Agreement dated December 4, 1992 between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 25, 1993) Exhibit 10.6 Incentive Stock Option Agreement dated December 4, 1992 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 25, 1993) -34- 35 Exhibit 10.7 Incentive Stock Option Agreement dated November 16, 1993 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Exhibit 10.8 1994 Stock Option Plan. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 28, 1995) Exhibit 10.9 TMBR/Sharp Drilling, Inc. Employee Retirement Plan. (Incorporated by reference to Exhibit 10.11 in Registrant's Annual Report on Form 10-K dated June 28, 1995) Exhibit 10.10 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated November 12, 1998) Exhibit 10.11 Incentive Stock Option Agreement dated September 1, 1998, between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.18 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.12 Incentive Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.19 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.13 Incentive Stock Option Agreement dated September 1, 1998, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.14 Incentive Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.15 Incentive Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.22 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.16 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.23 in Registrant's Annual Report on Form 10-K dated June 29, 1999) -35- 36 Exhibit 10.17 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.24 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.18 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.25 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.19 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.26 in Registrant's Annual Report on Form 10-K dated June 29, 1999) Exhibit 10.20 Directors' Fee Stock Plan (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 15, 2001) Exhibit 10.21 Retention Agreement, dated November 8, 2002, between Thomas C. Brown and the Registrant. Exhibit 10.22 Retention Agreement, dated November 8, 2002, between Jeffrey D. Phillips and the Registrant. Exhibit 10.23 Retention Agreement, dated November 8, 2002, between Patricia R. Elledge and the Registrant. Exhibit 10.24 Retention Agreement, dated November 8, 2002, between Don H. Lawson and the Registrant. Exhibit 10.25 Form of Stock Purchase Agreement, dated as of February 13, 1997, between the Registrant and the stockholders named therein (Incorporated by reference to Exhibit 10.1 in the Registrant's Registration Statement on Form S-3, No. 333-23391) Exhibit 10.26 Second Amended and Restated Loan Agreement dated June 26, 2000 between Wells Fargo Bank, Texas N. A. and the Registrant. (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated August 9,2000) Exhibit 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -36- 37 Exhibit 99.1 CERTIFICATION ------------- (Not filed pursuant to the Securities Exchange Act of 1934) Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Thomas C. Brown, the Chairman of the Board of Directors and Chief Executive Officer of TMBR/Sharp Drilling, Inc. (the "Company"), hereby certifies that the Quarterly Report on Form 10Q of the Company for the quarter ended September 30, 2002 fully complies with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the information contained in that Form 10Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ Thomas C. Brown --------------------------------------- Thomas C. Brown, Chairman of the Board of Directors and Chief Executive Officer -37- 38 Exhibit 99.2 CERTIFICATION ------------- (Not filed pursuant to the Securities Exchange Act of 1934) Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Patricia R. Elledge, the Chief Financial Officer of TMBR/Sharp Drilling, Inc. (the "Company"), hereby certifies that the Quarterly Report on Form 10Q of the Company for the quarter ended September 30, 2002 fully complies with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and the information contained in that Form 10Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ Patricia R. Elledge ---------------------------------------- Patricia R. Elledge, Chief Financial Officer -38- 39 Exhibit 10.21 RETENTION AGREEMENT This Retention Agreement (this "Agreement"), dated as of November 8, 2002, is between TMBR/SHARP DRILLING, INC., a Texas corporation (the "Company"), and Thomas C. Brown ("Employee"). RECITATIONS The Company may seek to enter into a transaction which could involve a Change in Control or otherwise become subject to a proposed or threatened Change in Control; The Board of Directors (the "Board") of the Company and the Compensation Committee of the Board have determined that it is imperative that the Company and the Board be able to rely upon the Employee to continue in the Employee's position as Chairman of the Board of Directors and Chief Executive Officer of the Company, and that the Company be able to receive and rely upon the Employee's services and advice for the best interests of the Company and its shareholders, without concern that the Employee might be distracted by the personal uncertainties and risks created by any proposed Change in Control; and The Board and its Compensation Committee have authorized the Company to enter into a retention agreement in the form hereof with the Employee; NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Employee and the availability of the Employee's services, advice and counsel notwithstanding the possibility, threat or occurrence of a Change in Control, and to induce the Employee to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Employee agree as follows: 1. Certain Definitions. In addition to the terms defined in the preamble and elsewhere in this Agreement, the following terms shall have the following meanings: (a) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (b) "Bonus Vesting Date" shall have the meaning given to such term in Section 2 hereof. (c) "Cause" shall have the meaning given to such term in Section 4 hereof. (d) a "Change in Control" shall be deemed to have occurred on the date: (A) any Person is or becomes the Beneficial Owner of securities of the Company representing more than fifty percent (50%) of the Voting Power; (B) (i) the shareholders of the Company approve the consolidation, merger or -39- 40 other business combination of the Company in which the Company is not the surviving or continuing corporation or pursuant to which shares of the Company's common stock are converted into cash, securities or other property, or (ii) the shareholders of the Company approve the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company and its subsidiaries, if any (taken as a group); (C) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (D) without the approval or recommendation of a majority of the then existing Board of Directors of the Company, a third person shall cause or bring about (through solicitation of proxies or otherwise) the removal or resignation of a majority of the then existing members of the Board of Directors or if a third person causes or brings about (through solicitation of proxies or otherwise) an increase in the size of the Board of Directors such that the then existing members of the Board of Directors thereafter represent a minority of the total number of persons comprising the entire Board; or (E) any shares of any class of the Company's stock are purchased pursuant to a tender or exchange offer (other than an offer by the Company). For purposes of this Agreement, where a Change of Control results from a series of related transactions, the Change of Control shall be deemed to have occurred on the date of the consummation of the first such transaction. (e) "Earnings" shall mean the base salary paid by the Company to the Employee during the twelve month period preceding the Bonus Vesting Date from the Company without giving effect to any reduction thereof that may have been made without the Employee's consent. (f) "Person" shall have the meaning set forth in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (g) "Voting Power" shall mean the combined voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote for the election of directors. 2. Services During Certain Events. If the Employee remains in continuous employment as Chairman of the Board of Directors and Chief Executive Officer of the Company from the date hereof until (i) a Change in Control occurs, or (ii) the Employee's employment with the Company is terminated by the Company for a reason other than Cause (with the earliest of such event to occur being referred to herein as the "Bonus Vesting Date"), then the Employee shall be entitled to receive a bonus in the amount determined pursuant to Section 3 hereof. 3. Payment of Bonus. (a) The Company agrees that the Employee shall be paid a bonus by the Company within five (5) days following the Bonus Vesting Date in an amount equal to 2.92 times the Employee's Earnings. -40- 41 (b) Other Benefit Plans. The bonus provided for in this Agreement is not intended to require or to exclude the Employee's continued participation in other benefit plans in which the Employee currently participates or which are available to the Company's personnel generally in the class or category of the Employee or to preclude other compensation or benefits as may be authorized by the Board or its Compensation Committee from time to time. 4. Conditions to the Obligations of the Company. The Company shall have no obligation to pay or cause to be paid to the Employee the bonus described herein (a) if the Company shall terminate the Employee's employment for (i) dishonesty, (ii) conviction of a felony, or (iii) the continued failure by the Employee to perform the duties assigned to the Employee that are consistent with the position of the Employee with the Company (termination for "Cause") or (b) if the Employee dies, becomes disabled, retires, ceases to be Chairman of the Board of Directors and Chief Executive Officer of the Company or voluntarily terminates his employment with the Company prior to the Bonus Vesting Date. 5. Confidentiality. (a) Confidentiality. The Employee agrees that at all times following the execution hereof, the Employee will not without the prior consent of the Company, disclose to any person, firm or corporation any confidential information of the Company or its subsidiaries which is now known to the Employee or which hereafter may become known to the Employee as a result of Employee's employment or association with the Company and which could be helpful to a competitor, unless such disclosure is required under the terms of a valid and effective subpoena or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. (b) Remedies for Breach. It is recognized that damages in the event of breach of this Section 5 by the Employee would be difficult, if not impossible, to ascertain, and it is therefore agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction enjoining any such breach, and the Employee hereby waives any and all defenses the Employee may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude the Company from pursuing any other rights and remedies at law or in equity which the Company may have. 6. Reduction in Payments. Notwithstanding the provisions of Section 3(a) hereof, in no event shall any payment to be made under Section 3(a) exceed $1.00 less than three times the Employee's "Base Amount" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). If any portion of the payments or benefits to be made available to the Employee pursuant to Section 3 would be considered an "excess parachute -41- 42 payment" within the meaning of Section 28OG of the Code, the amount of cash otherwise payable to the Employee pursuant to Section 3(a) hereof shall be reduced to the extent (but only to the extent) necessary to cause no portion of the payments or benefits made available to the Employee pursuant to Section 3 hereof to be considered an excess parachute payment within the meaning of Section 28OG of the Code. KPMG LLP or such other accounting firm that may be agreed upon by the Company and the Employee (the "Accounting Firm") shall determine the Employee's Base Amount and the amount of any excess parachute payments for purposes of this Section 6. All determinations made by the Accounting Firm shall be made within 60 days of the Bonus Vesting Date and shall be binding on the Company and the Employee. All fees and expenses of the Accounting Firm shall be borne solely by the Company. 7. Term of Agreement. Unless terminated earlier as a result of Employee's termination of employment with the Company, this Agreement shall remain in full force and effect through December 31, 2003, and, beginning each January lst thereafter, this Agreement shall be automatically extended for additional one (1) year periods, unless by September 30th of any year the Company gives notice that this Agreement will not be so extended. 8. Miscellaneous. (a) Assignment. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that the Employee may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance or annuity contract governing such right, benefit or interest. (b) Construction of Agreement. Except as expressly provided herein, nothing in this Agreement shall be construed to amend any provision of any plan or policy of the Company. This Agreement is not and nothing herein shall be deemed to create, a commitment of continued employment of the Employee by the Company. The benefits provided under this Agreement shall be in addition to any other compensation agreement or arrangement that the Company may have with the Employee. (c) Amendment. This Agreement may not be amended, modified or canceled except by written agreement of the Company and the Employee. (d) Waiver. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. (e) Severability. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) Successors. -42- 43 (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled to pursuant to clause (i) of Section 2 hereof. (ii) This Agreement shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legates. If the Employee dies after the Bonus Vesting Date but prior to the receipt of the bonus payable hereunder with respect to events occurring prior to death, such bonus shall be paid pursuant to the last beneficiary designation executed by the Employee and filed with the Company. If no beneficiary form has been filed with respect to this Agreement, the bonus shall be paid to the Employee's estate. (g) Taxes. Any payment or delivery required under this Agreement shall be subject to all requirements of law with regard to withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT T ITS CONFLICTS OF LAWS PRINCIPLES. VENUE SHALL LIE IN MIDLAND COUNTY, TEXAS FOR THE PURPOSE OF RESOLVING AND ENFORCING ANY DISPUTE WHICH MAY ARISE UNDER THIS AGREEMENT AND THE PARTIES AGREE THAT THEY WILL SUBMIT THEMSELVES TO THE JURISDICTION OF THE COMPETENT STATE OR FEDERAL COURT SITUATED IN MIDLAND COUNTY, TEXAS. (i) Not Contract of Employment. Subject to the provisions of Section 3 of this Agreement, the entering into of this Agreement shall not be deemed to be a contract of employment between the Company and the Employee, or to be consideration for the employment of the Employee, and nothing herein contained shall be deemed to give the Employee the right to be retained in the employ of the Company or to restrict the right of the Company to discharge the Employee at any time. (j) Gender. Wherever in this instrument words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender wherever they would so apply, and vice versa. Wherever words appear in the singular or plural, they shall be read and construed as in the plural or singular, respectively, wherever they would so apply. -43- 44 (k) Headings. The headings of the Sections herein are included solely for reference convenience, and shall not in any way affect the meaning or interpretation of the Agreement. (1) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TMBR/SHARP DRILLING, INC. By: /s/ Jeffrey D. Phillips -------------------------------- Jeffrey D. Phillips, President EMPLOYEE /s/ Thomas C. Brown -------------------------------- Thomas C. Brown -44- 45 Exhibit 10.22 RETENTION AGREEMENT This Retention Agreement (this "Agreement"), dated as of November 8, 2002, is between TMBR/SHARP DRILLING, INC., a Texas corporation (the "Company"), and Jeffrey D. Phillips ("Employee"). RECITATIONS The Company may seek to enter into a transaction which could involve a Change in Control or otherwise become subject to a proposed or threatened Change in Control; The Board of Directors (the "Board") of the Company and the Compensation Committee of the Board have determined that it is imperative that the Company and the Board be able to rely upon the Employee to continue in the Employee's position as President of the Company, and that the Company be able to receive and rely upon the Employee's services and advice for the best interests of the Company and its shareholders, without concern that the Employee might be distracted by the personal uncertainties and risks created by any proposed Change in Control; and The Board and its Compensation Committee have authorized the Company to enter into a retention agreement in the form hereof with the Employee; NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Employee and the availability of the Employee's services, advice and counsel notwithstanding the possibility, threat or occurrence of a Change in Control, and to induce the Employee to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Employee agree as follows: 1. Certain Definitions. In addition to the terms defined in the preamble and elsewhere in this Agreement, the following terms shall have the following meanings: (a) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (b) "Bonus Vesting Date" shall have the meaning given to such term in Section 2 hereof. (c) "Cause" shall have the meaning given to such term in Section 4 hereof. (d) a "Change in Control" shall be deemed to have occurred on the date: (A) any Person is or becomes the Beneficial Owner of securities of the Company representing more than fifty percent (50%) of the Voting Power; (B) (i) the shareholders of the Company approve the consolidation, merger or other business combination of the Company in which the Company is not the surviving or continuing corporation or pursuant to which shares of the -45- 46 Company's common stock are converted into cash, securities or other property, or (ii) the shareholders of the Company approve the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company and its subsidiaries, if any (taken as a group); (C) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (D) without the approval or recommendation of a majority of the then existing Board of Directors of the Company, a third person shall cause or bring about (through solicitation of proxies or otherwise) the removal or resignation of a majority of the then existing members of the Board of Directors or if a third person causes or brings about (through solicitation of proxies or otherwise) an increase in the size of the Board of Directors such that the then existing members of the Board of Directors thereafter represent a minority of the total number of persons comprising the entire Board; or (E) any shares of any class of the Company's stock are purchased pursuant to a tender or exchange offer (other than an offer by the Company). For purposes of this Agreement, where a Change of Control results from a series of related transactions, the Change of Control shall be deemed to have occurred on the date of the consummation of the first such transaction. (e) "Earnings" shall mean the base salary paid by the Company to the Employee during the twelve month period preceding the Bonus Vesting Date from the Company without giving effect to any reduction thereof that may have been made without the Employee's consent. (f) "Person" shall have the meaning set forth in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (g) "Voting Power" shall mean the combined voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote for the election of directors. 2. Services During Certain Events. If the Employee remains in continuous employment as President of the Company from the date hereof until (i) a Change in Control occurs, or (ii) the Employee's employment with the Company is terminated by the Company for a reason other than Cause (with the earliest of such event to occur being referred to herein as the "Bonus Vesting Date"), then the Employee shall be entitled to receive a bonus in the amount determined pursuant to Section 3 hereof. 3. Payment of Bonus. (a) The Company agrees that the Employee shall be paid a bonus by the Company within five (5) days following the Bonus Vesting Date in an amount equal to 2.97 times the Employee's Earnings. (b) Other Benefit Plans. The bonus provided for in this Agreement is not intended to require or to exclude the Employee's continued participation in other benefit plans in which the Employee currently participates or which are available to the Company's personnel generally in the class or category of the Employee or to preclude other compensation or benefits as may be authorized by the Board or its Compensation Committee from time to time. -46- 47 4. Conditions to the Obligations of the Company. The Company shall have no obligation to pay or cause to be paid to the Employee the bonus described herein (a) if the Company shall terminate the Employee's employment for (i) dishonesty, (ii) conviction of a felony, or (iii) the continued failure by the Employee to perform the duties assigned to the Employee that are consistent with the position of the Employee with the Company (termination for "Cause") or (b) if the Employee dies, becomes disabled, retires, ceases to be President of the Company or voluntarily terminates his employment with the Company prior to the Bonus Vesting Date. 5. Confidentiality. (a) Confidentiality. The Employee agrees that at all times following the execution hereof, the Employee will not without the prior consent of the Company, disclose to any person, firm or corporation any confidential information of the Company or its subsidiaries which is now known to the Employee or which hereafter may become known to the Employee as a result of Employee's employment or association with the Company and which could be helpful to a competitor, unless such disclosure is required under the terms of a valid and effective subpoena or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. (b) Remedies for Breach. It is recognized that damages in the event of breach of this Section 5 by the Employee would be difficult, if not impossible, to ascertain, and it is therefore agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction enjoining any such breach, and the Employee hereby waives any and all defenses the Employee may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude the Company from pursuing any other rights and remedies at law or in equity which the Company may have. 6. Reduction in Payments. Notwithstanding the provisions of Section 3(a) hereof, in no event shall any payment to be made under Section 3(a) exceed $1.00 less than three times the Employee's "Base Amount" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). If any portion of the payments or benefits to be made available to the Employee pursuant to Section 3 would be considered an "excess parachute payment" within the meaning of Section 28OG of the Code, the amount of cash otherwise payable to the Employee pursuant to Section 3(a) hereof shall be reduced to the extent (but only to the extent) necessary to cause no portion of the payments or benefits made available to the Employee pursuant to Section 3 hereof to be considered an excess parachute payment within the meaning of Section 28OG of the Code. KPMG LLP or such other accounting firm that may be agreed upon by the Company and the Employee (the "Accounting Firm") shall determine the Employee's Base Amount and the amount of any excess parachute payments for purposes of this Section 6. All determinations made by the Accounting Firm shall be made within 60 days of the Bonus Vesting Date and shall be binding on the Company and the Employee. All fees and expenses of the Accounting Firm shall be borne solely by the Company. -47- 48 7. Term of Agreement. Unless terminated earlier as a result of Employee's termination of employment with the Company, this Agreement shall remain in full force and effect through December 31, 2003, and, beginning each January lst thereafter, this Agreement shall be automatically extended for additional one (1) year periods, unless by September 30th of any year the Company gives notice that this Agreement will not be so extended. 8. Miscellaneous. (a) Assignment. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that the Employee may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance or annuity contract governing such right, benefit or interest. (b) Construction of Agreement. Except as expressly provided herein, nothing in this Agreement shall be construed to amend any provision of any plan or policy of the Company. This Agreement is not and nothing herein shall be deemed to create, a commitment of continued employment of the Employee by the Company. The benefits provided under this Agreement shall be in addition to any other compensation agreement or arrangement that the Company may have with the Employee. (c) Amendment. This Agreement may not be amended, modified or canceled except by written agreement of the Company and the Employee. (d) Waiver. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. (e) Severability. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) Successors. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled to pursuant to clause (i) of Section 2 hereof. -48- 49 (ii) This Agreement shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legates. If the Employee dies after the Bonus Vesting Date but prior to the receipt of the bonus payable hereunder with respect to events occurring prior to death, such bonus shall be paid pursuant to the last beneficiary designation executed by the Employee and filed with the Company. If no beneficiary form has been filed with respect to this Agreement, the bonus shall be paid to the Employee's estate. (g) Taxes. Any payment or delivery required under this Agreement shall be subject to all requirements of law with regard to withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT T ITS CONFLICTS OF LAWS PRINCIPLES. VENUE SHALL LIE IN MIDLAND COUNTY, TEXAS FOR THE PURPOSE OF RESOLVING AND ENFORCING ANY DISPUTE WHICH MAY ARISE UNDER THIS AGREEMENT AND THE PARTIES AGREE THAT THEY WILL SUBMIT THEMSELVES TO THE JURISDICTION OF THE COMPETENT STATE OR FEDERAL COURT SITUATED IN MIDLAND COUNTY, TEXAS. (i) Not Contract of Employment. Subject to the provisions of Section 3 of this Agreement, the entering into of this Agreement shall not be deemed to be a contract of employment between the Company and the Employee, or to be consideration for the employment of the Employee, and nothing herein contained shall be deemed to give the Employee the right to be retained in the employ of the Company or to restrict the right of the Company to discharge the Employee at any time. (j) Gender. Wherever in this instrument words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender wherever they would so apply, and vice versa. Wherever words appear in the singular or plural, they shall be read and construed as in the plural or singular, respectively, wherever they would so apply. (k) Headings. The headings of the Sections herein are included solely for reference convenience, and shall not in any way affect the meaning or interpretation of the Agreement. (1) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. -49- 50 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TMBR/SHARP DRILLING, INC. By: /s/ Thomas C. Brown ---------------------------------- Thomas C. Brown, Chairman of the Board and Chief Executive Officer EMPLOYEE /s/ Jeffrey D. Phillips ---------------------------------- Jeffrey D. Phillips -50- 51 Exhibit 10.23 RETENTION AGREEMENT This Retention Agreement (this "Agreement"), dated as of November 8, 2002, is between TMBR/SHARP DRILLING, INC., a Texas corporation (the "Company"), and Patricia R. Elledge ("Employee"). RECITATIONS The Company may seek to enter into a transaction which could involve a Change in Control or otherwise become subject to a proposed or threatened Change in Control; The Board of Directors (the "Board") of the Company and the Compensation Committee of the Board have determined that it is imperative that the Company and the Board be able to rely upon the Employee to continue in the Employee's position as Controller and Treasurer of the Company, and that the Company be able to receive and rely upon the Employee's services and advice for the best interests of the Company and its shareholders, without concern that the Employee might be distracted by the personal uncertainties and risks created by any proposed Change in Control; and The Board and its Compensation Committee have authorized the Company to enter into a retention agreement in the form hereof with the Employee; NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Employee and the availability of the Employee's services, advice and counsel notwithstanding the possibility, threat or occurrence of a Change in Control, and to induce the Employee to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Employee agree as follows: 1. Certain Definitions. In addition to the terms defined in the preamble and elsewhere in this Agreement, the following terms shall have the following meanings: (a) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (b) "Bonus Vesting Date" shall have the meaning given to such term in Section 2 hereof. (c) "Cause" shall have the meaning given to such term in Section 4 hereof. (d) a "Change in Control" shall be deemed to have occurred on the date: (A) any Person is or becomes the Beneficial Owner of securities of the -51- 52 Company representing more than fifty percent (50%) of the Voting Power; (B) (i) the shareholders of the Company approve the consolidation, merger or other business combination of the Company in which the Company is not the surviving or continuing corporation or pursuant to which shares of the Company's common stock are converted into cash, securities or other property, or (ii) the shareholders of the Company approve the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company and its subsidiaries, if any (taken as a group); (C) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (D) without the approval or recommendation of a majority of the then existing Board of Directors of the Company, a third person shall cause or bring about (through solicitation of proxies or otherwise) the removal or resignation of a majority of the then existing members of the Board of Directors or if a third person causes or brings about (through solicitation of proxies or otherwise) an increase in the size of the Board of Directors such that the then existing members of the Board of Directors thereafter represent a minority of the total number of persons comprising the entire Board; or (E) any shares of any class of the Company's stock are purchased pursuant to a tender or exchange offer (other than an offer by the Company). For purposes of this Agreement, where a Change of Control results from a series of related transactions, the Change of Control shall be deemed to have occurred on the date of the consummation of the first such transaction. (e) "Earnings" shall mean the base salary paid by the Company to the Employee during the twelve month period preceding the Bonus Vesting Date from the Company without giving effect to any reduction thereof that may have been made without the Employee's consent. (f) "Person" shall have the meaning set forth in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (g) "Voting Power" shall mean the combined voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote for the election of directors. 2. Services During Certain Events. If the Employee remains in continuous employment as Controller and Treasurer of the Company from the date hereof until (i) a Change in Control occurs, or (ii) the Employee's employment with the Company is terminated by the Company for a reason other than Cause (with the earliest of such event to occur being referred to herein as the "Bonus Vesting Date"), then the Employee shall be entitled to receive a bonus in the amount determined pursuant to Section 3 hereof. 3. Payment of Bonus. (a) The Company agrees that the Employee shall be paid a bonus by the Company within five (5) days following the Bonus Vesting Date in an amount equal to 1.60 times the Employee's Earnings. (b) Other Benefit Plans. The bonus provided for in this Agreement is not intended to require or to exclude the Employee's continued participation in other benefit plans in which the Employee currently participates or which are available to the Company's personnel generally in -52- 53 the class or category of the Employee or to preclude other compensation or benefits as may be authorized by the Board or its Compensation Committee from time to time. 4. Conditions to the Obligations of the Company. The Company shall have no obligation to pay or cause to be paid to the Employee the bonus described herein (a) if the Company shall terminate the Employee's employment for (i) dishonesty, (ii) conviction of a felony, or (iii) the continued failure by the Employee to perform the duties assigned to the Employee that are consistent with the position of the Employee with the Company (termination for "Cause") or (b) if the Employee dies, becomes disabled, retires, ceases to be Controller and Treasurer of the Company or voluntarily terminates her employment with the Company prior to the Bonus Vesting Date. 5. Confidentiality. (a) Confidentiality. The Employee agrees that at all times following the execution hereof, the Employee will not without the prior consent of the Company, disclose to any person, firm or corporation any confidential information of the Company or its subsidiaries which is now known to the Employee or which hereafter may become known to the Employee as a result of Employee's employment or association with the Company and which could be helpful to a competitor, unless such disclosure is required under the terms of a valid and effective subpoena or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. (b) Remedies for Breach. It is recognized that damages in the event of breach of this Section 5 by the Employee would be difficult, if not impossible, to ascertain, and it is therefore agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction enjoining any such breach, and the Employee hereby waives any and all defenses the Employee may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude the Company from pursuing any other rights and remedies at law or in equity which the Company may have. 6. Reduction in Payments. Notwithstanding the provisions of Section 3(a) hereof, in no event shall any payment to be made under Section 3(a) exceed $1.00 less than three times the Employee's "Base Amount" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). If any portion of the payments or benefits to be made available to the Employee pursuant to Section 3 would be considered an "excess parachute payment" within the meaning of Section 28OG of the Code, the amount of cash otherwise payable to the Employee pursuant to Section 3(a) hereof shall be reduced to the extent (but only to the extent) necessary to cause no portion of the payments or benefits made available to the Employee pursuant to Section 3 hereof to be considered an excess parachute payment within the meaning of Section 28OG of the Code. KPMG LLP or such other accounting firm that may be agreed upon by the Company and the Employee (the "Accounting Firm") shall determine the Employee's Base Amount and the amount of any -53- 54 excess parachute payments for purposes of this Section 6. All determinations made by the Accounting Firm shall be made within 60 days of the Bonus Vesting Date and shall be binding on the Company and the Employee. All fees and expenses of the Accounting Firm shall be borne solely by the Company. 7. Term of Agreement. Unless terminated earlier as a result of Employee's termination of employment with the Company, this Agreement shall remain in full force and effect through December 31, 2003, and, beginning each January lst thereafter, this Agreement shall be automatically extended for additional one (1) year periods, unless by September 30th of any year the Company gives notice that this Agreement will not be so extended. 8. Miscellaneous. (a) Assignment. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that the Employee may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance or annuity contract governing such right, benefit or interest. (b) Construction of Agreement. Except as expressly provided herein, nothing in this Agreement shall be construed to amend any provision of any plan or policy of the Company. This Agreement is not and nothing herein shall be deemed to create, a commitment of continued employment of the Employee by the Company. The benefits provided under this Agreement shall be in addition to any other compensation agreement or arrangement that the Company may have with the Employee. (c) Amendment. This Agreement may not be amended, modified or canceled except by written agreement of the Company and the Employee. (d) Waiver. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. (e) Severability. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) Successors. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled to pursuant to clause (i) of Section 2 hereof. -54- 55 (ii) This Agreement shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legates. If the Employee dies after the Bonus Vesting Date but prior to the receipt of the bonus payable hereunder with respect to events occurring prior to death, such bonus shall be paid pursuant to the last beneficiary designation executed by the Employee and filed with the Company. If no beneficiary form has been filed with respect to this Agreement, the bonus shall be paid to the Employee's estate. (g) Taxes. Any payment or delivery required under this Agreement shall be subject to all requirements of law with regard to withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT T ITS CONFLICTS OF LAWS PRINCIPLES. VENUE SHALL LIE IN MIDLAND COUNTY, TEXAS FOR THE PURPOSE OF RESOLVING AND ENFORCING ANY DISPUTE WHICH MAY ARISE UNDER THIS AGREEMENT AND THE PARTIES AGREE THAT THEY WILL SUBMIT THEMSELVES TO THE JURISDICTION OF THE COMPETENT STATE OR FEDERAL COURT SITUATED IN MIDLAND COUNTY, TEXAS. (i) Not Contract of Employment. Subject to the provisions of Section 3 of this Agreement, the entering into of this Agreement shall not be deemed to be a contract of employment between the Company and the Employee, or to be consideration for the employment of the Employee, and nothing herein contained shall be deemed to give the Employee the right to be retained in the employ of the Company or to restrict the right of the Company to discharge the Employee at any time. (j) Gender. Wherever in this instrument words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender wherever they would so apply, and vice versa. Wherever words appear in the singular or plural, they shall be read and construed as in the plural or singular, respectively, wherever they would so apply. (k) Headings. The headings of the Sections herein are included solely for reference convenience, and shall not in any way affect the meaning or interpretation of the Agreement. (1) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. -55- 56 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TMBR/SHARP DRILLING, INC. By:/s/ Thomas C. Brown ----------------------------------- Thomas C. Brown, Chairman of the Board and Chief Executive Officer EMPLOYEE /s/ Patricia R. Elledge -------------------------------------- Patricia R. Elledge -56- 57 Exhibit 10.24 RETENTION AGREEMENT This Retention Agreement (this "Agreement"), dated as of November 8, 2002, is between TMBR/SHARP DRILLING, INC., a Texas corporation (the "Company"), and Don H. Lawson ("Employee"). RECITATIONS The Company may seek to enter into a transaction which could involve a Change in Control or otherwise become subject to a proposed or threatened Change in Control; The Board of Directors (the "Board") of the Company and the Compensation Committee of the Board have determined that it is imperative that the Company and the Board be able to rely upon the Employee to continue in the Employee's position as Vice President-Operations of the Company, and that the Company be able to receive and rely upon the Employee's services and advice for the best interests of the Company and its shareholders, without concern that the Employee might be distracted by the personal uncertainties and risks created by any proposed Change in Control; and The Board and its Compensation Committee have authorized the Company to enter into a retention agreement in the form hereof with the Employee; NOW, THEREFORE, to assure the Company that it will have the continued dedication of the Employee and the availability of the Employee's services, advice and counsel notwithstanding the possibility, threat or occurrence of a Change in Control, and to induce the Employee to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Employee agree as follows: 1. Certain Definitions. In addition to the terms defined in the preamble and elsewhere in this Agreement, the following terms shall have the following meanings: (a) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (b) "Bonus Vesting Date" shall have the meaning given to such term in Section 2 hereof. (c) "Cause" shall have the meaning given to such term in Section 4 hereof. -57- 58 (d) a "Change in Control" shall be deemed to have occurred on the date: (A) any Person is or becomes the Beneficial Owner of securities of the Company representing more than fifty percent (50%) of the Voting Power; (B) (i) the shareholders of the Company approve the consolidation, merger or other business combination of the Company in which the Company is not the surviving or continuing corporation or pursuant to which shares of the Company's common stock are converted into cash, securities or other property, or (ii) the shareholders of the Company approve the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company and its subsidiaries, if any (taken as a group); (C) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (D) without the approval or recommendation of a majority of the then existing Board of Directors of the Company, a third person shall cause or bring about (through solicitation of proxies or otherwise) the removal or resignation of a majority of the then existing members of the Board of Directors or if a third person causes or brings about (through solicitation of proxies or otherwise) an increase in the size of the Board of Directors such that the then existing members of the Board of Directors thereafter represent a minority of the total number of persons comprising the entire Board; or (E) any shares of any class of the Company's stock are purchased pursuant to a tender or exchange offer (other than an offer by the Company). For purposes of this Agreement, where a Change of Control results from a series of related transactions, the Change of Control shall be deemed to have occurred on the date of the consummation of the first such transaction. (e) "Earnings" shall mean the base salary paid by the Company to the Employee during the twelve month period preceding the Bonus Vesting Date from the Company without giving effect to any reduction thereof that may have been made without the Employee's consent. (f) "Person" shall have the meaning set forth in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on the date of this Agreement. (g) "Voting Power" shall mean the combined voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote for the election of directors. 2. Services During Certain Events. If the Employee remains in continuous employment as Vice President-Operations of the Company from the date hereof until (i) a Change in Control occurs, or (ii) the Employee's employment with the Company is terminated by the Company for a reason other than Cause (with the earliest of such event to occur being referred to herein as the "Bonus Vesting Date"), then the Employee shall be entitled to receive a bonus in the amount determined pursuant to Section 3 hereof. 3. Payment of Bonus. (a) The Company agrees that the Employee shall be paid a bonus by the Company within five (5) days following the Bonus Vesting Date in an amount equal to 1.80 times the Employee's Earnings. -58- 59 (b) Other Benefit Plans. The bonus provided for in this Agreement is not intended to require or to exclude the Employee's continued participation in other benefit plans in which the Employee currently participates or which are available to the Company's personnel generally in the class or category of the Employee or to preclude other compensation or benefits as may be authorized by the Board or its Compensation Committee from time to time. 4. Conditions to the Obligations of the Company. The Company shall have no obligation to pay or cause to be paid to the Employee the bonus described herein (a) if the Company shall terminate the Employee's employment for (i) dishonesty, (ii) conviction of a felony, or (iii) the continued failure by the Employee to perform the duties assigned to the Employee that are consistent with the position of the Employee with the Company (termination for "Cause") or (b) if the Employee dies, becomes disabled, retires, ceases to be Vice President-Operations of the Company or voluntarily terminates her employment with the Company prior to the Bonus Vesting Date. 5. Confidentiality. (a) Confidentiality. The Employee agrees that at all times following the execution hereof, the Employee will not without the prior consent of the Company, disclose to any person, firm or corporation any confidential information of the Company or its subsidiaries which is now known to the Employee or which hereafter may become known to the Employee as a result of Employee's employment or association with the Company and which could be helpful to a competitor, unless such disclosure is required under the terms of a valid and effective subpoena or order issued by a court or governmental body; provided, however, that the foregoing shall not apply to confidential information which becomes publicly disseminated by means other than a breach of this Agreement. (b) Remedies for Breach. It is recognized that damages in the event of breach of this Section 5 by the Employee would be difficult, if not impossible, to ascertain, and it is therefore agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction enjoining any such breach, and the Employee hereby waives any and all defenses the Employee may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude the Company from pursuing any other rights and remedies at law or in equity which the Company may have. 6. Reduction in Payments. Notwithstanding the provisions of Section 3(a) hereof, in no event shall any payment to be made under Section 3(a) exceed $1.00 less than three times the Employee's "Base Amount" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). If any portion of the payments or benefits to be made available to the Employee pursuant to Section 3 would be considered an "excess parachute payment" within the meaning of Section 28OG of the Code, the amount of cash otherwise payable to the Employee pursuant to Section 3(a) hereof shall be reduced to the extent (but only to the extent) necessary to cause no portion -59- 60 of the payments or benefits made available to the Employee pursuant to Section 3 hereof to be considered an excess parachute payment within the meaning of Section 28OG of the Code. KPMG LLP or such other accounting firm that may be agreed upon by the Company and the Employee (the "Accounting Firm") shall determine the Employee's Base Amount and the amount of any excess parachute payments for purposes of this Section 6. All determinations made by the Accounting Firm shall be made within 60 days of the Bonus Vesting Date and shall be binding on the Company and the Employee. All fees and expenses of the Accounting Firm shall be borne solely by the Company. 7. Term of Agreement. Unless terminated earlier as a result of Employee's termination of employment with the Company, this Agreement shall remain in full force and effect through December 31, 2003, and, beginning each January lst thereafter, this Agreement shall be automatically extended for additional one (1) year periods, unless by September 30th of any year the Company gives notice that this Agreement will not be so extended. 8. Miscellaneous. (a) Assignment. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that the Employee may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance or annuity contract governing such right, benefit or interest. (b) Construction of Agreement. Except as expressly provided herein, nothing in this Agreement shall be construed to amend any provision of any plan or policy of the Company. This Agreement is not and nothing herein shall be deemed to create, a commitment of continued employment of the Employee by the Company. The benefits provided under this Agreement shall be in addition to any other compensation agreement or arrangement that the Company may have with the Employee. (c) Amendment. This Agreement may not be amended, modified or canceled except by written agreement of the Company and the Employee. (d) Waiver. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. (e) Severability. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) Successors. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession -60- 61 had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled to pursuant to clause (i) of Section 2 hereof. (ii) This Agreement shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legates. If the Employee dies after the Bonus Vesting Date but prior to the receipt of the bonus payable hereunder with respect to events occurring prior to death, such bonus shall be paid pursuant to the last beneficiary designation executed by the Employee and filed with the Company. If no beneficiary form has been filed with respect to this Agreement, the bonus shall be paid to the Employee's estate. (g) Taxes. Any payment or delivery required under this Agreement shall be subject to all requirements of law with regard to withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT T ITS CONFLICTS OF LAWS PRINCIPLES. VENUE SHALL LIE IN MIDLAND COUNTY, TEXAS FOR THE PURPOSE OF RESOLVING AND ENFORCING ANY DISPUTE WHICH MAY ARISE UNDER THIS AGREEMENT AND THE PARTIES AGREE THAT THEY WILL SUBMIT THEMSELVES TO THE JURISDICTION OF THE COMPETENT STATE OR FEDERAL COURT SITUATED IN MIDLAND COUNTY, TEXAS. (i) Not Contract of Employment. Subject to the provisions of Section 3 of this Agreement, the entering into of this Agreement shall not be deemed to be a contract of employment between the Company and the Employee, or to be consideration for the employment of the Employee, and nothing herein contained shall be deemed to give the Employee the right to be retained in the employ of the Company or to restrict the right of the Company to discharge the Employee at any time. (j) Gender. Wherever in this instrument words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender wherever they would so apply, and vice versa. Wherever words appear in the singular or plural, they shall be read and construed as in the plural or singular, respectively, wherever they would so apply. (k) Headings. The headings of the Sections herein are included solely for reference convenience, and shall not in any way affect the meaning or interpretation of the Agreement. (1) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. -61- 62 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TMBR/SHARP DRILLING, INC. By:/s/ Thomas C. Brown ----------------------------------- Thomas C. Brown, Chairman of the Board and Chief Executive Officer EMPLOYEE /s/ Don H. Lawson -------------------------------------- Don H. Lawson -62-