Exhibit 10.1

 

CANO PETROLEUM, INC.

2005 LONG-TERM INCENTIVE PLAN

 

The Cano Petroleum, Inc. 2005 Long-Term Incentive Plan (the “Plan”) was adopted
by the Board of Directors of Cano Petroleum, Inc., a Delaware corporation (the
“Company”), effective as of December 7, 2005, subject to approval by the
Company’s stockholders.

 

ARTICLE 1

PURPOSE

 

The purpose of the Plan is to attract and retain the services of key employees,
key consultants and Outside Directors of the Company and its Subsidiaries and to
provide such persons with a proprietary interest in the Company through the
granting of incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
awards, dividend equivalent rights, and other awards, whether granted singly, or
in combination, or in tandem, that will

 

(a)                                  increase the interest of such persons in
the Company’s welfare;

 

(b)                                 furnish an incentive to such persons to
continue their services for the Company; and

 

(c)                                  provide a means through which the Company
may attract able persons as employees, Consultants and Outside Directors.

 

With respect to Reporting Participants, the Plan and all transactions under the
Plan are intended to comply with all applicable conditions of Rule 16b-3
promulgated under the Securities Exchange Act of 1934 (the “1934 Act”).  To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void ab initio, to the extent permitted by law and
deemed advisable by the Committee.

 

ARTICLE 2

DEFINITIONS

 

For the purpose of the Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:

 

2.1                                 “Award” means the grant of any Incentive
Stock Option, Nonqualified Stock Option, Reload Option, Restricted Stock, SAR,
Restricted Stock Units, Performance Award, Dividend Equivalent Right or Other
Award, whether granted singly or in combination or in tandem (each individually
referred to herein as an “Incentive”).

 

2.2                                 “Award Agreement” means a written agreement
between a Participant and the Company which sets out the terms of the grant of
an Award.

 

2.3                                 “Award Period” means the period set forth in
the Award Agreement during which one or more Incentives granted under an Award
may be exercised.

 

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2.4                                 “Board” means the board of directors of the
Company.

 

2.5                                 “Change in Control” means any of the
following, except as otherwise provided herein:  (i) any consolidation, merger
or share exchange of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of the Company’s Common Stock
would be converted into cash, securities or other property, other than a
consolidation, merger or share exchange of the Company in which the holders of
the Company’s Common Stock immediately prior to such transaction have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after such transaction; (ii) any sale, lease, exchange or other transfer
(excluding transfer by way of pledge or hypothecation) in one transaction or a
series of related transactions, of all or substantially all of the assets of the
Company; (iii) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; (iv) the cessation of control (by
virtue of their not constituting a majority of directors) of the Board by the
individuals (the “Continuing Directors”) who (x) at the date of this Plan were
directors or (y) become directors after the date of this Plan and whose election
or nomination for election by the Company’s stockholders was approved by a vote
of at least two-thirds of the directors then in office who were directors at the
date of this Plan or whose election or nomination for election was previously so
approved; (v) the acquisition of beneficial ownership (within the meaning of
Rule 13d-3 under the 1934 Act) of an aggregate of 50% or more of the voting
power of the Company’s outstanding voting securities by any person or group (as
such term is used in Rule 13d-5 under the 1934 Act) who beneficially owned less
than 50% of the voting power of the Company’s outstanding voting securities on
the date of this Plan; provided, however, that notwithstanding the foregoing, an
acquisition shall not constitute a Change in Control hereunder if the acquirer
is (x) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company and acting in such capacity, (y) a Subsidiary of the Company
or a corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of voting
securities of the Company or (z) any other person whose acquisition of shares of
voting securities is approved in advance by a majority of the Continuing
Directors; or (vi) in a Title 11 bankruptcy proceeding, the appointment of a
trustee or the conversion of a case involving the Company to a case under
Chapter 7.

 

Notwithstanding the foregoing provisions of this Section 2.5, in the event an
Award issued under the Plan is subject to Section 409A of the Code, then, in
lieu of the foregoing definition and to the extent necessary to comply with the
requirements of Section 409A of the Code, the definition of “Change in Control”
for purposes of such Award shall be the definition provided for under
Section 409A of the Code and the regulations or other guidance issued
thereunder.

 

2.6                                 “Code” means the Internal Revenue Code of
1986, as amended.

 

2.7                                 “Committee” means the committee appointed or
designated by the Board to administer the Plan in accordance with Article 3 of
this Plan.

 

2.8                                 “Common Stock” means the common stock, par
value $0.0001 per share, which the Company is currently authorized to issue or
may in the future be authorized to issue, or any securities into which or for
which the common stock of the Company may be converted or exchanged, as the case
may be, pursuant to the terms of this Plan.

 

2.9                                 “Company” means Cano Petroleum, Inc, a
Delaware corporation, and any successor entity.

 

2.10                           “Consultant” means any person, who is not an
Employee, performing advisory or consulting services for the Company or a
Subsidiary, with or without compensation, provided that bona fide services must
be rendered by such person and such services shall not be rendered in connection
with the offer or sale of securities in a capital raising transaction.

 

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2.11                           “Corporation” means any entity that (i) is
defined as a corporation under Section 7701 of the Code and (ii) is the Company
or is in an unbroken chain of corporations (other than the Company) beginning
with the Company, if each of the corporations other than the last corporation in
the unbroken chain owns stock possessing a majority of the total combined voting
power of all classes of stock in one of the other corporations in the chain. 
For purposes of clause (ii) hereof, an entity shall be treated as a
“corporation” if it satisfies the definition of a corporation under Section 7701
of the Code.

 

2.12                           “Date of Grant” means the effective date on which
an Award is made to a Participant as set forth in the applicable Award
Agreement; provided, however, that solely for purposes of Section 16 of the 1934
Act and the rules and regulations promulgated thereunder, the Date of Grant of
an Award shall be the date of stockholder approval of the Plan if such date is
later than the effective date of such Award as set forth in the Award Agreement.

 

2.13                           “Dividend Equivalent Right” means the right of
the holder thereof to receive credits based on the cash dividends that would
have been paid on the shares of Common Stock specified in the Award if such
shares were held by the Participant to whom the Award is made.

 

2.14                           “Employee” means common law employee (as defined
in accordance with the Regulations and Revenue Rulings then applicable under
Section 3401(c) of the Code) of the Company or any Subsidiary of the Company.

 

2.15                           “Executive Officer” means an officer of the
Company or a Subsidiary subject to Section 16 of the 1934 Act or a “covered
employee” as defined in Section 162(m)(3) of the Code.

 

2.16                           “Fair Market Value” means, as of a particular
date, (a) if the shares of Common Stock are listed on any established national
securities exchange, the closing sales price per share of Common Stock on the
consolidated transaction reporting system for the principal securities exchange
for the Common Stock on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was so
reported, (b) if the shares of Common Stock are not so listed but are quoted on
the Nasdaq National Market System, the closing sales price per share of Common
Stock on the Nasdaq National Market System on that date, or, if there shall have
been no such sale so reported on that date, on the last preceding date on which
such a sale was so reported, (c) if the Common Stock is not so listed or quoted,
the mean between the closing bid and asked price on that date, or, if there are
no quotations available for such date, on the last preceding date on which such
quotations shall be available, as reported by Nasdaq, or, if not reported by
Nasdaq, by the National Quotation Bureau, Inc., or (d) if none of the above is
applicable, such amount as may be determined by the Committee (acting on the
advice of an Independent Third Party, should the Committee elect in its sole
discretion to utilize an Independent Third Party for this purpose), in good
faith, to be the fair market value per share of Common Stock.

 

2.17                           “Independent Third Party” means an individual or
entity independent of the Company having experience in providing investment
banking or similar appraisal or valuation services and with expertise generally
in the valuation of securities or other property for purposes of this Plan.  The
Committee may utilize one or more Independent Third Parties.

 

2.18                           “Incentive” is defined in Section 2.1 hereof.

 

2.19                           “Incentive Stock Option” means an incentive stock
option within the meaning of Section 422 of the Code, granted pursuant to this
Plan.

 

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2.20                           “Nonqualified Stock Option” means a nonqualified
stock option, granted pursuant to this Plan, which is not an Incentive Stock
Option.

 

2.21                           “Option Price” means the price which must be paid
by a Participant upon exercise of a Stock Option to purchase a share of Common
Stock.

 

2.22                           “Other Award” means an Award issued pursuant to
Section 6.9 hereof.

 

2.23                           “Outside Director” means a director of the
Company who is not an Employee or a Consultant.

 

2.24                           “Participant” means an Employee, Consultant or
Outside Director of the Company or a Subsidiary to whom an Award is granted
under this Plan.

 

2.25                           “Plan” means this Cano Petroleum, Inc. 2005
Long-Term Incentive Plan, as amended from time to time.

 

2.26                           “Performance Award” means an Award hereunder of
cash, shares of Common Stock, units or rights based upon, payable in, or
otherwise related to, Common Stock pursuant to Section 6.7 hereof.

 

2.27                           “Performance Goal” means any of the goals set
forth in Section 6.10 hereof.

 

2.28                           “Reload Stock Option” means a Nonqualified Stock
Option or an Incentive Stock Option granted pursuant to Section 8.3(c) hereof.

 

2.29                           “Reporting Participant” means a Participant who
is subject to the reporting requirements of Section 16 of the 1934 Act.

 

2.30                           “Restricted Stock” means shares of Common Stock
issued or transferred to a Participant pursuant to Section 6.4 of this Plan
which are subject to restrictions or limitations set forth in this Plan and in
the related Award Agreement.

 

2.31                           “Restricted Stock Units” means units awarded to
Participants pursuant to Section 6.6 hereof, which are convertible into Common
Stock at such time as such units are no longer subject to restrictions as
established by the Committee.

 

2.32                           “Retirement” means any Termination of Service
solely due to retirement upon or after attainment of age sixty-two and a half
(62 ½), or permitted early retirement as determined by the Committee.

 

2.33                           “SAR” or “stock appreciation right” means the
right to receive an amount, in cash and/or Common Stock, equal to the excess of
the Fair Market Value of a specified number of shares of Common Stock as of the
date the SAR is exercised (or, as provided in the Award Agreement, converted)
over the SAR Price for such shares.

 

2.34                           “SAR Price” means the exercise price or
conversion price of each share of Common Stock covered by a SAR, determined on
the Date of Grant of the SAR.

 

2.35                           “Stock Option” means a Nonqualified Stock Option,
a Reload Stock Option or an Incentive Stock Option.

 

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2.36                           “Subsidiary” means (i) any corporation in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing a majority of the total combined voting power of all classes of stock
in one of the other corporations in the chain, (ii) any limited partnership, if
the Company or any corporation described in item (i) above owns a majority of
the general partnership interest and a majority of the limited partnership
interests entitled to vote on the removal and replacement of the general
partner, and (iii) any partnership or limited liability company, if the partners
or members thereof are composed only of the Company, any corporation listed in
item (i) above or any limited partnership listed in item (ii) above. 
“Subsidiaries” means more than one of any such corporations, limited
partnerships, partnerships or limited liability companies.

 

2.37                           “Termination of Service” occurs when a
Participant who is (i) an Employee of the Company or any Subsidiary ceases to
serve as an Employee of the Company and its Subsidiaries, for any reason;
(ii) an Outside Director of the Company or a Subsidiary ceases to serve as a
director of the Company and its Subsidiaries for any reason; or (iii) a
Consultant of the Company or a Subsidiary ceases to serve as a Consultant of the
Company and its Subsidiaries for any reason.  Except as may be necessary or
desirable to comply with applicable federal or state law, a “Termination of
Service” shall not be deemed to have occurred when a Participant who is an
Employee becomes an Outside Director or Consultant or vice versa.  If, however,
a Participant who is an Employee and who has an Incentive Stock Option ceases to
be an Employee but does not suffer a Termination of Service, and if that
Participant does not exercise the Incentive Stock Option within the time
required under Section 422 of the Code upon ceasing to be an Employee, the
Incentive Stock Option shall thereafter become a Nonqualified Stock Option. 
Notwithstanding the foregoing provisions of this Section 2.37, in the event an
Award issued under the Plan is subject to Section 409A of the Code, then, in
lieu of the foregoing definition and to the extent necessary to comply with the
requirements of Section 409A of the Code, the definition of “Termination of
Service” for purposes of such Award shall be the definition of “separation from
service” provided for under Section 409A of the Code and the regulations or
other guidance issued thereunder.

 

2.38                           “Total and Permanent Disability” means a
Participant is qualified for long-term disability benefits under the Company’s
or Subsidiary’s disability plan or insurance policy; or, if no such plan or
policy is then in existence or if the Participant is not eligible to participate
in such plan or policy, that the Participant, because of a physical or mental
condition resulting from bodily injury, disease, or mental disorder which
prevents the Participant from performing his or her duties of employment for a
period of six (6) continuous months, as determined in good faith by the
Committee, based upon medical reports or other evidence satisfactory to the
Committee; provided that, with respect to any Incentive Stock Option, Total and
Permanent Disability shall have the meaning given it under the rules governing
Incentive Stock Options under the Code. Notwithstanding the foregoing provisions
of this Section 2.38, in the event an Award issued under the Plan is subject to
Section 409A of the Code, then, in lieu of the foregoing definition and to the
extent necessary to comply with the requirements of Section 409A of the Code,
the definition of “Total and Permanent Disability” for purposes of such Award
shall be the definition of “disability” provided for under Section 409A of the
Code and the regulations or other guidance issued thereunder.

 

ARTICLE 3

ADMINISTRATION

 

3.1                               General Administration; Establishment of
Committee.  Subject to the terms of this Article 3, the Plan shall be
administered by the Board or such committee of the Board as is designated by the
Board to administer the Plan (the “Committee”). The Committee shall consist of
not fewer than two persons.  Any member of the Committee may be removed at any
time, with or without cause, by resolution of the Board. Any vacancy occurring
in the membership of the Committee may be filled by appointment by the Board. 
At

 

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any time there is no Committee to administer the Plan, any references in this
Plan to the Committee shall be deemed to refer to the Board.

 

Membership on the Committee shall be limited to those members of the Board who
are “outside directors” under Section 162(m) of the Code and “non-employee
directors” as defined in Rule 16b-3 promulgated under the 1934 Act.  The
Committee shall select one of its members to act as its Chairman.  A majority of
the Committee shall constitute a quorum, and the act of a majority of the
members of the Committee present at a meeting at which a quorum is present shall
be the act of the Committee.

 

3.2                               Designation of Participants and Awards.

 

(a)                                  The Committee or the Board shall determine
and designate from time to time the eligible persons to whom Awards will be
granted and shall set forth in each related Award Agreement, where applicable,
the Award Period, the Date of Grant, and such other terms, provisions,
limitations, and performance requirements, as are approved by the Committee, but
not inconsistent with the Plan.  The Committee shall determine whether an Award
shall include one type of Incentive or two or more Incentives granted in
combination or two or more Incentives granted in tandem (that is, a joint grant
where exercise of one Incentive results in cancellation of all or a portion of
the other Incentive). Although the members of the Committee shall be eligible to
receive Awards, all decisions with respect to any Award, and the terms and
conditions thereof, to be granted under the Plan to any member of the Committee
shall be made solely and exclusively by the other members of the Committee, or
if such member is the only member of the Committee, by the Board.

 

(b)                                 Notwithstanding Section 3.2(a), the Board
may, in its discretion and by a resolution adopted by the Board, authorize one
or more officers of the Company (an “Authorized Officer”) to (i) designate one
or more Employees as eligible persons to whom Awards will be granted under the
Plan and (ii) determine the number of shares of Common Stock that will be
subject to such Awards; provided, however, that the resolution of the Board
granting such authority shall (x) specify the total number of shares of Common
Stock that may be made subject to the Awards, (y) set forth the price or prices
(or a formula by which such price or prices may be determined) to be paid for
the purchase of the Common Stock subject to such Awards, and (z) not authorize
an officer to designate himself as a recipient of any Award.

 

3.3                               Authority of the Committee.  The Committee, in
its discretion, shall (i) interpret the Plan, (ii) prescribe, amend, and rescind
any rules and regulations necessary or appropriate for the administration of the
Plan, (iii) establish performance goals for an Award and certify the extent of
their achievement, and (iv) make such other determinations or certifications and
take such other action as it deems necessary or advisable in the administration
of the Plan.  Any interpretation, determination, or other action made or taken
by the Committee shall be final, binding, and conclusive on all interested
parties.  The Committee’s discretion set forth herein shall not be limited by
any provision of the Plan, including any provision which by its terms is
applicable notwithstanding any other provision of the Plan to the contrary.

 

The Committee may delegate to officers of the Company, pursuant to a written
delegation, the authority to perform specified functions under the Plan.  Any
actions taken by any officers of the Company pursuant to such written delegation
of authority shall be deemed to have been taken by the Committee.

 

With respect to restrictions in the Plan that are based on the requirements of
Rule 16b-3 promulgated under the 1934 Act, Section 422 of the Code,
Section 162(m) of the Code, the rules of any exchange or inter-dealer quotation
system upon which the Company’s securities are listed or quoted, or any other
applicable law, rule or restriction (collectively, “applicable law”), to the
extent that any such restrictions are no longer required

 

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by applicable law, the Committee shall have the sole discretion and authority to
grant Awards that are not subject to such mandated restrictions and/or to waive
any such mandated restrictions with respect to outstanding Awards.

 

ARTICLE 4

ELIGIBILITY

 

Any Employee (including an Employee who is also a director or an officer),
Consultant or Outside Director of the Company whose judgment, initiative, and
efforts contributed or may be expected to contribute to the successful
performance of the Company is eligible to participate in the Plan; provided that
only Employees of a corporation shall be eligible to receive Incentive Stock
Options.  The Committee, upon its own action, may grant, but shall not be
required to grant, an Award to any Employee, Consultant or Outside Director of
the Company or any Subsidiary.  Awards may be granted by the Committee at any
time and from time to time to new Participants, or to then Participants, or to a
greater or lesser number of Participants, and may include or exclude previous
Participants, as the Committee shall determine.  Except as required by this
Plan, Awards granted at different times need not contain similar provisions. 
The Committee’s determinations under the Plan (including without limitation
determinations of which Employees, Consultants or Outside Directors, if any, are
to receive Awards, the form, amount and timing of such Awards, the terms and
provisions of such Awards and the agreements evidencing same) need not be
uniform and may be made by it selectively among Participants who receive, or are
eligible to receive, Awards under the Plan.

 

ARTICLE 5

SHARES SUBJECT TO PLAN

 

5.1                               Number Available for Awards.  Subject to
adjustment as provided in Articles 11 and 12, the maximum number of shares of
Common Stock that may be delivered pursuant to Awards granted under the Plan is
1,000,000 shares, of which 100% may be delivered pursuant to Incentive Stock
Options.  Subject to adjustment pursuant to Articles 11 and 12, no Executive
Officer may receive in any calendar year (i) Stock Options or SARs relating to
more than 100,000 shares of Common Stock, or (ii) Restricted Stock, Restricted
Stock Units, Performance Awards or Other Awards that are subject to the
attainment of Performance Goals relating to more than 100,000 shares of Common
Stock; provided, however, that all such Awards to any Executive Officer during
any calendar year shall not exceed an aggregate of more than 100,000 shares of
Common Stock.  Shares to be issued may be made available from authorized but
unissued Common Stock, Common Stock held by the Company in its treasury, or
Common Stock purchased by the Company on the open market or otherwise.  During
the term of this Plan, the Company will at all times reserve and keep available
the number of shares of Common Stock that shall be sufficient to satisfy the
requirements of this Plan.

 

5.2                               Reuse of Shares.  To the extent that any Award
under this Plan shall be forfeited, shall expire or be canceled, in whole or in
part, then the number of shares of Common Stock covered by the Award or stock
option so forfeited, expired or canceled may again be awarded pursuant to the
provisions of this Plan.  In the event that previously acquired shares of Common
Stock are delivered to the Company in full or partial payment of the exercise
price for the exercise of a Stock Option granted under this Plan, the number of
shares of Common Stock available for future Awards under this Plan shall be
reduced only by the net number of shares of Common Stock issued upon the
exercise of the Stock Option.  Awards that may be satisfied either by the
issuance of shares of Common Stock or by cash or other consideration shall be
counted against the maximum number of shares of Common Stock that may be issued
under this Plan only during the period that the Award is outstanding or to the
extent the Award is ultimately satisfied by the issuance of shares of Common
Stock.  Awards will not reduce the number of shares of Common Stock that may be
issued pursuant to this Plan if the

 

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settlement of the Award will not require the issuance of shares of Common Stock,
as, for example, a SAR that can be satisfied only by the payment of cash. 
Notwithstanding any provisions of the Plan to the contrary, only shares
forfeited back to the Company, shares canceled on account of termination,
expiration or lapse of an Award, shares surrendered in payment of the exercise
price of an option or shares withheld for payment of applicable employment taxes
and/or withholding obligations resulting from the exercise of an option shall
again be available for grant of Incentive Stock Options under the Plan, but
shall not increase the maximum number of shares described in Section 5.1 above
as the maximum number of shares of Common Stock that may be delivered pursuant
to Incentive Stock Options.

 

ARTICLE 6

GRANT OF AWARDS

 

6.1                               In General.

 

(a)                                  The grant of an Award shall be authorized
by the Committee and shall be evidenced by an Award Agreement setting forth the
Incentive or Incentives being granted, the total number of shares of Common
Stock subject to the Incentive(s), the Option Price (if applicable), the Award
Period, the Date of Grant, and such other terms, provisions, limitations, and
performance objectives, as are approved by the Committee, but not inconsistent
with the Plan.  The Company shall execute an Award Agreement with a Participant
after the Committee approves the issuance of an Award.  Any Award granted
pursuant to this Plan must be granted within ten (10) years of the date of
adoption of this Plan. The Plan shall be submitted to the Company’s stockholders
for approval; however, the Committee may grant Awards under the Plan prior to
the time of stockholder approval.  Any such Award granted prior to such
stockholder approval shall be made subject to such stockholder approval. The
grant of an Award to a Participant shall not be deemed either to entitle the
Participant to, or to disqualify the Participant from, receipt of any other
Award under the Plan.

 

(b)                                 If the Committee establishes a purchase
price for an Award, the Participant must accept such Award within a period of
thirty (30) days (or such shorter period as the Committee may specify) after the
Date of Grant by executing the applicable Award Agreement and paying such
purchase price.

 

(c)                                  Any Award under this Plan that is settled
in whole or in part in cash on a deferred basis may provide for interest
equivalents to be credited with respect to such cash payment. Interest
equivalents may be compounded and shall be paid upon such terms and conditions
as may be specified by the grant.

 

6.2                               Option Price.  The Option Price for any share
of Common Stock which may be purchased under a Nonqualified Stock Option for any
share of Common Stock may equal to or greater than the Fair Market Value of the
share on the Date of Grant.  The Option Price for any share of Common Stock
which may be purchased under an Incentive Stock Option must be at least equal to
the Fair Market Value of the share on the Date of Grant; if an Incentive Stock
Option is granted to an Employee who owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than ten percent (10%) of
the combined voting power of all classes of stock of the Company (or any parent
or Subsidiary), the Option Price shall be at least 110% of the Fair Market Value
of the Common Stock on the Date of Grant.

 

6.3                               Maximum ISO Grants.  The Committee may not
grant Incentive Stock Options under the Plan to any Employee which would permit
the aggregate Fair Market Value (determined on the Date of Grant) of the Common
Stock with respect to which Incentive Stock Options (under this and any other
plan of the

 

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Company and its Subsidiaries) are exercisable for the first time by such
Employee during any calendar year to exceed $100,000.  To the extent any Stock
Option granted under this Plan which is designated as an Incentive Stock Option
exceeds this limit or otherwise fails to qualify as an Incentive Stock Option,
such Stock Option (or any such portion thereof) shall be a Nonqualified Stock
Option.  In such case, the Committee shall designate which stock will be treated
as Incentive Stock Option stock by causing the issuance of a separate stock
certificate and identifying such stock as Incentive Stock Option stock on the
Company’s stock transfer records.

 

6.4                               Restricted Stock.  If Restricted Stock is
granted to or received by a Participant under an Award (including a Stock
Option), the Committee shall set forth in the related Award Agreement: (i) the
number of shares of Common Stock awarded, (ii) the price, if any, to be paid by
the Participant for such Restricted Stock and the method of payment of the
price, (iii) the time or times within which such Award may be subject to
forfeiture, (iv) specified Performance Goals of the Company, a Subsidiary, any
division thereof or any group of Employees of the Company, or other criteria,
which the Committee determines must be met in order to remove any restrictions
(including vesting) on such Award, and (v) all other terms, limitations,
restrictions, and conditions of the Restricted Stock, which shall be consistent
with this Plan.  The provisions of Restricted Stock need not be the same with
respect to each Participant.

 

(a)                                  Legend on Shares.  Each Participant who is
awarded or receives Restricted Stock shall be issued a stock certificate or
certificates in respect of such shares of Common Stock.  Such certificate(s)
shall be registered in the name of the Participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such Restricted Stock, substantially as provided in Section 15.9
of the Plan.

 

(b)                                  Restrictions and Conditions.  Shares of
Restricted Stock shall be subject to the following restrictions and conditions:

 

(i)                                     Subject to the other provisions of this
Plan and the terms of the particular Award Agreements, during such period as may
be determined by the Committee commencing on the Date of Grant or the date of
exercise of an Award (the “Restriction Period”), the Participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock. Except
for these limitations, the Committee may in its sole discretion, remove any or
all of the restrictions on such Restricted Stock whenever it may determine that,
by reason of changes in applicable laws or other changes in circumstances
arising after the date of the Award, such action is appropriate.

 

(ii)                                  Except as provided in sub-paragraph
(i) above or in the applicable Award Agreement, the Participant shall have, with
respect to his or her Restricted Stock, all of the rights of a stockholder of
the Company, including the right to vote the shares, and the right to receive
any dividends thereon.  Certificates for shares of Common Stock free of
restriction under this Plan shall be delivered to the Participant promptly
after, and only after, the Restriction Period shall expire without forfeiture in
respect of such shares of Common Stock or after any other restrictions imposed
in such shares of Common Stock by the applicable Award Agreement or other
agreement have expired.  Certificates for the shares of Common Stock forfeited
under the provisions of the Plan and the applicable Award Agreement shall be
promptly returned to the Company by the forfeiting Participant.  Each Award
Agreement shall require that each Participant, in connection with the issuance
of a certificate for Restricted Stock, shall endorse such certificate in blank
or execute a stock power in form satisfactory to the Company in blank and
deliver such certificate and executed stock power to the Company.

 

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(iii)                               The Restriction Period of Restricted Stock
shall commence on the Date of Grant or the date of exercise of an Award, as
specified in the Award Agreement, and, subject to Article 12 of the Plan, unless
otherwise established by the Committee in the Award Agreement setting forth the
terms of the Restricted Stock, shall expire upon satisfaction of the conditions
set forth in the Award Agreement; such conditions may provide for vesting based
on such Performance Goals, as may be determined by the Committee in its sole
discretion.

 

(iv)                              Except as otherwise provided in the particular
Award Agreement, upon Termination of Service for any reason during the
Restriction Period, the nonvested shares of Restricted Stock shall be forfeited
by the Participant.  In the event a Participant has paid any consideration to
the Company for such forfeited Restricted Stock, the Committee shall specify in
the Award Agreement that either (i) the Company shall be obligated to, or
(ii) the Company may, in its sole discretion, elect to, pay to the Participant,
as soon as practicable after the event causing forfeiture, in cash, an amount
equal to the lesser of the total consideration paid by the Participant for such
forfeited shares or the Fair Market Value of such forfeited shares as of the
date of Termination of Service, as the Committee, in its sole discretion shall
select. Upon any forfeiture, all rights of a Participant with respect to the
forfeited shares of the Restricted Stock shall cease and terminate, without any
further obligation on the part of the Company.

 

6.5                               SARs.  The Committee may grant SARs to any
Participant, either as a separate Award or in connection with a Stock Option. 
SARs shall be subject to such terms and conditions as the Committee shall
impose, provided that such terms and conditions are (i)  not inconsistent with
the Plan and (ii) to the extent a SAR issued under the Plan is subject to
Section 409A of the Code, in compliance with the applicable requirements of
Section 409A of the Code and the regulations or other guidance issued
thereunder.  The grant of the SAR may provide that the holder may be paid for
the value of the SAR either in cash or in shares of Common Stock, or a
combination thereof.  In the event of the exercise of a SAR payable in shares of
Common Stock, the holder of the SAR shall receive that number of whole shares of
Common Stock having an aggregate Fair Market Value on the date of exercise equal
to the value obtained by multiplying (i) the difference between the Fair Market
Value of a share of Common Stock on the date of exercise over the SAR Price as
set forth in such SAR (or other value specified in the agreement granting the
SAR), by (ii) the number of shares of Common Stock as to which the SAR is
exercised, with a cash settlement to be made for any fractional shares of Common
Stock.  The SAR Price for any share of Common Stock subject to a SAR may be
equal to or greater than the Fair Market Value of the share on the Date of
Grant.  The Committee, in its sole discretion, may place a ceiling on the amount
payable upon exercise of a SAR, but any such limitation shall be specified at
the time that the SAR is granted.

 

6.6                               Restricted Stock Units.  Restricted Stock
Units may be awarded or sold to any Participant under such terms and conditions
as shall be established by the Committee, provided, however, that such terms and
conditions are (i) not inconsistent with the Plan and (ii) to the extent a
Restricted Stock Unit issued under the Plan is subject to Section 409A of the
Code, in compliance with the applicable requirements of Section 409A of the Code
and the regulations or other guidance issued thereunder).  Restricted Stock
Units shall be subject to such restrictions as the Committee determines,
including, without limitation, (a) a prohibition against sale, assignment,
transfer, pledge, hypothecation or other encumbrance for a specified period; or
(b) a requirement that the holder forfeit (or in the case of shares of Common
Stock or units sold to the Participant, resell to the Company at cost) such
shares or units in the event of Termination of Service during the period of
restriction.

 

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6.7                               Performance Awards.

 

(a)                                  The Committee may grant Performance Awards
to any Participant upon such terms and conditions as shall be specified at the
time of the grant and may include provisions establishing the performance
period, the Performance Goals to be achieved during a performance period, and
the maximum or minimum settlement values, provided that such terms and
conditions are (i) not inconsistent with the Plan and (ii) to the extent a
Performance Award issued under the Plan is subject to Section 409A of the Code,
in compliance with the applicable requirements of Section 409A of the Code and
the regulations or other guidance issued thereunder.  Each Performance Award
shall have its own terms and conditions.  At the time of the grant of a
Performance Award intended to satisfy the requirements of Section 162(m) of the
Code  (other than a Stock Option) and to the extent permitted under
Section 162(m) of the Code and the regulations issued thereunder, the Committee:

 

(i)                                     shall provide for the manner in which
the Performance Goals shall be reduced to take into account the negative effect
on the attained levels of the Performance Goals which result from specified
corporate transactions, extraordinary events, accounting changes and other
similar occurrences, so long as those transactions, events, changes and
occurrences were not certain at the time the Performance Goal was initially
established and the amount of the Performance Award for any Participant is not
increased, unless the reduction in the Performance Goals would reduce or
eliminate the amount of the Performance Award, and the Committee determines not
to make such reduction; and

 

(ii)                                  may provide for the manner in which the
Performance Goals will be measured in light of specified corporate transactions,
extraordinary events, accounting changes and other similar occurrences, to the
extent those transactions, events, changes and occurrences have a positive
effect on the attained levels of the Performance Goals, so long as the
Committee’s actions do not increase the amount of the Performance Award for any
Participant.

 

The determination of the amount of any reduction in the Performance Goals shall
be made by the Committee in consultation with the Company’s independent auditor
or compensation consultant.  With respect to a Performance Award that is not
intended to satisfy the requirements of Section 162(m) of the Code, if the
Committee determines, in its sole discretion, that the established performance
measures or objectives are no longer suitable because of a change in the
Company’s business, operations, corporate structure, or for other reasons that
the Committee deemed satisfactory, the Committee may modify the performance
measures or objectives and/or the performance period.

 

(b)                                 Performance Awards may be valued by
reference to the Fair Market Value of a share of Common Stock or according to
any formula or method deemed appropriate by the Committee, in its sole
discretion, including, but not limited to, achievement of Performance Goals or
other specific financial, production, sales or cost performance objectives that
the Committee believes to be relevant to the Company’s business and/or remaining
in the employ of the Company for a specified period of time.  Performance Awards
may be paid in cash, shares of Common Stock, or other consideration, or any
combination thereof.  If payable in shares of Common Stock, the consideration
for the issuance of such shares may be the achievement of the performance
objective established at the time of the grant of the Performance Award. 
Performance Awards may be payable in a single payment or in installments and may
be payable at a specified date or dates or upon attaining the performance
objective.  The extent to which any applicable performance objective has been
achieved shall be conclusively determined by the Committee.

 

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6.8                               Dividend Equivalent Rights.  The Committee may
grant a Dividend Equivalent Right to any Participant, either as a component of
another Award or as a separate Award. The terms and conditions of the Dividend
Equivalent Right shall be specified by the grant.  Dividend equivalents credited
to the holder of a Dividend Equivalent Right may be paid currently or may be
deemed to be reinvested in additional shares of Common Stock (which may
thereafter accrue additional dividend equivalents).  Any such reinvestment shall
be at the Fair Market Value at the time thereof.  Dividend Equivalent Rights may
be settled in cash or shares of Common Stock, or a combination thereof, in a
single payment or in installments.  A Dividend Equivalent Right granted as a
component of another Award may provide that such Dividend Equivalent Right shall
be settled upon exercise, settlement, or payment of, or lapse of restrictions
on, such other Award, and that such Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other Award.

 

6.9                               Other Awards.  The Committee may grant to any
Participant other forms of Awards, based upon, payable in, or otherwise related
to, in whole or in part, shares of Common Stock, if the Committee determines
that such other form of Award is consistent with the purpose and restrictions of
this Plan.  The terms and conditions of such other form of Award shall be
specified by the grant.  Such Other Awards may be granted for no cash
consideration, for such minimum consideration as may be required by applicable
law, or for such other consideration as may be specified by the grant.

 

6.10                        Performance Goals.  Awards of Restricted Stock,
Restricted Stock Units, Performance Award and Other Awards (whether relating to
cash or shares of Common Stock) under the Plan may be made subject to the
attainment of Performance Goals relating to one or more business criteria within
the meaning of Section 162(m) of the Code may consist of one or more or any
combination of the following criteria: cash flow; cost; revenues;  sales; ratio
of debt to debt plus equity; net borrowing, credit quality or debt ratings;
profit before tax; economic profit; earnings before interest and taxes; earnings
before interest, taxes, depreciation and amortization; gross margin; earnings
per share (whether on a pre-tax, after-tax, operational or other basis);
operating earnings; capital expenditures; expenses or expense levels; economic
value added; ratio of operating earnings to capital spending or any other
operating ratios; free cash flow; net profit; net sales; net asset value per
share; the accomplishment of mergers, acquisitions, dispositions, public
offerings or similar extraordinary business transactions; sales growth; price of
the Company’s Common Stock; return on assets, equity or stockholders’ equity;
market share; inventory levels, inventory turn or shrinkage; or total return to
stockholders (“Performance Criteria”).  Any Performance Criteria may be used to
measure the performance of the Company as a whole or any business unit of the
Company and may be measured relative to a peer group or index.  Any Performance
Criteria may include or exclude (i) extraordinary, unusual and/or non-recurring
items of gain or loss, (ii) gains or losses on the disposition of a business,
(iii) changes in tax or accounting regulations or laws, or (iv) the effect of a
merger or acquisition, as identified in the Company’s quarterly and annual
earnings releases.  In all other respects, Performance Criteria shall be
calculated in accordance with the Company’s financial statements, under
generally accepted accounting principles, or under a methodology established by
the Committee prior to the issuance of an Award which is consistently applied
and identified in the audited financial statements, including footnotes, or the
Management Discussion and Analysis section of the Company’s annual report. 
However, the Committee may not in any event increase the amount of compensation
payable to an individual upon the attainment of a Performance Goal.

 

6.11                        Tandem Awards.  The Committee may grant two or more
Incentives in one Award in the form of a “tandem Award,” so that the right of
the Participant to exercise one Incentive shall be canceled if, and to the
extent, the other Incentive is exercised.  For example, if a Stock Option and a
SAR are issued in a tandem Award, and the Participant exercises the SAR with
respect to 100 shares of Common Stock, the right of the Participant to exercise
the related Stock Option shall be canceled to the extent of 100 shares of Common
Stock.

 

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ARTICLE 7

AWARD PERIOD; VESTING

 

7.1                               Award Period.  Subject to the other provisions
of this Plan, the Committee may, in its discretion, provide that an Incentive
may not be exercised in whole or in part for any period or periods of time or
beyond any date specified in the Award Agreement.  Except as provided in the
Award Agreement, an Incentive may be exercised in whole or in part at any time
during its term.  The Award Period for an Incentive shall be reduced or
terminated upon Termination of Service.  No Incentive granted under the Plan may
be exercised at any time after the end of its Award Period.  No portion of any
Incentive may be exercised after the expiration of ten (10) years from its Date
of Grant.  However, if an Employee owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than ten percent (10%) of
the combined voting power of all classes of stock of the Company (or any parent
or Subsidiary) and an Incentive Stock Option is granted to such Employee, the
term of such Incentive Stock Option (to the extent required by the Code at the
time of grant) shall be no more than five (5) years from the Date of Grant.

 

7.2                               Vesting.  The Committee, in its sole
discretion, may determine that an Incentive will be immediately vested in whole
or in part, or that all or any portion may not be vested until a date, or dates,
subsequent to its Date of Grant, or until the occurrence of one or more
specified events, subject in any case to the terms of the Plan.  If the
Committee imposes conditions upon vesting, then, subsequent to the Date of
Grant, the Committee may, in its sole discretion, accelerate the date on which
all or any portion of the Incentive may be vested.

 

ARTICLE 8

EXERCISE OR CONVERSION OF INCENTIVE

 

8.1                               In General.  A vested Incentive may be
exercised or converted, during its Award Period, subject to limitations and
restrictions set forth in the Award Agreement.

 

8.2                               Securities Law and Exchange Restrictions.  In
no event may an Incentive be exercised or shares of Common Stock be issued
pursuant to an Award if a necessary listing or quotation of the shares of Common
Stock on a stock exchange or inter-dealer quotation system or any registration
under state or federal securities laws required under the circumstances has not
been accomplished.

 

8.3                               Exercise of Stock Option.

 

(a)                                  In General.  If a Stock Option is
exercisable prior to the time it is vested, the Common Stock obtained on the
exercise of the Stock Option shall be Restricted Stock which is subject to the
applicable provisions of the Plan and the Award Agreement.  If the Committee
imposes conditions upon exercise, then subsequent to the Date of Grant, the
Committee may, in its sole discretion, accelerate the date on which all or any
portion of the Stock Option may be exercised.  No Stock Option may be exercised
for a fractional share of Common Stock.  The granting of a Stock Option shall
impose no obligation upon the Participant to exercise that Stock Option.

 

(b)                                  Notice and Payment.  Subject to such
administrative regulations as the Committee may from time to time adopt, a Stock
Option may be exercised by the delivery of written notice to the Committee
setting forth the number of shares of Common Stock with respect to which the
Stock Option is to be exercised and the date of exercise thereof (the “Exercise
Date”) which shall be at least three (3) days after giving such notice unless an
earlier time shall have been mutually agreed upon. 

 

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On the Exercise Date, the Participant shall deliver to the Company consideration
with a value equal to the total Option Price of the shares to be purchased,
payable as provided in the Award Agreement, which may provide for payment in any
one or more of the following ways:  (a) cash or check, bank draft, or money
order payable to the order of the Company, (b) Common Stock (including
Restricted Stock) owned by the Participant on the Exercise Date, valued at its
Fair Market Value on the Exercise Date, and which the Participant has not
acquired from the Company within six (6) months prior to the Exercise Date,
(c) by delivery (including by FAX) to the Company or its designated agent of an
executed irrevocable option exercise form together with irrevocable instructions
from the Participant to a broker or dealer, reasonably acceptable to the
Company, to sell certain of the shares of Common Stock purchased upon exercise
of the Stock Option or to pledge such shares as collateral for a loan and
promptly deliver to the Company the amount of sale or loan proceeds necessary to
pay such purchase price, and/or (d) in any other form of valid consideration
that is acceptable to the Committee in its sole discretion.  In the event that
shares of Restricted Stock are tendered as consideration for the exercise of a
Stock Option, a number of shares of Common Stock issued upon the exercise of the
Stock Option equal to the number of shares of Restricted Stock used as
consideration therefor shall be subject to the same restrictions and provisions
as the Restricted Stock so tendered.

 

(c)                                  Reload Stock Options.  In the event that
shares of Common Stock are delivered by a Participant in payment of all or a
portion of the exercise price of a Stock Option as set forth in
Section 8.3(b) above and/or shares of Common Stock are delivered to or withheld
by the Company in satisfaction of the Company’s tax withholding obligations upon
exercise in accordance with Section 15.6 hereof, then, subject to Article 10
hereof, the Committee may authorize the automatic grant to a Participant so
exercising a Nonqualified Stock Option, a replacement Nonqualified Stock Option,
and to a Participant so exercising an Incentive Stock Option, a replacement
Incentive Stock Option (in either case, a “Reload Stock Option”), to purchase
that number of shares so delivered to or withheld by the Company, as the case
may be, at an option exercise price equal to the Fair Market Value per share of
the Common Stock on the date of exercise of the original Stock Option (subject
to the provisions of the Plan regarding Incentive Stock Options and, in any
event not less than the par value per share of the Common Stock). The option
period for a Reload Stock Option will commence on its Date of Grant and expire
on the expiration date of the original Stock Option it replaces (subject to the
provisions of the Plan regarding Incentive Stock Options), after which period
the Reload Stock Option cannot be exercised.  The Date of Grant of a Reload
Stock Option shall be the date that the Stock Option it replaces is exercised. 
A Reload Stock Option shall automatically vest and be exercisable in full after
the expiration of six (6) months from its Date of Grant.  It shall be a
condition to the grant of a Reload Stock Option that promptly after its Date of
Grant, a stock option agreement shall be delivered to the Participant and
executed by the Participant and the Company which sets forth the total number of
shares subject to the Reload Stock Option, the option exercise price, the option
period of the Reload Stock Option and such other terms and provisions as are
consistent with the Plan.

 

(d)                                  Issuance of Certificate.  Except as
otherwise provided in Section 6.4 hereof (with respect to shares of Restricted
Stock) or in the applicable Award Agreement, upon payment of all amounts due
from the Participant, the Company shall cause certificates for the Common Stock
then being purchased to be delivered as directed by the Participant (or the
person exercising the Participant’s Stock Option in the event of his death) at
its principal business office promptly after the Exercise Date; provided that if
the Participant has exercised an Incentive Stock Option, the Company may at its
option retain physical possession of the certificate evidencing the shares
acquired upon exercise until the expiration of the holding periods described in
Section 422(a)(1) of the Code. The obligation of the Company to deliver shares
of Common Stock shall, however, be subject to the condition that, if at any time
the Committee shall determine in its discretion that the listing, registration,
or qualification of the Stock Option or the Common Stock upon any securities
exchange

 

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or inter-dealer quotation system or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary as a
condition of, or in connection with, the Stock Option or the issuance or
purchase of shares of Common Stock thereunder, the Stock Option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent, or approval shall have been effected or obtained free of any conditions
not reasonably acceptable to the Committee.

 

(e)                                  Failure to Pay.  Except as may otherwise be
provided in an Award Agreement, if the Participant fails to pay for any of the
Common Stock specified in such notice or fails to accept delivery thereof, that
portion of the Participant’s Stock Option and right to purchase such Common
Stock may be forfeited by the Company.

 

8.4                               SARs.  Subject to the conditions of this
Section 8.4 and such administrative regulations as the Committee may from time
to time adopt, a SAR may be exercised by the delivery (including by FAX) of
written notice to the Committee setting forth the number of shares of Common
Stock with respect to which the SAR is to be exercised and the date of exercise
thereof (the “Exercise Date”) which shall be at least three (3) days after
giving such notice unless an earlier time shall have been mutually agreed upon.
Subject to the terms of the Award Agreement and only if permissible under
Section 409A of the Code and the regulations or other guidance issued thereunder
(or, if not so permissible, at such time as permitted by Section 409A of the
Code and the regulations or other guidance issued thereunder), the Participant
shall receive from the Company in exchange therefor in the discretion of the
Committee, and subject to the terms of the Award Agreement:

 

(i)                                     cash in an amount equal to the excess
(if any) of the Fair Market Value (as of the date of the exercise, or if
provided in the Award Agreement, conversion, of the SAR) per share of Common
Stock over the SAR Price per share specified in such SAR, multiplied by the
total number of shares of Common Stock of the SAR being surrendered;

 

(ii)                                  that number of shares of Common Stock
having an aggregate Fair Market Value (as of the date of the exercise, or if
provided in the Award Agreement, conversion, of the SAR) equal to the amount of
cash otherwise payable to the Participant, with a cash settlement to be made for
any fractional share interests; or

 

(iii)                               the Company may settle such obligation in
part with shares of Common Stock and in part with cash.

 

The distribution of any cash or Common Stock pursuant to the foregoing sentence
shall be made at such time as set forth in the Award Agreement.

 

8.5                               Disqualifying Disposition of Incentive Stock
Option.  If shares of Common Stock acquired upon exercise of an Incentive Stock
Option are disposed of by a Participant prior to the expiration of either two
(2) years from the Date of Grant of such Stock Option or one (1) year from the
transfer of shares of Common Stock to the Participant pursuant to the exercise
of such Stock Option, or in any other disqualifying disposition within the
meaning of Section 422 of the Code, such Participant shall notify the Company in
writing of the date and terms of such disposition.  A disqualifying disposition
by a Participant shall not affect the status of any other Stock Option granted
under the Plan as an Incentive Stock Option within the meaning of Section 422 of
the Code.

 

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ARTICLE 9

AMENDMENT OR DISCONTINUANCE

 

Subject to the limitations set forth in this Article 9, the Board may at any
time and from time to time, without the consent of the Participants, alter,
amend, revise, suspend, or discontinue the Plan in whole or in part; provided,
however, that no amendment for which stockholder approval is required either
(i) by any securities exchange or inter-dealer quotation system on which the
Common Stock is listed or traded or (ii) in order for the Plan and Incentives
awarded under the Plan to continue to comply with Sections 162(m), 421, and 422
of the Code, including any successors to such Sections;  shall be effective
unless such amendment shall be approved by the requisite vote of the
stockholders of the Company entitled to vote thereon.  Any such amendment shall,
to the extent deemed necessary or advisable by the Committee, be applicable to
any outstanding Incentives theretofore granted under the Plan, notwithstanding
any contrary provisions contained in any Award Agreement.  In the event of any
such amendment to the Plan, the holder of any Incentive outstanding under the
Plan shall, upon request of the Committee and as a condition to the
exercisability thereof, execute a conforming amendment in the form prescribed by
the Committee to any Award Agreement relating thereto.  Notwithstanding anything
contained in this Plan to the contrary, unless required by law, no action
contemplated or permitted by this Article 9 shall adversely affect any rights of
Participants or obligations of the Company to Participants with respect to any
Incentive theretofore granted under the Plan without the consent of the affected
Participant.

 

ARTICLE 10

TERM

 

The Plan shall be effective from the date that this Plan is approved by the
Board.  Unless sooner terminated by action of the Board, the Plan will terminate
on December 7, 2015, but Incentives granted before that date will continue to be
effective in accordance with their terms and conditions.

 

ARTICLE 11

CAPITAL ADJUSTMENTS

 

In the event that the Committee shall determine that any dividend or other
distribution (whether in the form of cash, Common Stock, other securities, or
other property), recapitalization, stock split, reverse stock split, rights
offering, reorganization, merger, consolidation, split-up, spin-off, split-off,
combination, subdivision, repurchase, or exchange of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar corporate
transaction or event affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate to prevent the dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee shall, in such manner as it may deem
equitable, adjust any or all of the (i) the number of shares and type of Common
Stock (or the securities or property) which thereafter may be made the subject
of Awards, (ii) the number of shares and type of Common Stock (or other
securities or property) subject to outstanding Awards, (iii) the number of
shares and type of Common Stock (or other securities or property) specified as
the annual per-participant limitation under Section 5.1 of the Plan, (iv) the
Option Price of each outstanding Award, (v) the amount, if any, the Company pays
for forfeited shares of Common Stock in accordance with Section 6.4, and
(vi) the number of or SAR Price of shares of Common Stock then subject to
outstanding SARs previously granted and unexercised under the Plan to the end
that the same proportion of the Company’s issued and outstanding shares of
Common Stock in each instance shall remain subject to exercise at the same
aggregate SAR Price; provided however, that the number of shares of Common Stock
(or other securities or property) subject to any Award shall always be a whole

 

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number.  In lieu of the foregoing, if deemed appropriate, the Committee may make
provision for a cash payment to the holder of an outstanding Award. 
Notwithstanding the foregoing, no such adjustment or cash payment shall be made
or authorized to the extent that such adjustment or cash payment would cause the
Plan or any Stock Option to violate Section 422 of the Code.  Such adjustments
shall be made in accordance with the rules of any securities exchange, stock
market, or stock quotation system to which the Company is subject.

 

Upon the occurrence of any such adjustment or cash payment, the Company shall
provide notice to each affected Participant of its computation of such
adjustment or cash payment which shall be conclusive and shall be binding upon
each such Participant.

 

ARTICLE 12

RECAPITALIZATION, MERGER AND CONSOLIDATION

 

12.1                        No Effect on Company’s Authority.  The existence of
this Plan and Incentives granted hereunder shall not affect in any way the right
or power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations, or other changes in the
Company’s capital structure and its business, or any Change in Control, or any
merger or consolidation of the Company, or any issuance of bonds, debentures,
preferred or preference stocks ranking prior to or otherwise affecting the
Common Stock or the rights thereof (or any rights, options, or warrants to
purchase same), or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.

 

12.2                        Conversion of Incentives Where Company Survives. 
Subject to any required action by the stockholders and except as otherwise
provided by Section 12.4 hereof or as may be required to comply with
Section 409A of the Code and the regulations or other guidance issued
thereunder, if the Company shall be the surviving or resulting corporation in
any merger, consolidation or share exchange, any Incentive granted hereunder
shall pertain to and apply to the securities or rights (including cash,
property, or assets) to which a holder of the number of shares of Common Stock
subject to the Incentive would have been entitled.

 

12.3                        Exchange or Cancellation of Incentives Where Company
Does Not Survive.  Except as otherwise provided by Section 12.4 hereof or as may
be required to comply with Section 409A of the Code and the regulations or other
guidance issued thereunder, in the event of any merger, consolidation or share
exchange pursuant to which the Company is not the surviving or resulting
corporation, there shall be substituted for each share of Common Stock subject
to the unexercised portions of outstanding Incentives, that number of shares of
each class of stock or other securities or that amount of cash, property, or
assets of the surviving, resulting or consolidated company which were
distributed or distributable to the stockholders of the Company in respect to
each share of Common Stock held by them, such outstanding Incentives to be
thereafter exercisable for such stock, securities, cash, or property in
accordance with their terms.

 

12.4                        Cancellation of Incentives.  Notwithstanding the
provisions of Sections 12.2 and 12.3 hereof, and except as may be required to
comply with Section 409A of the Code and the regulations or other guidance
issued thereunder, all Incentives granted hereunder may be canceled by the
Company, in its sole discretion, as of the effective date of any Change in
Control, merger, consolidation or share exchange, or any issuance of bonds,
debentures, preferred or preference stocks ranking prior to or otherwise
affecting the Common Stock or the rights thereof (or any rights, options, or
warrants to purchase same), or of any proposed sale of all or substantially all
of the assets of the Company, or of any dissolution or liquidation of the
Company, by either:

 

(a)                                  giving notice to each holder thereof or his
personal representative of its intention to cancel those Incentives for which
the issuance of shares of Common Stock involved payment by the

 

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Participant for such shares and, permitting the purchase during the thirty (30)
day period next preceding such effective date of any or all of the shares of
Common Stock subject to such outstanding Incentives, including in the Board’s
discretion some or all of the shares as to which such Incentives would not
otherwise be vested and exercisable; or

 

(b)                                 in the case of Incentives that are either
(i) settled only in shares of Common Stock, or (ii) at the election of the
Participant, settled in shares of Common Stock, paying the holder thereof an
amount equal to a reasonable estimate of the difference between the net amount
per share payable in such transaction or as a result of such transaction, and
the price per share of such Incentive to be paid by the Participant (hereinafter
the “Spread”), multiplied by the number of shares subject to the Incentive.  In
cases where the shares constitute, or would after exercise, constitute
Restricted Stock, the Company, in its discretion may include some or all of
those shares in the calculation of the amount payable hereunder.  In estimating
the Spread, appropriate adjustments to give effect to the existence of the
Incentives shall be made, such as deeming the Incentives to have been exercised,
with the Company receiving the exercise price payable thereunder, and treating
the shares receivable upon exercise of the Incentives as being outstanding in
determining the net amount per share.  In cases where the proposed transaction
consists of the acquisition of assets of the Company, the net amount per share
shall be calculated on the basis of the net amount receivable with respect to
shares of Common Stock upon a distribution and liquidation by the Company after
giving effect to expenses and charges, including but not limited to taxes,
payable by the Company before such liquidation could be completed.

 

(c)                                  An Award that by its terms would be fully
vested or exercisable upon a Change in Control will be considered vested or
exercisable for purposes of Section 12.4(a) hereof.

 

ARTICLE 13

LIQUIDATION OR DISSOLUTION

 

Subject to Section 12.4 hereof, in case the Company shall, at any time while any
Incentive under this Plan shall be in force and remain unexpired, (i) sell all
or substantially all of its property, or (ii) dissolve, liquidate, or wind up
its affairs, then each Participant shall be entitled to receive, in lieu of each
share of Common Stock of the Company which such Participant would have been
entitled to receive under the Incentive, the same kind and amount of any
securities or assets as may be issuable, distributable, or payable upon any such
sale, dissolution, liquidation, or winding up with respect to each share of
Common Stock of the Company.  If the Company shall, at any time prior to the
expiration of any Incentive, make any partial distribution of its assets, in the
nature of a partial liquidation, whether payable in cash or in kind (but
excluding the distribution of a cash dividend payable out of earned surplus and
designated as such) and an adjustment is determined by the Committee to be
appropriate to prevent the dilution of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall, in such
manner as it may deem equitable, make such adjustment in accordance with the
provisions of Article 11 hereof.

 

ARTICLE 14

INCENTIVES IN SUBSTITUTION FOR

INCENTIVES GRANTED BY OTHER ENTITIES

 

Incentives may be granted under the Plan from time to time in substitution for
similar instruments held by employees, consultants or directors of a
corporation, partnership, or limited liability company who become or are about
to become Employees, Consultants or Outside Directors of the Company or any
Subsidiary as a

 

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result of a merger or consolidation of the employing corporation with the
Company, the acquisition by the Company of equity of the employing entity, or
any other similar transaction pursuant to which the Company becomes the
successor employer.  The terms and conditions of the substitute Incentives so
granted may vary from the terms and conditions set forth in this Plan to such
extent as the Committee at the time of grant may deem appropriate to conform, in
whole or in part, to the provisions of the Incentives in substitution for which
they are granted.

 

ARTICLE 15

MISCELLANEOUS PROVISIONS

 

15.1                        Investment Intent.  The Company may require that
there be presented to and filed with it by any Participant under the Plan, such
evidence as it may deem necessary to establish that the Incentives granted or
the shares of Common Stock to be purchased or transferred are being acquired for
investment and not with a view to their distribution.

 

15.2                        No Right to Continued Employment.  Neither the Plan
nor any Incentive granted under the Plan shall confer upon any Participant any
right with respect to continuance of employment by the Company or any
Subsidiary.

 

15.3                        Indemnification of Board and Committee.  No member
of the Board or the Committee, nor any officer or Employee of the Company acting
on behalf of the Board or the Committee, shall be personally liable for any
action, determination, or interpretation taken or made in good faith with
respect to the Plan, and all members of the Board and the Committee, each
officer of the Company, and each Employee of the Company acting on behalf of the
Board or the Committee shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination, or interpretation.

 

15.4                        Effect of the Plan.  Neither the adoption of this
Plan nor any action of the Board or the Committee shall be deemed to give any
person any right to be granted an Award or any other rights except as may be
evidenced by an Award Agreement, or any amendment thereto, duly authorized by
the Committee and executed on behalf of the Company, and then only to the extent
and upon the terms and conditions expressly set forth therein.

 

15.5                        Compliance With Other Laws and Regulations. 
Notwithstanding anything contained herein to the contrary, the Company shall not
be required to sell or issue shares of Common Stock under any Incentive if the
issuance thereof would constitute a violation by the Participant or the Company
of any provisions of any law or regulation of any governmental authority or any
national securities exchange or inter-dealer quotation system or other forum in
which shares of Common Stock are quoted or traded (including without limitation
Section 16 of the 1934 Act and Section 162(m) of the Code); and, as a condition
of any sale or issuance of shares of Common Stock under an Incentive, the
Committee may require such agreements or undertakings, if any, as the Committee
may deem necessary or advisable to assure compliance with any such law or
regulation.  The Plan, the grant and exercise of Incentives hereunder, and the
obligation of the Company to sell and deliver shares of Common Stock, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency as may be required.

 

15.6                        Tax Requirements.  The Company or, if applicable,
any Subsidiary (for purposes of this Section 15.6, the term “Company” shall be
deemed to include any applicable Subsidiary), shall have the right to deduct
from all amounts paid in cash or other form in connection with the Plan, any
Federal, state, local, or other taxes required by law to be withheld in
connection with an Award granted under this Plan.  The Company may, in its sole
discretion, also require the Participant receiving shares of Common Stock issued

 

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under the Plan to pay the Company the amount of any taxes that the Company is
required to withhold in connection with the Participant’s income arising with
respect to the Award.  Such payments shall be required to be made when requested
by Company and may be required to be made prior to the delivery of any
certificate representing shares of Common Stock.  Such payment may be made
(i) by the delivery of cash to the Company in an amount that equals or exceeds
(to avoid the issuance of fractional shares under (iii) below) the required tax
withholding obligations of the Company; (ii) if the Company, in its sole
discretion, so consents in writing, the actual delivery by the exercising
Participant to the Company of shares of Common Stock that the Participant has
not acquired from the Company within six (6) months prior to the date of
exercise, which shares so delivered have an aggregate Fair Market Value that
equals or exceeds (to avoid the issuance of fractional shares under (iii) below)
the required tax withholding payment; (iii) if the Company, in its sole
discretion, so consents in writing, the Company’s withholding of a number of
shares to be delivered upon the exercise of the Stock Option, which shares so
withheld have an aggregate fair market value that equals (but does not exceed)
the required tax withholding payment; or (iv) any combination of (i), (ii), or
(iii).  The Company may, in its sole discretion, withhold any such taxes from
any other cash remuneration otherwise paid by the Company to the Participant. 
The Committee may in the Award Agreement impose any additional tax requirements
or provisions that the Committee deems necessary or desirable.

 

15.7                        Assignability.  Incentive Stock Options may not be
transferred, assigned, pledged, hypothecated or otherwise conveyed or encumbered
other than by will or the laws of descent and distribution and may be exercised
during the lifetime of the Participant only by the Participant or the
Participant’s legally authorized representative, and each Award Agreement in
respect of an Incentive Stock Option shall so provide. The designation by a
Participant of a beneficiary will not constitute a transfer of the Stock
Option.  The Committee may waive or modify any limitation contained in the
preceding sentences of this Section 15.7 that is not required for compliance
with Section 422 of the Code.

 

Except as otherwise provided herein, Nonqualified Stock Options and SARs may not
be transferred, assigned, pledged, hypothecated or otherwise conveyed or
encumbered other than by will or the laws of descent and distribution.  The
Committee may, in its discretion, authorize all or a portion of a Nonqualified
Stock Option or SAR to be granted to a Participant on terms which permit
transfer by such Participant to (i) the spouse (or former spouse), ancestors,
children or grandchildren of the Participant (“Immediate Family Members”),
(ii) a trust or trusts for the exclusive benefit of such Immediate Family
Members, (iii) a partnership in which the only partners are (1) such Immediate
Family Members and/or (2) entities which are controlled by Immediate Family
Members, (iv) an entity exempt from federal income tax pursuant to
Section 501(c)(3) of the Code or any successor provision, or (v) a split
interest trust or pooled income fund described in Section 2522(c)(2) of the Code
or any successor provision, provided that (x) there shall be no consideration
for any such transfer, (y) the Award Agreement pursuant to which such
Nonqualified Stock Option or SAR is granted must be approved by the Committee
and must expressly provide for transferability in a manner consistent with this
Section, and (z) subsequent transfers of transferred Nonqualified Stock Options
or SARs shall be prohibited except those by will or the laws of descent and
distribution.

 

Following any transfer, any such Nonqualified Stock Option and SAR shall
continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that for purposes of Articles 8, 9, 11,
13 and 15 hereof the term “Participant” shall be deemed to include the
transferee.  The events of Termination of Service shall continue to be applied
with respect to the original Participant, following which the Nonqualified Stock
Options and SARs shall be exercisable or convertible by the transferee only to
the extent and for the periods specified in the Award Agreement.  The Committee
and the Company shall have no obligation to inform any transferee of a
Nonqualified Stock Option or SAR of any expiration, termination, lapse or
acceleration of such Stock Option or SAR.  The Company shall have no obligation
to register with any federal or state securities commission or agency any Common
Stock issuable or issued under a Nonqualified Stock Option or SAR that has been
transferred by a Participant under this Section 15.7.

 

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15.8                        Use of Proceeds.  Proceeds from the sale of shares
of Common Stock pursuant to Incentives granted under this Plan shall constitute
general funds of the Company.

 

15.9                        Legend.  Each certificate representing shares of
Restricted Stock issued to a Participant shall bear the following legend, or a
similar legend deemed by the Company to constitute an appropriate notice of the
provisions hereof (any such certificate not having such legend shall be
surrendered upon demand by the Company and so endorsed):

 

On the face of the certificate:

 

“Transfer of this stock is restricted in accordance with conditions printed on
the reverse of this certificate.”

 

On the reverse:

 

“The shares of stock evidenced by this certificate are subject to and
transferable only in accordance with that certain Cano Petroleum, Inc. 2005
Long-Term Incentive Plan, a copy of which is on file at the principal office of
the Company in Fort Worth, Texas.  No transfer or pledge of the shares evidenced
hereby may be made except in accordance with and subject to the provisions of
said Plan.  By acceptance of this certificate, any holder, transferee or pledgee
hereof agrees to be bound by all of the provisions of said Plan.”

 

The following legend shall be inserted on a certificate evidencing Common Stock
issued under the Plan if the shares were not issued in a transaction registered
under the applicable federal and state securities laws:

 

“Shares of stock represented by this certificate have been acquired by the
holder for investment and not for resale, transfer or distribution, have been
issued pursuant to exemptions from the registration requirements of applicable
state and federal securities laws, and may not be offered for sale, sold or
transferred other than pursuant to effective registration under such laws, or in
transactions otherwise in compliance with such laws, and upon evidence
satisfactory to the Company of compliance with such laws, as to which the
Company may rely upon an opinion of counsel satisfactory to the Company.”

 

A copy of this Plan shall be kept on file in the principal office of the Company
in Fort Worth, Texas.

 

15.10                 Gender and Number.  Except when otherwise indicated by the
context, words in the masculine gender when used in the Plan shall include the
feminine gender, the singular shall include the plural, and the plural shall
include the singular.

 

***************

 

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IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of
December  7, 2005, by its Chief Executive Officer and Secretary pursuant to
prior action taken by the Board.

 

 

 

CANO PETROLEUM, INC.

 

 

 

 

 

By:

  /s/ S. Jeffrey Johnson

 

 

S. Jeffrey Johnson

 

 

Chief Executive Officer

 

 

 

 

Attest:

 

 

 

 

 

 

/s/ James K. Teringo, Jr.

 

 

James K. Teringo, Jr.

 

Secretary

 

 

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